Tony Smith (Casey, Liberal Party, Deputy Chairman , Coalition Policy Development Committee) Share this | Hansard source

The Corporations Amendment (Sons of Gwalia) Bill 2010 will amend the Corporations Act to reverse the effect of the High Court’s decision in the Sons of Gwalia case, which was heard by the court in February 2007. This bill, as we know, was first announced by the government back, I think, in January this year and introduced and reintroduced, following the election, in September. In the Sons of Gwalia case, the High Court held that a compensation claim by a shareholder against the company was not subordinated below the claims of other unsecured creditors by virtue of section 563A of the Corporations Act. The substance of this issue was summed up by the Senate Legal and Constitutional Affairs Legislation Committee, which recently inquired into and reported on this bill. As the Senate committee found, the issue for judicial determination was whether the shareholder should be admitted as an unsecured creditor under the deed of company arrangement, ranking equally with other unsecured creditors, on the basis that he had been induced to purchase shares of the company as a result of conduct prior to its insolvency. Under section 563A of the Corporations Act, the payment of a debt owed by a company to a person in the person’s capacity as a member of a company is postponed until the debts of all other creditors are satisfied.

However, in this case the High Court determined that claims by persons who purchase shares in a company, relying on misleading or deceptive information from the company or material nondisclosures, were not claims ‘as a member of the company’ and therefore were not postponed under section 563A behind the claims of unsecured creditors. As I said at the outset, this bill seeks to reverse that decision. At the time that the decision was made the coalition, then in government, realised the importance of the decision and accordingly referred it to the Corporations and Markets Advisory Committee. At the time the Parliamentary Secretary to the Treasurer, the Hon. Chris Pearce MP, had referred that off in 2007 for consideration. Throughout the course of 2008 the Corporations and Markets Advisory Committee advised that to overturn the decision would stymie the trend of shareholder empowerment. However, notwithstanding that, the coalition understands that incorporated businesses have found it difficult to obtain credit particularly since the financial crisis and, of course, if this decision were not overturned it would have the potential to raise the risk and cost of lending, which in turn would increase borrowing costs—and I know my friend and colleague the member for Dunkley is well aware of these issues as well within his shadow portfolio of small business. This would particularly be the case for companies in financial distress. As well, as the parliamentary secretary has pointed out and as, before him, the former Assistant Treasurer has pointed out, the decision could also delay the external administration of companies as it became necessary to work out which shareholders were ranked alongside unsecured creditors, and the confusion about the rights of creditors and shareholders could provoke costly legal action against a company. Were that to occur, that would ultimately be borne by creditors and other shareholders.

The bill contains, as the parliamentary secretary pointed out in his speech in the second reading debate, three core measures. The first states that claims in relation to shares are to be ranked equally and after all other creditors’ claims. Secondly, the bill removes the rights of persons bringing claims regarding shares to vote as creditors in a voluntary administration or a winding-up unless they receive permission from a court and, finally, it provides that any restriction on the capacity of a shareholder to recover damages against a company, based on how they acquired the shares, is removed. In practice, as was pointed out by the government, these measures would ensure that shareholder compensation claims are paid from the pool of funds available to shareholders rather than out of a pool available to unsecured creditors.

Fundamentally, shareholders assume a higher level of risk and obviously they have the potential for reward, whereas unsecured creditors are in a different situation. Shareholders are part-owners of the company and they are in a different situation. The parliamentary secretary, Mr Bradbury, summed that up in his speech very well and it is a principle that this side of the House shares. The bill was sent off to a Senate committee, which looked at it very closely. The recommendation of the Senate committee was that the bill be passed subject to a number of technical amendments. It is my understanding that the government has picked up all of those technical amendments. They were circulated yesterday, and I will address the substance of each of those before the third reading. The coalition supports this bill and we commend it to the House.

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