Laura Smyth (La Trobe, Australian Labor Party) Share this | Hansard source

I rise to support the Corporations Amendment (Sons of Gwalia) Bill 2010 and remark that, while we have seen this legislation considered for a period of time now, it is very appropriate that a considered response be given by the government to something which affects such a wide range of stakeholders. Obviously in the context of a global financial crisis any impediments to companies accessing credit, and reasonably priced credit at that, is particularly important. I am pleased to be able to speak in relation to the bill today.

As we have heard in the debate thus far we know that this is largely a question of appropriate risk allocation. We know that shareholders make a conscious decision, as has been said in this debate, to invest money in a company in the hope of sharing in that company’s profits. In doing so they are certainly entitled to expect appropriate disclosure from the company and they are certainly entitled to the protections that both the Corporations Act and common law provide. But in doing so they must also accept that they are taking a risk in making that investment.

Creditors by contrast, however, are not consciously exposing themselves to the same degree of risk. They are dealing with companies on a contractual basis, and in many instances those creditors can be small businesses or trade creditors that are simply owed money for work they have already done or for materials or services they have already supplied. It is appropriate that this bill redress the risk profile and balance that has, arguably, arisen as a result of the High Court decision in Sons of Gwalia. It should go without saying, of course, that shareholders who are misled in making their investments should correctly be able to seek a remedy. It should not mean, however, that creditors engaged in their usual commercial dealings with a company should be disadvantaged relative to those shareholders in circumstances where that company becomes insolvent.

This bill will give effect to the government’s decision to reverse the outcome of the Sons of Gwalia and Margaretic case. It will amend the Corporations Act to reform the treatment of shareholder claims against companies that become insolvent. As we have heard, section 563A of the Corporations Act subordinates any claims made by a person in their capacity as a member of a company, whether by way of dividends, profits or otherwise, below the claims of other unsecured creditors against the company. Prior to the High Court’s decision in Sons of Gwalia, the common understanding of that provision and its operation was that all shareholder claims against a company in external administration which related to their shareholding were made in the ‘capacity as a member of the company’ and were postponed by section 563A.

The High Court’s decision obviously determined that a compensation claim for corporate misconduct made by a shareholder against a company was not subordinated by this section. The provision, as currently interpreted through the High Court’s decision, would have the effect of undermining the traditional distinction between debt and equity. The effect of that decision is that shareholders with compensation claims for corporate misconduct against a company are, irrespective of whether the claims arise in relation to their shareholdings or not, entitled to share in any proceeds of an external administration with the same priority as other creditors. In particular, as was the case in Sons of Gwalia, compensation claims against listed companies arising from the provision of misleading information or the failure to disclose information will gain equal ranking with creditors. This bill gives effect to the government’s stated purpose of reversing the High Court’s decision. The bill changes that position so that any claim brought by a person, not just a shareholder, against a company, which arose from the buying, selling, holding or otherwise dealing with a shareholding is to be postponed in an external administration until after all other claims have been paid.

For the avoidance of doubt, the bill also abrogates the rule in the decision on Houldsworth and the City of Glasgow Bank by providing that how a person acquired shares and whether they still hold them would not restrict their ability to bring a claim for damages. The decision in Sons of Gwalia has had the effect of shifting the losses suffered by shareholders due to a company’s misleading conduct or nondisclosure to the company’s unsecured creditors. By reducing the likely return to unsecured lenders in an insolvency, the decision increases the potential risk to which creditors may find themselves exposed. The necessary consequence of this is an increase to the costs of unsecured debt and a reduced availability of credit, particularly for less well-established companies.

In order to remedy this, the bill provides that all claims in relation to the buying, selling, holding or otherwise dealing with shares will rank equally and with lower priority than all other creditor claims. So, to the ultimate benefit of both shareholders and creditors, this bill will remove an area of uncertainty that currently results in higher finance costs for businesses. It will reduce the costs and complexity associated with running insolvency administrations and, as I mentioned earlier, it will redress the risk imbalance that is currently in place as a consequence of the Sons of Gwalia decision.

The second function of the bill before us is to streamline the manner in which shareholder claimants are treated in an external administration. Those who seek to bring claims regarding their shareholdings will not be able to vote as creditors in a voluntary administration or a winding-up unless they receive permission from the court. They will also not be entitled to receive reports to creditors unless they make a request in writing to the external administrator.

Finally, the bill places a restriction on the capacity of a shareholder to recover damages against a company based on how they acquire the shares or whether they still hold the shares. The Sons of Gwalia decision was handed down in January 2007, and we know that many industry participants are keenly awaiting this bill. The global financial crisis that affected us all certainly highlights the importance of addressing any restrictions to companies accessing credit. The reforms that the government now proposes restore the order of priority for distributions of assets in corporate insolvencies to the position that we all understood existed prior to the Sons of Gwalia decision. In doing so, the bill will improve access by companies to credit, ensuring continued employment and economic growth.

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