Tony Smith (Casey, Liberal Party, Deputy Chairman , Coalition Policy Development Committee) Share this | Link to 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.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

It is a pleasure to be able to speak on the Corporations Amendment (Sons of Gwalia) Bill 2010 and it is good to hear that not only has this bill gone through a Senate committee process, where a number of technical amendments have been made and accepted by government, but the opposition also supports what this bill does. In effect this bill reverses the High Court decision in the Sons of Gwalia v Margaretic case. The main effect of the bill is that all claims in relation to the buying, selling, holding or otherwise dealing with shares are to be ranked equally and after all other creditors’ claims. The bill is widely supported, obviously, within the parliament but also outside the parliament from a range of significant stakeholders. It is important that we get this right, and it is important that we have a consistent approach to the liabilities and risks that shareholders take and to who sits in the line of those to be paid in the event of a collapse of a particular company.

The bill contains three key measures. It provides that all claims in relation to the buying, selling, holding or otherwise dealing with shares are to be ranked equally and after all other creditors’ claims. It also removes the right of persons bringing claims regarding shareholdings 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. It eliminates the restriction on the capacity of a shareholder to recover damages against a company based on how they acquired those shares or whether they still hold those shares.

In comparing the current law with the proposed new law all claims against an insolvent company arising from buying, selling, holding or otherwise dealing with a shareholder are to rank equally and to be postponed until all other claims are paid. That is an important principle ensuring the availability of credit and the proper assignment of risk. The current law in accordance with the Sons of Gwalia v Margaretic case states that some shareholder claims, for example compensation claims, would not be postponed by section 563A of the Corporations Act. Instead they would rank equally with unsecured creditors in any distribution to creditors after secured credits and payments to priority creditors. The proposed new law will ensure that persons bringing subordinated claims would not be able to receive communications to creditors from an external administrator without making that request in writing nor would they be able to vote in an external administration without the leave of the court.

The current law also means that persons bringing subordinated claims are treated as creditors themselves and are entitled to receive communications to creditors from external administrators. This is obviously a complex set of arrangements and currently is done without making a written request. The proposed new law places a restriction on the ability of a shareholder to recover damages against a company based on how they acquired the shares or whether they still hold the shares. The current law also states that a person’s capacity to bring a claim for damages could be affected by how they acquired the shares and whether they still hold them. This was particularly the case in the High Court ruling.

What this bill ultimately does is benefit both creditors and shareholders because it reduces higher financing costs. It also helps facilitate the provision of credit to companies in an efficient way for the economic development of the nation. If credit is more available it will also increase the chances of a company actually staying in existence in the first place. It also reduces the risk premiums charged to the extent of onerous terms and conditions placed on companies by credit providers.

The bill reduces the costs and complexity for insolvency practitioners to carry out external administrations and a range of other cost savings which are passed onto creditors. The bill improves the efficacy of external administration in terms of both the reallocation of capital to productive uses and the promotion of business rehabilitation. When shareholders invest in a company in the hope of sharing in the company’s future profits, they do this knowing that there is a risk, and they share in that risk in a particular manner.

Creditors do not get the chance to share in these profits. They provide a good or a service and invoice the company for payment on that basis. It is a different relationship and a different set of risk terms that are applied and it should be clear in the line of risk who takes what risk at what point and how that ought to be administered. Shareholders who have been misled should have the right to recover some of their losses but not to the detriment of creditors.

This is a good bill and is supported by the parliament and I commend it to the House.

Laura Smyth (La Trobe, Australian Labor Party) Share this | Link to 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.

David Bradbury (Lindsay, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

in reply—I wish to thank all of the honourable members who have contributed to the debate, in particular I acknowledge the member for Casey and the member for Oxley, and also the member for La Trobe for her very valuable contribution to the debate on the Corporations Amendment (Sons of Gwalia) Bill 2010. The bill will postpone shareholder compensation claims made in an insolvency administration so that they will rank equally with the other shareholder claims. Subordinating these claims will facilitate the provision of affordable credit to companies, particularly those in financial distress. The reform will reduce complexity and costs in external administrations and improve the prospects of rehabilitating insolvent companies through formal insolvency procedures.

The bill also provides that a person bringing a subordinated claim will not have an entitlement to a copy of any notice, report or statement to creditors unless they make a written request to the external administrator for a copy. The bill similarly provides that they will not have a right to vote as a creditor of the company unless given leave by the court. The bill also ensures that a person’s ability to bring a claim for damages against a company will not be restricted by how they acquired the shares or whether they continue to hold the shares when bringing the action.

On behalf of the government, I would like to thank all the stakeholders for their contributions at various stages. I acknowledge, in particular, the very valuable contribution of the Law Council of Australia that has been taken up in part by the recommendations of the Senate Legal and Constitutional Affairs Legislation Committee. On 30 September 2010, the Senate referred the bill to the Legal and Constitutional Affairs Legislation Committee for inquiry and report. On 18 November 2010, the committee delivered its report recommending that the bill be passed, subject to a number of drafting concerns. I thank the Senate committee for that report. I intend to amend the bill to take account of the committee’s recommendations, and these amendments have previously been circulated. I am advised by Treasury that each of these concerns has now been addressed in the government’s amendments to the bill. The government is committed to ensuring that the bill achieves its intended policy objectives.

In conclusion, this bill will address a range of negative impacts on access to finance by companies and the conduct of external administrations, arising from the Sons of Gwalia decision. This will consequentially benefit creditors, shareholders and employees of Australian companies.

Question agreed to.

Bill read a second time.