Jacinta Collins (Victoria, Australian Labor Party, Parliamentary Secretary for School Education and Workplace Relations) Share this | Link to this | Hansard source

I table a revised explanatory memorandum relating to the bill and move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

Today I re-introduce a bill which will amend the Corporations Act to reform the treatment of shareholder claims against companies that become insolvent.

This Bill gives effect to the Government’s decision to reverse the outcome of the High Court’s decision in the Sons of Gwalia v Margaretic case.  The Bill also introduces reforms relating to notices to creditors and shareholder voting, and clarifies the position of shareholders bringing claims for damages against companies.

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 business.  It will also reduce the costs and complexity associated with running insolvency administrations.   

The Bill contains three primary measures. 

Firstly, the Bill amends section 563A of the Corporations Act to provide 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. 

In January 2010, the Government announced its decision to introduce legislation to reverse the effect of the High Court’s decision in Sons of Gwalia v Margaretic.  In Sons of Gwalia, the High Court determined that section 563A, as it is currently worded, did not subordinate certain compensation claims by shareholders below the claims of other creditors. 

Prior to Sons of Gwalia, the common understanding was that all shareholder claims against a company in external administration that related to a shareholding, were made in the ‘capacity as a member of the company’ and were postponed by operation of section 563A of the Corporations Act.

Investors make a conscious decision to invest money in a company in the hope of sharing in the company’s profits.  In doing so, they are entitled to expect proper disclosure from the company.  But they must accept that they are taking a risk in making that investment. 

In contrast, creditors are not hoping to increase their wealth by gambling on the future profitability of a company. They are often small businesses or trade creditors who are simply owed money for work they have already done, or for materials they have supplied.   

Investors who have been misled into making that investment should rightly be able to claim redress.  However, they should not be able to do so to the detriment of creditors when a company is insolvent. 

The provision, as currently interpreted, has the effect of undermining the traditional distinction between debt and equity.

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 non-disclosure) to the company’s unsecured creditors.

By reducing the likely return to unsecured lenders in an insolvency, the Sons of Gwalia decision has had the effect of increasing the cost of unsecured debt and of reducing the availability of credit, particularly for less well-established companies. 

Secondly, the Bill streamlines the treatment of shareholder claimants in an external administration.  Persons bringing claims regarding shareholdings will not vote as creditors in a voluntary administration or a winding up unless they receive permission from the Court.  They will also not receive reports to creditors unless they first make a request for such to the external administrator. 

Thirdly, the Bill eliminates certain residual common law restrictions on the capacity of a shareholder to recover damages against a company.

The 1880 House of Lords decision in Houldsworth v City of Glasgow Bank determined that a person who has subscribed for shares in a company may not, while they retain those shares, recover damages against the company on the ground that they were induced by the company to subscribe for those shares by fraud or misrepresentation. 

Although case law in Australia has subsequently limited the reach of this decision, there are still situations where a shareholder may unfairly be prevented from suing for damages.  The application of the old rule is limited, uncertain and difficult for stakeholders to comprehend.  I note that in the United Kingdom, the rule was excluded in all cases by the Companies Act 2006 (UK).

The Global Financial Crisis highlighted the importance of addressing any impediments to companies accessing reasonably priced credit.

These reforms restore the order of priority for distributions of assets in corporate insolvencies to the position that was understood to exist prior to the Sons of Gwalia judgment.

In doing so, they improve access by companies to credit, ensuring continued employment, entrepreneurialism and economic growth.

Mitch Fifield (Victoria, Liberal Party, Manager of Opposition Business in the Senate) Share this | Link to this | Hansard source

The Corporations Amendment (Sons of Gwalia) Bill 2010 will amend the Corporations Act 2001 to reverse the effect of the High Court’s decision in Sons of Gwalia Ltd v Margaretic and to make other amendments to streamline external administrations of companies. The Sons of Gwalia case was heard by the High Court in February 2007. The court held that a compensation claim by a shareholder against a company was not subordinated below the claims of other unsecured creditors by virtue of section 563A of the Corporations Act. The coalition realised the importance of the decision and referred it to the Corporations and Markets Advisory Committee in 2007 for consideration. In late 2008 CAMAC advised that to overturn the decision would stymie the trend of shareholder empowerment. Nevertheless, the coalition understands that incorporated businesses have found it difficult to obtain credit since the financial crisis. The decision in Sons of Gwalia had the potential to raise the risk and cost of lending, which in turn could increase borrowing costs, especially for companies in financial distress. Moreover, the Sons of Gwalia decision could delay the external administration of companies because it would become necessary to work out which shareholders are ranked alongside unsecured creditors. The confusion about rights of creditors and shareholders could provoke costly legal action against the company which is ultimately borne by creditors and other shareholders.

The bill contains three measures. The first says that all claims in relation to shares are to be ranked equally and after creditors’ claims. The second 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 the court. The third 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, these measures are designed to ensure that shareholder compensation claims are paid from the pool of funds available to shareholders rather than out of the pool available to unsecured creditors. Shareholders assume a higher level of risk—and potential reward, for that matter—than unsecured creditors. Unlike unsecured creditors, they are part owners of a company. As such, shareholders themselves could undertake due diligence to avoid corporate misfortune. Ranking all shareholders after unsecured creditors restores the appropriate risk balance between creditors and shareholders.

The coalition supports this bill. We reserved our final opinion until the Senate Legal and Constitutional Affairs Legislation Committee had considered the bill in detail. The committee has now published its final report, and we are pleased that the government is amending the bill to incorporate the recommendations of the committee. The committee’s recommendations were put to the committee by the Law Council of Australia, and they improve the drafting of the bill. The amendments include measures to ensure the consistent use of terminology in the Corporations Act to avoid ambiguity, to clarify the types of claims which rank above subordinated claims and to ensure that the bill does not disturb the effective operations of creditors’ schemes of arrangement. Finally, we understand that the government has undertaken to refer the impact of this bill to the Senate economics committee in a year’s time and that the committee will examine whether the bill is having its intended effect.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

I will make a very short contribution, if I may. I indicate that I do not support the Corporations Amendment (Sons of Gwalia) Bill 2010. I understand that the numbers are not here and that this is essentially non-controversial legislation, but I do have concerns about this. The Sons of Gwalia decision effectively protected investors who became shareholders, to put them on an equal footing with creditors. It is in the context of those who become shareholders who have subscribed pursuant to an offering. I see them, as did the High Court, as being involved in the company pursuant to that offering, pursuant to that subscription, effectively as investors in the company. If misrepresentations were made, I think they should be on equal terms with creditors. I know that the coalition and the government have taken the view that since the global financial crisis this could affect equity raising and could affect corporations—this has been raised as a concern—but I have real concerns about that. I think that the High Court got it right, and I think the parliament is getting it wrong by going down this path.

I understand from my officers’ discussions with the government that there will be an opportunity for the Senate Standing Committee on Economics to review this further—I am not sure if the parliamentary secretary can confirm that—but I just want to raise my concerns and my opposition to this bill. I think we are making a mistake. I think that the High Court took the right approach in protecting those who have invested in companies, and I worry that, under the cover of the global financial crisis, there are some entities who are getting away with an approach that I do not think is necessarily in the best interests of those who have put money in companies. Let us wait and see how this pans out, but I hope that a review of this may cause some reconsideration of this measure down the track.

David Johnston (WA, Liberal Party, Shadow Minister for Defence) Share this | Link to this | Hansard source

I wish to associate myself with the remarks of Senator Xenophon, and I want to compliment him on his jurisprudential understanding. The Corporations Amendment (Sons of Gwalia) Bill 2010 takes away rights of Australians. Very rarely does legislation come through both chambers of this parliament and remove rights of people, tortious rights, that we have fought long and hard for very many years to protect and revere in our system. Unfortunately, I really believe that not very many senators and not very many members of the House of Representatives understand just how this works, but I do say that I want to compliment Senator Xenophon and I agree with him.

Jacinta Collins (Victoria, Australian Labor Party, Parliamentary Secretary for School Education and Workplace Relations) Share this | Link to this | Hansard source

in reply—I thank senators who have contributed to this debate. I particularly thank those who are members of the Senate Legal and Constitutional Affairs Legislation Committee for their report and the stakeholders who provided submissions to the committee’s inquiry, particularly the Law Council of Australia. I commend the Corporations Amendment (Sons of Gwalia) Bill 2010 to the Senate. In doing so, further to Senator Xenophon’s remarks, I table a letter from the Parliamentary Secretary to the Treasurer to Senator Xenophon, dealing with the issues he raised.

Question agreed to.

Bill read a second time.