McDonald Vague The Insolvency & Business Recovery Specialists

Sons Of Gwalia

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The Sons of Gwalia decision which was handed down by the High court of Australia in January of this year, clarified three earlier decisions which were made in the years 2005 and 2006.  The Sons of Gwalia case and the earlier decisions set out the circumstances where in Australia a shareholder or shareholders can make a claim against a company which will rank equally with the claims of the unsecured creditors.

The earlier cases formulated the following principles:-

a.Clarification that shareholders who have bought shares under a prospectus that contained misleading or deceptive statements or omissions can claim compensation from the issuing company for loss suffered, even if they have sold their shares (Cadence Asset Management Pty Limited v Concept Sports Limited [2005] FCAFC 265 (16 December 2005)); and
b.Restricting the capacity of representative parties in class actions to limit the definition of the class of the persons they represent (Dorajay Pty Limited v Aristocrat Leisure [2005] FCA 1483(20 October 2005)); and
c.Confirmation that shareholders who bought their shares on the market in a company which subsequently becomes insolvent and who have valid claims against that company for loss connected in some way with the share purchase may rank equally with other unsecured creditors (Crosbie, in the matter of Media World Communications Limited (Administrator Appointed) [2005] FCA51 (31 January 2005), Johnston v McGrath & Ors [2005], NSWSC 1183 (23 November 2005) (to the contrary), Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC17 (27 February 2006)).
The background of the Sons of Gwalia case was as follows -
Sons of Gwalia, a mining company entered voluntary administration in August 2004.  The plaintiff, a shareholder who purchased his shares from another shareholder, claims Sons of Gwalia (prior to entering administration) was in breach of its continuous disclosure obligations, and by reason of those failures, had contravened section 52 of the Trade Practices Act 1974 (this section prohibits misleading and deceptive contact) and several provisions of the Corporations Act which also prohibits misleading and deceptive conduct.  The Court ruled the plaintiff was an unsecured creditor for the purposes of the Deed of Company Arrangement executed by Sons of Gwlaia.  Hundreds of thousands of other shareholders have similar claims against Sons of Gwalia.

Basic Principle
The basic principle so far as Australia is concerned seems to be quite clear.  Where a shareholder has been induced to purchase shares because of a misleading prospectus or because perhaps of a lack of disclosure, that shareholder may have a claim in damages against the company, which in event of liquidation would rank as a claim by an unsecured creditor.

In examining the Sons of Gwalia and the preceding cases, the Courts when applying the common law and legislation, have regarded subscription shareholders and transferee shareholders as two separate classes of shareholders.

THE SITUATION IN NEW ZEALAND
The situation in New Zealand is untested and is therefore unclear.  Certainly the New Zealand Courts will have to carefully consider the rule in Houldsworth's case.

The 1887 English case of Houldsworth (Houldsworth v City of Glasgow Bank and Liquidators (1880) 5 App Cas 317)) is that a person who has subscribed for shares in a company may not while he retains those shares, recover damages on the grounds he was induced to subscribe for those by fraud or misrepresentation.  In essence, until there is a decision in New Zealand to the contrary, the rule applies in all those cases where statute does not override the rule.

New Zealand also has the Securities Act and Securities Markets Act that provides for specific remedies against the company.  The position is yet to be clarified whether the claim by a shareholder under those provisions would rank as an unsecured creditor or not.

CONCLUSION
The Sons of Gwalia case has impacted on Australia.  Until there is a case in New Zealand, the effect of Sons of Gwalia on New Zealand cannot be anticipated.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.