On 29 January 2009 the Corporations and Markets Advisory Committee issued a report on the decision made in the 2007 Sons of Swalia case. The report is titled Claims by shareholders against insolvent companies: implications of the Sons of Gwalia decision.
In 2007 the High Court decision confirmed the rights of members to lodge certain claims in a company liquidation and have those claims receive the same priority as unsecured creditors. The court examined the provisions of section 563A of the Corporations Act, which says:
“Payment of a debt owed by a company to a person in the person’s capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.”
and how that provision reconciled with Section 553, which says that all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company;
and section 555 that says: Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.
The High Court decided that the section 563A subordination is limited to debts owed to a member as a member (including the rights to dividends etc), and does not apply to debts owed to a person who also is a member”otherwise than as a member” – the important words. The judgment stated:
“The claims .. are not founded on any obligations owed by or to him as a member. He relies on statutory causes of action .. which are available to “a person who has suffered, or is likely to suffer, loss or damage”. Any obligation on the company to pay compensation .. for fraudulent misrepresentation .. does not answer the description of being owed .. in [his] capacity as a member of the company“.
The Corporations and Markets Advisory Committee considered the effect of this decision and whether any action should be taken given those consequences. The Committee did not recommended any action to overturn the decision’s effect. The press release accompaning the release of the report says:
“While clarifying the law, it brought into focus the largely unanticipated conflict between the provision to shareholders of statutory remedies for corporate misconduct and the traditional notion of shareholder interests being postponed behind those of conventional unsecured creditors in a liquidation.
The Committee acknowledges the possible consequences of Sons of Gwalia for companies seeking funds in the unsecured debt market and in the rehabilitation of financially distressed companies. The High Court decision has provided a measure of certainty and it is likely that changes have already occurred as the market has adapted to the legal environment.”
Obviously to be able to claim against a company in liquidation a shareholder will have to prove that they have been wronged and suffered a loss, and in a manner that would give them a right to take action against the company ‘not in their capacity as shareholder’. Otherwise they will simply be a shareholder whose investment went bad.
Sons of Gwalia Ltd v Margaretic  HCA 1; (2007) 232 ALR 232; (2007) 81 ALJR 525 (31 January 2007)