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17 Int'l Insolvency Rev. 1 (2008)

handle is hein.journals/intvcy17 and id is 1 raw text is: Sons of Gwalia: Defrauded Shareholders' Claims in Insolvency Rasiah Gengatharen * Senior Lecturer in Law, Universiy of Western Australia, Australia Abstract The recent Australian High Court decision in Sons ofGwalia v Margaretic abolished the rule that defrauded shareholders claims should be subordinated to the claims of gen- eral creditors in insolvency. This paper examines the decision, discusses its potential implications and explores whether it should be overruled through legislative amend- ment. Copyright G 2008JohnWiley & Sons, Ltd. I. Introduction On 31January 2007, the Australian High Court decided in Sons oGwalia v Magaretic1 that a claim for damages brought under consumer protection legislation by a share- holder who suffered losses on shares purchased on the Australian Stock Exchange should rank equally with the claims of unsecured creditors in an insolvency admin- istration. Yet the much anticipated decision, while controversial, did not come as a complete surprise, as the UK House of Lords had earlier arrived at an analogous conclusion in Soden v British and Commonwealth Holdings Plc2 based on roughly similar statutory language. However, while shareholder advocates applauded the Sons of Gwalia decision, it has not been well received in financial circles because of concerns that the supply of credit and insolvency administration would be adversely affected. Barely a week after the decision was handed down, the federal government asked the Corporations and Markets Advisory Committee to evaluate its implications and to advise whether reforms to the statutory scheme were needed.3 This paper analyses the decision and explores the case for legislative amendment. It will be divided into four parts. Section II examines the reasons behind the High Court decision. Section III discusses the potential ramifications of the decision. Section IV identifies some of *E-mail: rgengath@law.uwa.edu.au MP, to the Corporations and Markets Advisory Com- 1. (2007) HCA 1. mittee dated 06 February 2007. The Committee 2. (1998) AC 298. released a discussion paper, Shareholder Claims Against 3. See the letter written by the Parliamentary Sec- Insolvent Companies: Implications of the Sons of Gwalia retary to the Treasurer, The Honourable Chris Pearce Decision, in September 2007. Copyright ( 2008JohnWiley & Sons, Ltd. Int. Insolv. Rev.,Vol. 17:1 12 (2008) Published online inWiley InterScience (www.interscience.wiley.com) DOI: 10.1002/iir.153

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