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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

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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