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Australia: Sunset for the Sons of Gwalia? Proposed Legislation to Subordinate Shareholder Claims

May 14, 2010

We have been sending Client Updates since 2007 concerning the decision of the Australian High (Supreme) Court in Sons of Gwalia Ltd v. Margaretic. Specifically, the High Court held that the damages claims of shareholders of insolvent companies for fraud and misrepresentation should be treated pari passu with the claims of all other unsecured creditors, rather than being treated as subordinated to unsecured claims as is the case in the U.S.  See our prior Client Updates: Australia: The Sins of the Sons (of Gwalia) Are Visited on Creditors Yet Again, July 27, 2007; US Investors in Australia Beware: New Advisory Report Supports the Sons of Gwalia Decision, January 29, 2009; and The Rights of Creditors in Australia Restored: Sons of Gwalia To Be Reversed Through Legislation, January 19, 2010.

On April 23, 2010, the Australian Department of the Treasury issued an "Exposure Draft" of proposed legislation to reverse the effects of Sons of Gwalia. The Exposure Draft can be found here and the "Explanatory Memorandum" that accompanies the Exposure Draft can be found here.

In a nutshell, here are the three matters that U.S. investors (whether par or distressed) need to know about the proposed legislation:

  • First, the legislation is clear that all claims in relation to the buying, selling, holding or otherwise dealing with shares are subordinated to all other creditors' claims.
  • Second, shareholders will not be entitled to vote as creditors, which was a major problem in the Sons of Gwalia administration, as discussed in our first Client Update.
  • Third, the legislation will not have "retrospective effect." This means that the legislation will not affect any shareholder damages claims that arose prior to the effective date of the legislation. This is so even with respect to claims that have not yet been asserted, so long as the fraud or misrepresentation giving rise to the claims occurred prior to the effective date.

Under the Australian Parliamentary system, it is likely that the legislation will be enacted by the end of this year. However, the purpose of the Exposure Draft is to solicit comments concerning the legislation, both as to whether it should be enacted and also as to the specific wording and scope of the legislation.

Bracewell & Giuliani was involved in the Sons of Gwalia litigation and, with many others in Australia, we have been lobbying for this legislative reversal. In that same vein, we have provided specific comments to the Australian Treasury emphasizing the importance of the legislation to the U.S. capital markets and providing suggestions as to broadening the scope of the legislation to include other types of securities in addition to common shares. The full text of our comments can be found here.  A g'day indeed!