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The Rights of Creditors in Australia Restored: Sons of Gwalia To Be Reversed Through Legislation

January 19, 2010

We have reported twice before on the infamous Sons of Gwalia decision in which the High (i.e. Supreme) Court in Australia concluded that a shareholder's claim against an Australian issuer for damages caused by defective disclosure practices should not be subordinated to the claims of legitimate unsecured creditors in insolvency proceedings. For our initial update on the Sons of Gwalia decision, in which we discuss the decision in detail including its potentially drastic implications for Australian corporate finance, click here.  After the decision came out, a number of interested parties, including Bracewell & Giuliani, lobbied for a change in the law to overrule the decision. Unfortunately, as our second update reported (click here), the influential Australian Corporations and Markets Committee (CAMAC) issued an Advisory Report supporting the Sons of Gwalia decision.

While matters appeared bleak, we and others continued our lobbying efforts directly with the Australian government. Now, much to our delight, the Rudd government has just announced a series of insolvency reforms that includes a legislative reversal of the Sons of Gwalia decision. In other words, once the legislation becomes effective, the claims of defrauded shareholders will return to being postponed (subordinated) to the claims of legitimate unsecured creditors, including the holders of private placement notes and public debt securities.

One of the issues we highlighted in our initial update and in our subsequent lobbying efforts was that the Sons of Gwalia decision could result in more demands for security and higher interest rates to compensate for the increased risk, both of which could harm the financing efforts of Australian corporate borrowers. In announcing the decision to reverse the Sons of Gwalia decision through legislation, Australia's Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, agreed with the concerns, indicating that, "[a]ny direct benefits to aggrieved shareholders arising from non-subordination are outweighed by the negative impacts on shareholders generally as a result of restrictions on access to, and increases in, the cost of debt financing for companies." Minister Bowen added that, "[t]he Government also remains concerned that the Sons of Gwalia decision has the potential to further increase uncertainty and costs associated with external administration [i.e. corporate insolvency proceedings]." For the full text of Minister Bowen's press release, which includes other beneficial changes to corporate insolvency laws that promote out-of-court work-outs, click here.

While the actual effective date of the legislation is still months away, the legislation will presumably affect existing finance arrangements in addition to new financings and it should be very welcome news indeed, both in Australia and the US. In the past, Australia and the UK vied for the position as the number one international destination for US financing outside of North America, and this new legislation will not only assist Australian corporates with their financing needs but also restore Australia as a favored haven for billions of dollars of US capital on reasonable pricing terms.

The restructuring partners at Bracewell & Giuliani have been representing US noteholders and bondholders in Australia for close to 15 years, including four current Australian assignments. For further information about the new legislation or about Australian restructurings and insolvencies in general, please contact your Bracewell relationship partner or either of the authors listed on the top-right of this Update.