Vol 4 (2007) - Issue 3

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Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Luka Margaretic & Anor [2007] HCA 1. (High Court of Australia)

The referral by the Treasurer’s Parliamentary Secretary to the Corporations and Markets Advisory Committee (CAMAC) of the High Court decision in Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Luka Margaretic & Anor within a week of it being handed down illustrated one thing – that the considerable media attention which had followed the case throughout its history and the potential impact of this decision on large-scale corporate insolvencies was heard by Australia’s politicians. This case, which either established a principle that needs to be ‘changed urgently’, or which delivered ‘unprecedented rights to shareholders’ is likely to be challenged through the political process, with the referral to CAMAC requesting that it consider and report on the following:

1. Should shareholders who acquired shares as a result of misleading conduct by a company prior to its insolvency be able to participate in an insolvency proceeding as an unsecured creditor for any debt that may arise out of the misleading conduct?
2. If so, are there any reforms to the statutory scheme that would facilitate the efficient administration of insolvency proceedings in the presence of such claims?
3. If not, are there any reforms to the statutory scheme that would better protect shareholders from the risk that they may acquire shares on the basis of misleading information?

Facts

The facts of the matter are relatively simple but belie the controversy that is raised. The Sons of Gwalia mine, near the rich gold mining district of Kalgoorlie had a long and prosperous history. Originally founded and managed by Herbert Hoover, who was later to become the 31st President of the United States of America, it
had yielded vast gold and mineral reserves. In 2001, the shares in the company Sons of Gwalia were valued at over USD 10 per share with the market capitalization over USD 1bn. Three years later the company had collapsed, brought down by unauthorised gold and foreign exchange trading activities – activities that arguably were known to the company by 2000, but not disclosed to the market until some years later. It was in August of 2004 that Luka Margaretic purchased 20,000 shares in Sons of Gwalia. Eleven days after this the shares were worthless. The claim of Margaretic was that the company had failed to comply with the continuous disclosure obligations required by the Corporations Act 2001 and the ASX Listing Rules. Margaretic argued that if he had known the true plight of the company, he was that the company had failed to keep the market properly informed, and by this omission, the entity had engaged in misleading and deceptive conduct. If proven, this would breach a number of statutory provisions designed to protect investors:
s52 of the Trade Practices Act 1974;
s1041H of the Corporations Act 2001; or
s12DA of the Australian Securities and Investments Commission Act 2001.