Vol 3 (2006) - Issue 3

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Sons of Gwalia Ltd v Margaretic: Voluntary Administration and the Elevation of a Shareholder to Creditor Status – A Hard Case Making Bad Law?

Introduction
The Full Federal Court decision in Sons of Gwalia Ltd v Margaretic1 attracted considerable interest when decided.
With the practical implications of the result (in favour of Margaretic) extraordinarily significant for insolvency administrators, regulators and policy makers alike are sure to examine this decision and consider whether legislative amendment is necessary. This case note explores both the Trial Judge and Full Federal Court decision, before concluding with a discussion of the practical implications of the decision.
Facts
On 18 August 2004, Margaretic purchased 20,000 shares in Sons of Gwalia. His name was entered on the register of members on 23 August 2004. Some six days after this registration, and 11 days after purchase, administrators were appointed to the company pursuant to s436A of the Corporations Act 2001.2 By that time, the shares were worthless. Margaretic,3 in seeking damages of AUD 26,200 (representing the cost of the shares), plus stock brokerage of AUD 81.21 and Goods and Services Tax of AUD 7.38, alleged that, at the time of purchase;4
– the company was a disclosing entity listed on the Australian Stock Exchange (ASX);
– that the Corporations Act 2001, s674(2)5 and the ASX listing rules required the company to immediately tell the ASX about any information concerning the company that a reasonable person would expect to have a material effect on the price or value of the company’s shares;
– that at the time of purchase, the company had information relating to its ongoing gold commitments and its present reserves that would indicate to a reasonable person that they would not be able to meet their commitments;– such information was not generally available to the market and was not known to the shareholder; and
– that if this information had been known, the shareholder would not have purchased the shares in the company.
Because of these matters, Margaretic alleged that the company engaged in misleading and deceptive conduct,contrary to:
– Section 52 of the Trade Practices Act 1974;
– Section 1041H of Corporations Act 2001 and
– Section 12DA of the Australian Securities and Investments
Commission Act 2001.6
Because of this petition, the shareholder asserted that he was entitled to be treated as a creditor of the company in relation to his claim. If this was accepted, Margaretic would be an unsecured creditor (as would all shareholders/creditors with similar claims) in the process of the company administration and formulation of the deed of company arrangement. Not surprisingly, the administrators and an unsecured creditor (ING Investment Management LLC) disputed this – this creditor being the ‘true contradictor of the arguments put by the shareholder’.7 Accordingly, the company, through the appellants, sought a declaration that the shareholders suit was not provable under the proposed deed of company arrangement or that the shareholders claim be postponed until all other claims had been satisfied. In response to this, the shareholder made a cross-claim that he was entitled to exercise all the rights of a creditor including notice of, attendance at, and the right to vote at meetings concerning the implementation of a deed of company arrangement.