Lawyers and company directors have welcomed the federal government's move to reverse the impact of High Court's Sons of Gwalia ruling but one expert believes the move is unnecessary.
Lawyers and company directors have welcomed the federal government's move to reverse the impact of High Court's Sons of Gwalia ruling but one expert believes the move is unnecessary.
The Corporations Act is to be be amended to restore the rights of creditors undone by the court decision in Sons of Gwalia v Margaretic, which determined that certain compensation claims by shareholders were not subordinated below the claims of other creditors in the case of corporate collapses.
Corporate Law Minister Chris Bowen said on Tuesday the ruling's benefits were outweighed by the negative impact on a company's access to debt financing.
"The government also remains concerned that the Sons of Gwalia decision has the potential to further increase uncertainty and costs of associated with external administration," he said.
Nick Dunstone, a partner with insolvency practice Henry Davis York, said the Sons of Gwalia decision was adding cost and complexity to insolvency administrations.
"The reform will bring substantial costs savings to the administration of listed insolvent companies for the benefit of all creditors, both secured and unsecured, and will also increase the prospects of being able to implement a successful restructuring," he said.
Chartered Secretaries Australia chief executive Tim Sheehy also praised the federal government's changes.
"The government has now delivered the right result by confirming that shareholders must continue to absorb the risk of insolvency as part of the broad range of risks they assume in acquiring shares and which properly include the risks of corporate fraud, misconduct and the non-disclosure of price-sensitive information," Mr Sheehy said.
"The government's decision promotes regulatory certainty and greater equity - both of which are good for governance."
Australian Institute of Company Directors (AICD) chief executive John Colvin said the government's move would restore the long-standing principle that lenders to companies rank ahead of the owners of companies.
However an expert on the Sons of Gwalia litigation believes the legislation undermines the protection of shareholders.
Australian School of Business associate professor Anil Hargovan said there was no evidence to support concerns that it had hampered access to credit.
"The government's decision will do nothing to instil confidence in Australians who are one of the highest share owners in the world with major exposure to superannuation investment in the equity market," Professor Hargovan said.
Litigation funder IMF Australia Ltd says the changes will not impact any of its current cases as circumstances similar to Sons of Gwalia are rare.
"Except in the unlikely circumstance that the government introduces retrospective legislation, none of the company's current cases will be affected," it said.
IMF is currently funding three shareholder actions against insolvent companies, in which one litigation has been issued.
The federal government also on Tuesday launched a consultation process on proposed reforms of Australia's insolvent trading laws relating to attempts at business rescue outside of external administration.
Henry Davis York partner John Martin applauded the government for "astutely identifying" the current laws as an impediment to attempts to reorganise a financially troubled company.
Australian Bankers' Association chief executive David Bell described the reform proposals as "innovative".
