Sons of Gwalia and statutory debt subordination: An appraisal of the North American experience
- Publisher:
- LexisNexis Butterworths
- Publication Type:
- Journal Article
- Citation:
- Hargovan Anil and Harris Jason 2007, 'Sons of Gwalia and statutory debt subordination: An appraisal of the North American experience', LexisNexis Butterworths, vol. 20, no. 3, pp. 265-300.
- Issue Date:
- 2007
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The judicial uncertainty on the interpretation and reach of s 563A of the Corporations Act, dealing with debt priority
issues, has now been resolved by the High Court in the landmark decision Sons of Gwalia Ltd v Margaretic. The High
Court has (in certain circumstances) elevated the status of shareholders, with claims for damages caused by defective
disclosure practices, to that of ordinary creditors. Uncertainty, however, remains over whether this is a sound policy
outcome. Parliamentary intention regarding the appropriate delineation between creditor and investor rights during
insolvency remains unclear. Adverse reaction by the commercial community has led to the High Court's decision being
examined by the Corporations and Markets Advisory Committee. As part of the calls for law reform, in order to clarify
the rights of debt and equity investors during insolvency, bankers and commentators have advocated that Australia adopt
the US model for statutory debt subordination with its emphasis on a 'shareholders come last' principle during
insolvency. The purpose of this article is to examine the policy and legal position of the subordination of shareholder
claims during insolvency in the United States and Canada and to gauge what lessons may be learnt from that experience.
A critical appraisal of the North American jurisprudence and experience, on the subordination of shareholder claims for
damages arising out of misrepresentation inducing the acquisition or retention of shares, may be of assistance in
resolving the current difficulties experienced in Australian insolvency law. The authors argue that the US position of
blanket subordination should not be adopted in Australia.
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