row grows over sons of gwalia decision

Row grows over Sons of Gwalia decision
Richard Gluyas | April 11, 2009

Article from: The Australian
THE campaign for legislative change to overrule the controversial Sons of Gwalia court decision, which ranks shareholders equally with secured creditors in company collapses, is intensifying.

Key institutions are starting to lobby Canberra after the federal Government's corporate law adviser said in January that the High Court decision should stand.

Some foreign banks are believed to be so hostile towards the decision that they have indicated they will now only lend in Australia on a secured basis.

The Australian Financial Markets Association -- the main lobbying organisation for foreign banks -- will soon write to the the Minister for Superannuation and Corporate Law, Nick Sherry, to voice its deep concerns about Sons of Gwalia.

AFMA executive director Duncan Fairweather told The Weekend Australian the letter would say there was a "markedly reduced appetite" for unsecured Australian corporate debt in the wake of the decision.

"Given the current, very difficult credit climate, it is essential to restore the long-standing practice that lenders to companies rank ahead of the owners of companies, and bring the Australian law back into line with the approach taken in the US, which is a major source of capital for Australian companies," Mr Fairweather said.

In a dramatic boost for shareholder rights, the 2007 Sons of Gwalia decision effectively created a new class of creditor by elevating shareholder rights in failed companies -- class actions, for example -- to the same level as unsecured creditors.

Foreign lenders, in particular, have been less willing to lend unsecured, while recapitalisations are more difficult where shareholder suits have been lodged because the new equity will rank behind a successful shareholder claim.

Dividends to unsecured creditors are also considered likely to fall, and the overall cost of company administrations will rise as shareholder claims have to be verified.

After receiving 20 detailed submissions, the Government's corporate law adviser, the Corporations and Markets Advisory Committee, said it recognised Sons of Gwalia had "significant implications" for banks and the conduct of external administrations.

"But any move to curtail the rights of recourse of aggrieved shareholders where a company is financially distressed could be seen as undermining legislative initiatives to provide shareholders with direct rights of action against corporate misconduct," CAMAC said.

It also said that helping shareholders pursue private remedies had encouraged self-help and complemented the role of regulators, with shareholders and creditors having a common interest in an efficient and informed market.

Senator Sherry said after CAMAC's January 29 recommendation that it was too early to say if the Government would accept its findings.

However, he seemed to indicate support for the CAMAC view, noting that the issue had been considered at a time of credit shortages due to the global financial crisis.

"It is one of the issues that CAMAC have looked at -- they are the experts, they are the ones that examined this issue," the Senator said.

The Australian Bankers Association, mainly on behalf of domestic lenders including the Big Four, has also recently raised the subject of Sons of Gwalia with Senator Sherry.

ABA director of retail regulatory policy Ian Gilbert said the Senator had informed ABA chief executive David Bell that no decision had been made on whether to change the law.

Arnold Block Leibler partner Leon Zwier, who has campaigned strongly against Sons of Gwalia, said the High Court decision had to be reversed.

"It makes the job of saving corporations and jobs much more difficult, and it adds costs and expense to the detriment of every person adversely affected by corporate collapses," Mr Zwier said.

"Companies are man-made devices and we can make them operate as we see fit; it's a matter of balance and pragmatism."