interesting ruling with sgw

http://www.news.com.au/business/story/0,23636,21148193-31037,00.html

Ruling could net shareholders millions
January 31, 2007 05:14pm
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THOUSANDS of shareholders stand to win substantial compensation from companies that deceive them following a landmark High Court ruling that a shareholder in failed gold miner Sons of Gwalia can be treated as a creditor.

The decision is a win for thousands of shareholders in car parts maker Ion Group already lining up to get compensation over its collapse.

However the Australian Shareholders Association (ASA) says the High Court ruling could backfire on mum and dad investors in the longer term if it makes it harder for companies to get money from banks and creditors.

The case arose when Luka Margaretic lost $26,288 of his retirement savings by buying shares in the Western Australian company just 11 days before Sons of Gwalia collapsed in August 2004.

In the past, shareholders were among the last to be paid out by failed companies, ranked behind secured and unsecured creditors.

But Mr Margaretic tested this entitlement by seeking compensation anyway, claiming he was the victim of misleading and deceptive conduct because Sons of Gwalia had failed to notify the Australian Stock Exchange it did not have enough gold reserves to keep going.

After his case succeeded in the federal court, Sons of Gwalia administrators Ferrier Hodgson and creditor ING Investment management appealed to the High Court, which today dismissed their appeal by a six-to-one majority.

"A person who buys shares in a company in reliance upon misleading or deceptive information from the company, or misled as to the company's worth by its failure to make disclosures required by law, may have a claim for damages against the company which ranks equally with claims of other creditors," the court held.

ASA chairman John Curry said he was surprised by the decision which he thinks may make it harder for some companies to get credit and funds.

"Shareholders say 'I will put money into your company, I know it is at risk and I may lose it all', but a creditor doesn't expect to lose it all for supplying goods and services," Mr Curry said.

He said today's decision could be seen as a win for small shareholders.

"But it may backfire on them, particularly if banks take a harder line on the companies in which they invest."

Litigation funder IMF's executive director, Hugh McLernon, said he believed the decision would impact on the price of unsecured debt - with unsecured creditors either seeking security or raising the cost of credit.

But he said the ruling was very positive for small shareholders and he expected to see a number of new cases.

"There are already a number of cases which we are funding, there will be others," Mr McLernon said.

IMF is funding action for thousands of shareholders against the failed Ion Group.

Mr McLernon said Mr Margaretic was one of 800 IMF clients seeking $70 million from the estimated Sons of Gwalia kitty of $600 million.

Not all shareholders of Sons of Gwalia are entitled to make a claim, only those who bought shares on the market in the two to three years the company was believed to have engaged in deceptive or misleading conduct, IMF said.