govt to overturn sons of gwalia ruling

(from the age)
The Federal Government will legislate to overturn a High Court ruling that made it easier for shareholders to recover funds when a company goes bust.

The Corporations Act will be amended to reverse the effect of the court decision in Sons of Gwalia v Margaretic which determined that, in a corporate winding up, certain compensation claims by shareholders were not subordinated below the claims of other creditors.

The High Court decision three years ago ranked shareholders of miner Sons of Gwalia equally with unsecured creditors in corporate collapses.

The decision to reverse the ruling, part of insolvency law reform by the Federal Government, addresses concern it increased risks for creditors and swelled the cost of debt.

The relaxation of rules responds to concern that some directors liquidate companies that could be saved in order to avoid prosecution.

Corporate Law Minister Chris Bowen said the ruling undermined the distinction between debt and equity.

"I was concerned that not only funders, banks, but also creditors who are often small businesses were being disadvantaged by that ruling," he told ABC Radio this morning.

Mr Bowen also released a discussion paper on the operation of Australia's insolvent trading laws in the event of a business rescue outside external administration.

Informal work-outs played an important role in business rescue and the use of formal insolvency re-organisation procedures was not always appropriate, he said.