Victory for Gwalia investors Andrew Trounson September 16, 2005 SHAREHOLDERS left out-of-pocket by collapsed companies were celebrating yesterday after a landmark court judgment dramatically improved the prospects of salvaging something from the wreckage of collapsed goldminer Sons of Gwalia.
But liquidators and investment analysts said the judgment could dramatically cut returns to creditors and reduce demand for Australian corporate bonds by reducing the amount those groups might recover from corporate collapses.
Federal court justice Arthur Emmett ruled in Sydney yesterday that shareholder Luka Margaretic, 67, could be considered a creditor in his damages claim against Sons of Gwalia, which collapsed earlier this year owing nearly $1billion.
Mr Margaretic, a mechanical engineer, lost more than $26,000 of his retirement savings after buying shares days before the collapse.
The ruling means shareholders can seek damages from the pool of funds that would normally be available to unsecured creditors such as bond holders and contractors, rather than having to wait until those groups were paid.
Sons of Gwalia administrators Ferrier Hodgson have received more than 1000 claims from shareholders amounting to some $40million, and the list of claimants is growing.
Shareholders in collapsed Melbourne auto-parts maker ION are also trying to muscle in on creditors, and similar actions are being considered by shareholders in failed contractor Henry Walker Eltin.
The judgment, which is likely to be appealed to the High Court, was condemned by insolvency practitioners, who called for the commonwealth Government to change corporate laws if the decision was allowed to stand.
There are also concerns that the judgment will hit Australia's $110billion corporate bond market, where investors could be discouraged from investing or demand higher premiums to cover their risks.
"There is a lot of offshore debt from Australian corporates and these investors will want a premium to invest in Australian debt if they aren't going to be protected," Stuart Gray, credit analyst at Deutsche Bank, said.
Last night, the Ferrier Hodgson administrators said the decision would have "significant consequences to commercial life in Australia". They are now preparing an appeal to the full bench of the Federal Court.
Mr Margaretic said he had faced "legalised robbery" ahead of the decision. Mr Margaretic put his retirement on hold because of the loss, and while he only expected to recoup about $7000 from the administration, he said it was a victory in principle.
Ferrier Hodgson had opposed the claim, but Justice Emmett found that when a shareholder bought their shares on-market and had a claim, there was "no reason in principle or policy why the shareholder should be deprived of a say" in the administration of the company.
"It follows that the shareholder is a creditor as that term is defined in the proposed deed of company arrangement," he said.
John Walker, managing director of IMF, which funded Mr Margaretic's action, said it was fair for shareholders to count among creditors when they have been deceived by misleading information from the company, as is allegedly the case in Sons of Gwalia.
"Where a company has done the right thing, there won't be this problem. But where it has defrauded the market, whether it is controlled by the directors or an external controller, there ought to be repercussions," Mr Walker said.
But Mark Korda of insolvency specialists KordaMentha, condemned the decision, warning that the adjudication of damages claims could add years to administrations.
"If the law stands like this, then the Government has to seriously consider amending the law to eliminate such claims," Mr Korda said.
Sons of Gwalia collapsed last year when it emerged that its gold reserves were insufficient to cover its gold-hedging liabilities. Ferrier Hodgson has issued writs against company founders Peter and Chris Lalor, alleging negligence and breach of duties.
SGW Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
