Side C Claims - Sons of Gwalia

Sons of Gwalia - be scared, be very scared

Here is a nice little "Side C" type claim which if I was a D&O Claims officer would find that it is one I would likely reject due to alleged deliberate fraud by the company. What is it about?

Luka Margaretic, an investor, bought shares in the gold miner Sons of Gwalia in August 2004, just 11 days before administrators were appointed to the company.

In Sons of Gwalia v Margaretic the High Court overturned the convention that shareholders rank behind creditors in an insolvency. The court ruled that a shareholder in a failed company had the same right as an unsecured creditor to pursue a claim against the company in cases where the shareholder had suffered loss as a result of misleading and deceptive conduct by the company.

The decision was based on an interpretation of section 563A of the Corporations Act, which says: Payment of a debt owed by a company to a person in the person’s capacity as a member (shareholder) of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to or claims made by persons otherwise than as members of the company have been satisfied.

The impact of the decision is that section 563A of the Corporations Act no longer embodies a general principle that in an insolvency shareholders come last.

When investing in a company, shareholders assume many risks that trade creditors do not in exchange for the rights and benefits that accompany their ownership stake. But this should not include the risk of insolvency caused by fraud or the non-disclosure of material information.Prospective shareholders rely on a listed company's compliance with its continuous disclosure obligations when making investment decisions.

Fair enough, now to how the Government will fix it.

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