Sherry to back “deceived” investors

Shareholders don’t necessarily  stand behind other creditors these days, in the queues that form after  company collapses.

Their claims, for a little of what is left, can be as good as any-one else’s, if they were misled when they bought their shares.

That, at least, is the broad thrust of  the decision the High Court took, in the case of a small investor,  Luke Margaretic, who bought shares in the historic Sons of Gwalia mining company, shortly before it failed.

In a six-one decision, the High Court confirmed the decisions of  lower courts, which had ruled that Mr Margaretic had this  status, because he had been misled, when he bought the shares.

Sons of Gwalia had collapsed, essentially, because one of its senior officials had been engaging in secret trades, without authorisation and  had chalked up huge losses, over several years.

The Margaretic case, though, upset long-standing traditions of that had  governed who stands where, in creditors’ queues.

As part owners of the failed company, investors were traditionally believed to rank well behind ordinary commercial creditors.

Understandably, the Margaretic case raised tempers.

And one leading law firm, Malleson Stephen Jaques, warned  that unless the law is changed urgently, the Margaretic decision would present “significant practical problems for current insolvency administrations and future administrations.”

With Australian companies collapsing right and left, as a result of the global economic crisis, that issue could hardly be more critical than it has now become.

So should the law be changed, to put investors like Mr Mrgaretic, back in queue, as tradition once demanded?

The Howard government sought official advice on that point, during its last year in office.

And its successor, the Rudd government has just received it, from the experts in the Corporations and Markets Advisory Committee.

But the news, for administrators, is not good.

The Minister for Superannuation and Corporate Law, Nick Sherry, put out a statement yesterday “acknowledging” release of the CMAC report.

And he said the government would “closely examine” the committee’s report.

But, critically, he noted that the committee had recommended that the current law, as reflected in Mr Margaretic’s case, “be retained.”   Senator Sherry declared that  the government would “closely examine” that recommendation.

Translated from  Canberra’s bureaucratic speak, that means “If you think we are going to overturn a High Court decision  just to keep lazy  accountants and lawyers happy, you’re mad.”

Yes, the administration of failed companies’ affairs will be more difficult in future, just as the lawyers and accountants had feared.

But there is always a bright side.

Their fees will be bigger, too.

Related stories:

1. Australian investors – and advisers – get some excellent advice
2. Disclosure documents “unreadable:”Sherry
3. Sherry moves to assure share traders