Shareholders to be pushed back in the distribution queue

With the cries of angry shareholders ringing in his ears, Chris Bowen flew to Hong Kong yesterday, to promote Australia as a regional financial hub.

The Financial Services Minister had just moved to overturn a string of expensive court cases, by declaring that some shareholders will not have the same rights as creditors, after all when a company goes bust.

He did that, very simply, by announcing that he will seek changes to the law.

Luke Margaretic, who lost $26,000 when the gold miner, Sons of Gwalia, went broke believed he had established that right.

His claim to have been misled, when he invested $20,000 in the miner, shortly before it failed, was critical to his success in  cases that went all the way to a full bench of the High Court.

While that outcome proved controversial in Australia – as it gave at least some shareholders – in certain circumstances -  a higher place in the payout queue – it was not out of line with international standards.

Commenting on the case, as it then stood, the respected legal firm Allens Arthur Robinson said:”The position is broadly the same as applies in England.

“In other comparable overseas jurisdictions, there is no subordination of shareholder claims at all,” the firm added.

That is, shareholders are not necessarily pushed further back in the queue than other creditors, such as, say, local shopkeepers who might also be owed money.

But Mr Bowen, effectively, declared yesterday that he is having no more of this nonsense from cheeky, queue jumping shareholders.

Announcing a new corporate law insolvency reform package, Mr Bowen said the government is still worried about the implications of the Sons of Gwalia decision.

He said that decision has the potential to further increase both  uncertainty and the costs associated with insolvency procedures.

“The decision has also been taken in the light of the decision’s potential negative impact on business rescue procedures,” he said.

“Any direct benefits to aggrieved shareholders arising from non-subordination are outweighed by negative impacts on shareholders generally, as a result of restrictions on access to – and increases in – the cost of debt financing for companies,”
Mr Bowen added.

How’s that for Ruddy jargon?

More simply, Mr Bowen insisted that he was just returning Australia to traditional understandings, when it comes to the rights of creditors and shareholders, after a company goes broke.

He said small businesses, which are owed money, could be hurt if some shareholders get a higher place in queue than they have previously had.

No-one, though, could accuse Mr Bowen of leaving an untidy desk, as he flew to Asia.

His Corporate Law Insolvency Package, which does much more than just settle queue jumping arguments, was just one of a slew of announcements that he made before leaving.

Mr Bowen also announced refinements to Australia’s prudential regulation of both companies generally and financial service providers, in particular.

All the details are at www.treasury.gov.au

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