2010 has already witnessed several key legislative changes in various areas of the law. One of these, related to insolvency law and The Corporations Act 2001, is worth writing about. The High Court’s decision in Sons of Gwalia v Margaretic [2007] HCA 1 is being overturned.  

Quick facts

The High Court in 2007 delivered judgment in favour of shareholders after investors bought shares from a West Australian mining company before it slipped into liquidation.

In the winding up order, the company’s shareholders looking for compensation were treated on par with other creditors.

Why is the decision being reversed?

·         Critics believe that the case seemed unfair in ranking shareholders equally with lenders in securing compensation in insolvency cases.

·         Chris Bowen, Federal Minister for Financial Services also believes that the decision blurred the boundaries between debt and equity.

·         The ruling provided an adverse effect on a company’s access to debt financing.

·         The decision attracted uncertainty, delay and high costs associated with external administration.

·         This case raised serious concerns that some directors liquidate companies that could be saved in order to avoid prosecution.

What good will come from a reversal?

·         Regulatory certainty and greater equity will be promoted, as per the government’s prediction. This in turn will assist better governance.

·         Funders, banks and creditors, often small businesses, will no longer be disadvantaged by the earlier ruling.

• Brett Bondfield, law professor at Sydney University states that a “more standard expectation” and a balance of risks will be re introduced in insolvency regimes.

·         John Colvin, chief executive of Australian Institute of Company Directors says that the old principle that lenders to companies rank ahead of the owners of companies will return.

·         The reform will considerably lower administration costs of insolvent companies for the benefit of all creditors, whether secured or unsecured. 

·         It will propel a move towards successful and less complex restructuring.

·         Insolvency practitioners believe that a reversal in decision will align Australian law with those of other key foreign jurisdictions.

What are the key changes?

·         'Informal work-outs’ will be encouraged, allowing companies to work out their own internal affairs. It is suggested that conventional insolvency procedures are not always the best solution.

• The reforms will also remove irregularities in respect of 'relation-back' and 'commencement' dates for liquidations.
• The hope is also to reduce the potential for abuse of corporate insolvency law by introducing new business judgment rules, for example.

• Creditor meeting procedures will be simplified and some proposals to be voted on without a creditor's meeting being held will be permitted.

However, all practitioners and experts are not yet convinced. Critics suspect that the proposed reforms will weaken the protection of shareholders. Others believe that the government’s agenda lacks enough evidence. In fact, the confidence of some investors and creditors might suffer.

It is never easy to secure the interests of all stakeholders, especially in complex insolvency structures. It is too early to comment on these theoretical changes. Their true impact remains to be seen.