Sons of Gwalia and statutory debt subordination: An appraisal of the North American experience

LexisNexis Butterworths
Publication Type:
Journal article
Hargovan Anil and Harris Jason 2007, 'Sons of Gwalia and statutory debt subordination: An appraisal of the North American experience', LexisNexis Butterworths, vol. 20, no. 3, pp. 265-300.
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The judicial uncertainty on the interpretation and reach of s 563A of the Corporations Act, dealing with debt priority issues, has now been resolved by the High Court in the landmark decision Sons of Gwalia Ltd v Margaretic. The High Court has (in certain circumstances) elevated the status of shareholders, with claims for damages caused by defective disclosure practices, to that of ordinary creditors. Uncertainty, however, remains over whether this is a sound policy outcome. Parliamentary intention regarding the appropriate delineation between creditor and investor rights during insolvency remains unclear. Adverse reaction by the commercial community has led to the High Court's decision being examined by the Corporations and Markets Advisory Committee. As part of the calls for law reform, in order to clarify the rights of debt and equity investors during insolvency, bankers and commentators have advocated that Australia adopt the US model for statutory debt subordination with its emphasis on a 'shareholders come last' principle during insolvency. The purpose of this article is to examine the policy and legal position of the subordination of shareholder claims during insolvency in the United States and Canada and to gauge what lessons may be learnt from that experience. A critical appraisal of the North American jurisprudence and experience, on the subordination of shareholder claims for damages arising out of misrepresentation inducing the acquisition or retention of shares, may be of assistance in resolving the current difficulties experienced in Australian insolvency law. The authors argue that the US position of blanket subordination should not be adopted in Australia.
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