Sons of Gwalia - Research Paper Example

? CASE STUDY: Sons of Gwalia Ltd v Margaretic Introduction ity for the proposition that a properly registered company is a separate legal entity from its owners (the shareholders) and the managers, directors and executive officers is Salomon v Salomon & Co Ltd (Salomon). Salomon has been in Australian corporate law for a very long time, the ramifications of the separate legal entity has not been yet fully implemented, thus the shareholders even having control and ownership are not be equated with corporate entity. This distinction between the corporation and the shareholders is facilitated though numerous legislative protections, This limited liability of the shareholders, gives them opportunity for creating numerous company and business profiles offering diversified business investment portfolios. First corporate legislation was created in 1862, since then corporate legislation has undergone and is undergoing through some dramatic, and other changes which are less dramatic but do bring effect over the corporate practices. Thus, social, legal and economic climate has since the first private corporation legislation, has been changed. Now, it has become different and Australian Securities and Investments Commission has recognized the requirement and need for the consumers’ confidence in the market, so that they could more informed and confident about the investment decision they would be undertaking. This change in ASIC commission behavior did not occurred by itself, the main cause and event behind this changing of character and care for the investors became when Australian Government started the active campaign for improving business opportunities and business investment in the country. Luka Margaretic, shareholder of “Sons of Gwalia Ltd” which is publicly listed company on Australian Stock Exchange, filed a legal process against the company demanding claims for damages caused by loss of the stock values of “Sons of Gwalia Ltd” gold mining company. The damages claims were based upon the allegedly misleading or deceptive conduct of the company and a failure of the company to comply with the Sons of Gwalia continuous disclosure obligations. The conduct involved statements made by the company management to ASX, disclosing false figures of the company’s gold reserves. This false claim of company gold reserves was making it problematic and challenging for the company to supply gold to their customers with whom they hard contractual agreement of the then fixed gold prices. Due to rise in gold prices and insufficient availability of gold stock in company reserves caused share price to drop substantially, thus providing reason to Luka Margaretic to file a lawsuit claiming damages. In order for capital markets to operate efficiently, market investors are required to possess accurate information and detail about the companies which are offering trade on the market. Therefore, Australian corporate laws have generated a surplus of corporate disclosure requirements which ensure that price-sensitive information, information which can have effect over the prices of the stock values of the company. These obligations include. Continuous Disclosure Transaction-specific disclosure obligation These rules are formulated by disclosure laws which are enforceable by a range of public and private preparations. However, this creation of private preparations to avoid the problems often can result the tension between prioritizing the parties involved. Though, the law has set off systems which favor, unsecured creditors over the members of the company, thus undermining the investment of the shareholder. Numerous decisions have been examined and the scope of the rules which are subordinated claims to become insolvency. The pinnacle of the development has been the sculptures misrepresentation which induced the purchase of the shares which had occurred in the secondary market; these were then forbidden and not allowed over the secondary market. Protections in Corporate Law for Creditors Corporate law provides numerous protection standards and remedies for creditors, Winding Up Company (1) A company under administration cannot be wound up voluntarily, except as provided by section 446A. (2) The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. (3) The Court is not to appoint a provisional liquidator of a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed. BRIEF ABOUT THE SCENARIO Sons of Gwalia is Australian gold mining firm which is also listed company in Australian Stock Exchange (ASX). Before price hike in gold prices, Sons of Gwalia had entered into the gold forward contracts with numerous companies. The contract required company to supply gold to numerous parties on prices agreed upon the contract which had been previously agreed upon. Sudden rise in gold prices caused the Sons of Gwalia with the dilemma; resulting, them without the possibility of keeping up with the contracts they had acquired with numerous parties. Sons of Gwalia administration announced the appointment of new administration and also the removal of the company name from pubic listing on Australian Stock Exchange. This caused, Downward plunge of the stock prices Produced the financial loss of shareholders. CAUSE OF FAILURE This failure of Sons of Gwalia was caused by the fact that, The company has share false information with authorities regarding there gold reserves. The practice affected the company into finding itself with the situation Where they have to provide the parties with gold while there gold reserves were insufficient. They could not afford to buy gold from the market and continue with the distribution. The sudden hike in gold prices, and insufficient gold reserves corned the management into disclosing the failure of the company. CONSEQUENCES The consequences of the failure resulted in the value loss of the company stock, the shareholder suffered due to the same reason. Luka Margaretic found himself in same scenario, he bought Sons of Gwalia shares, and soon after buying the shares he found company going into administration change, and decline in the stock value of the company stocks. He filed the damages claim, which were based upon the deceptive conduct of Sons of Gwalia and dishonoring the company statement made to Australian Stock Exchange which were, The false stock value provided to Australian Stock Exchange of the company gold reserves.    Margaretic claimed that the statement provided by the company administration breached market disclosure laws, which included Prohibiting in engagement of misleading and dishonest conduct This misleading, dishonest and deceptive conduct resulted in his decision of buying Sons of Gwalia share, and thus losing his investment caused by the company administration for not following the obligation implemented by the law. Margaretic Compensation claim sought To recover the cost of shares and brokerage ($20,000 approximately) IMF ltd, which is the publicly listed litigation funder, supported Margaretic's claim. Administration Response Sons of Gwalia administration responded to suite filed by Margaretic by, Rejecting proof of debt provided by Margaretic In federal court they ought Court declaration that Margaretic claim is prohibited by rule City of Glasgow Bank or subordinated by section S563A of the Corporation Act 2001. Emmett J dismissed the administrator’s application and shareholder’s cross claim was granted. This paved away opportunity for Margaretic to vote and prove in the company voluntary administration as an unsecured creditor. The reason of his Honour was Margaretic's Response  In response to this Margaretic Filed a cross claim to seek declaration stating he has been creditor for the purposes of the company's voluntary administration thus he was entitled to vote at creditor's meeting. In Sons of Gwalia case, the high court decision holds significant and important place because it overturns and flips the conventional view which has been that shareholders of the company are not to be permitted and allowed to be wind up in competition with the rights of non-share holder creditors. Before i go any further i would like to comment and discuss Houldsworth briefly. Houldsworth Australian companies are operated within complex matrix of legislation, business norms, common law and numerous policy considerations. The rules which these numerous legislations are comprised off, one of them were developed in the court in Houldsworth, In year 1880, The rule stated that the member of the company cannot claim damages for misrepresentation and fraudulent exercises against the company when fraudulent misrepresentation against the company when liquidation process is held. The court also held that there is no right to rescission of the contract of the share subscription on the basis of the misrepresentation once company starts liquidation, as now restitution becomes impossible.  IMPLICATIONS AND ROLE OF LAW: Factors for Court Decision Among seven judges there in the court ruling, three of the judges paid attention towards the modern trend which enhanced the investors protection in the contemporary Australian corporate culture and the policy issues which arise from the treatment of the shareholder and creditors’ claims, were causing insolvency. The judgment of Gleeson CJ did recognize the intersection between rights of creditors and shareholders, and the insolvency issues and he observed that modern legislation. He commented “Has extended greatly the scope for ‘shareholder claims’ against corporations, with consequences for ordinary creditors who may find themselves, in insolvency,   proving in competition with members now armed with statutory rights.” He felt the need, For legislative clarification. As there was requirement where the line should be drawn so that competing shareholder and creditor interest can be accommodated, what he said is been briefed in following points, On the one hand, extending the range of claims by shareholders is likely to be at the expense of ordinary creditors. The specter of insolvency stands behind corporate regulation. Legislation that discusses rights of damages upon shareholders necessarily increases the number of potential creditors in a winding up.   Such   an   increase normally will be   at   the expense of those who previously would have shared in the available assets. On the other hand, since the need for protection of investors often arises only in the event of insolvency. Such protection  may be illusory if the claims of   those who are given the apparent benefit of the protection are subordinated to the claims of ordinary creditors” S 563A did not provide for a policy of blanket subordination, causing all member claims to be deferred to non-member creditors when insolvency occurs. Kirby J also did agreed with Gleeson CJ, he concluded, S 563A does not evidence any” members come last policy” By supporting his decision, Kirby J specified attention to the aim of the policy, According to him, one of the principal reasons for the establishment of law such as this one, Was the provision of protection, in circumstances such as arose in [Margaretic’s] case, to persons like him.  The obligation of  constant disclosure … was specifically designed and enacted to protect shareholders and potential shareholders from losses that might be suffered from undisclosed facts and to afford a foundation that would prevent, compensate for and reduce the incidence of such losses” He then offered rational to the federal Parliament, To offer remedy for shareholders for misleading or deceptive conduct and behavior or dealing He held that these new remedies and procedure in legislative law are provided and designed to Improve the protection available to shareholders in case of loss occurred over the accounts of company management misconduct of the code of law. Significance of the Court Decision and Arguments Sons of Gwalia case goes into the center of numerous different philosophies, ideas and views. This Underpins allocation of risk in insolvency law. Uncertainty of the interpretation of s 563a by the judges has been resolved by the high court favoring limited subordination of shareholders claim in insolvency. Hitherto buried legal path towards a legislative policy of limited subordination has been exposed by High Court. Though in some quarters of the commercial community, there is still uncertainty, as to whether in the case of Sons of Gwalia; Decision was made which represents a sound legislative policy. Arguments have been made for legislative amendment ensuring an appropriate balance in risk allocation between creditors and investors, and also the priorities between them when insolvency occurs. The treatment of defrauded shareholders claims adopts for law reforms. The balance should be found which prohibits massive power shit from creditors to shareholders. During all this Sons of Gwalia Ltd and Margaretic episode policy issues also came forth into the light. Policy issues involved with sharing of risk between shareholders and creditors. Upon insolvency of the issue, which party is to given priority? Kirby J was sympathetic towards the creditors however His honor felt constrained over the interpretation of s 563A, his honor openly declared his finding to be counter intuitive. In the end nuanced approach was given towards s 563 and Margaretic’s claim was allowed, thus the power shift has occurred which resulted in the rejection of ‘members come last’ policy, which has been in practice for very long. His honor went further enough to offer an amendment to redress the imbalance between shareholder and creditor rights during insolvency event. His Honor proposed that the phrase ‘a debt owed by a company to a person in the person’s ability as a member of the company’ be transformed to ‘a debt owed by a company to a person who is a affiliate of the company’ There has been inherent tension involving in granting of the investors right to enforce disclosure practices and remedies which would compensate breach of the disclosure requirements. This decision of the high court, in case of Sons of Gwalia is of outmost and significant importance because it has overturned 120 years old practices, which has been going on and accepted by Australian corporate culture which undermines the rights of the shareholders and investors. The rule in Houldsworth had been accepted for many years and was actively applied to numerous cases by differently constituted High Courts. However, in this case high court judges, by majority supported notion and formed new practice and remedies to solve future insolvency issues occurring between the parties. Works Cited AustlII. (n.d.). AUSTLII. Retrieved Jan 04, 2010, from Australasian Legal Information Institute: htpp://www.austlii.edu.au Australian Government. (n.d.). Retrieved Jan 04, 2010, from Australian Securities and Investments Commission Regulations 2001: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401074?OpenDocument Australian Government Attorney Generals. (n.d.). Retrieved Jan 04, 2010, from ComLaw: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401309?OpenDocument LCA. (n.d.). LCA. Retrieved Jan 4, 2010, from Business Law Section: http://www.lawcouncil.asn.au/bls/ Section 52 of the Trade Practices Act 1974 ('TPA'); "Misleading or deceptive conduct” Section 1041H of the Act is in relevantly similar terms. Section 12DA of the Australian Securities and Investments Commission Act 2001 ('ASIC Act'); Read More