Shareholders rights trampled (again) or a justified restoration of the status quo?
Those questions arise from the Federal Government’s latest attempts to reform Australia’s corporate insolvency laws.
They won’t win many cheers among shareholders (or the corporate regulator it seems).
But for directors and others at the big end of town, it’s smiles all around.
The Government says it will now legislate to overturn a High Court ruling that made it easier for shareholders to recover funds when a company goes bust.
The High Court decision three years ago ranked shareholders of miner Sons of Gwalia equally with unsecured creditors in corporate collapses.
That reversed years of accepted practice where debtors ranked ahead of shareholders when companies collapsed and distributions were made from the proceeds of asset sales.
That generally meant shareholders lost all or some of their investments, or faced long delays in getting any returns.
Now after extensive moaning and groaning from big business, the government will reverse the High Court ruling in its proposed insolvency law reform.
Business groups wanted the law changed, but ASIC and shareholder groups wanted the new situation to continue.
But arguments from business that the High Court decision (it was claimed) increased risks for creditors and boosted the cost of debt, won the day in Canberra.
The government made no mention in yesterday’s announcement that there was strong support for the new situation to continue.
The change of rules also responds to claimed concern that some directors liquidate companies that could be saved in order to avoid prosecution.
Corporate Law Minister Chris Bowen said the ruling undermined the distinction between debt and equity.
He said the Government will amend the Corporations Act to reverse the effect of the High Court’s decision in the Sons of Gwalia v Margaretic case which determined that, in a corporate winding up, certain compensation claims by shareholders against the company were not subordinated below the claims of other creditors.
"Any direct benefits to aggrieved shareholders arising from non-subordination are outweighed by the 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 said in his statement yesterday.
"The Government also remains concerned that the Sons of Gwalia decision has the potential to further increase uncertainty and costs of associated with external administration.
"The decision has also been taken in light of the decision’s potential negative impact on business rescue procedures," he said.
Mr Bowen also released a discussion paper on the operation of Australia’s insolvent trading laws in the event of a business rescue outside external administration.
Informal work-outs played an important role in business rescue and the use of formal insolvency re-organisation procedures was not always appropriate, he said.
The federal government’s reform package will also streamline creditor meeting procedures, publication of insolvency related events, and allow some proposals to be voted on without a creditors’ meeting being held.
Additionally, the Australian Securities and Investment Commission will be empowered to take and transfer records should there be a vacancy with an external administrator, the government said.
Mr Bowen said the reform package contained a range of reforms directed at reducing the costs and complexity of insolvency administrations; improving communications with creditors; and reducing the potential for abuse of corporate insolvency law.
He said the insolvent trading discussion paper contains an overview of the current insolvent trading laws; the options available to companies facing insolvency; and outlines the advantages and disadvantages of informal corporate work-outs.
"The paper sets out three possible options: to maintain the status quo; to adopt a modified business judgement rule in respect of the director’s duty to avoid insolvent trading; and to adopt a mechanism for invoking a moratorium from the insolvent trading prohibition while work-outs are attempted.
"Concerns have been raised that the laws directed at preventing businesses from trading while insolvent may negatively impact on genuine work-out attempts; in particular, where restrictions on the availability of credit impede the ability of businesses to temporarily maintain solvency while work-outs are attempted.
"This discussion paper provides an overview of the current insolvent trading laws including the existing defences and relief provisions; the options available to companies facing insolvency; and the advantages and disadvantages of informal work-out attempts."
All these are no doubt worthy, but shareholders won’t see any benefit from them, creditors will.
