Sons of Gwalia Ltd v Margaretic [2007] HCA 1

What the court decided

Sons of Gwalia Ltd (Gwalia), a listed gold mining company, went into administration on 29 August 2004 [8]. Mr Margaretic had bought 20,000 Gwalia shares on 18 August 2004 for $26,200 [8]. He bought on the Australian Stock Exchange, and it was agreed the shares became worthless when the administrators were appointed [140].

He alleged that Gwalia had not told the market that its gold reserves could not meet its delivery contracts or that it could not continue as a going concern [8]. He put that as a breach of the continuous disclosure obligation in section 674 of the Corporations Act 2001 (Cth) [141]. He also alleged misleading or deceptive conduct contrary to section 1041H of that Act, section 52 of the Trade Practices Act 1974 (Cth) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) [8]. Gwalia's deed postponed members' debts to the extent contemplated by section 563A and the general law [139]. The case was argued on the assumption that he could prove the contraventions and the damage he alleged [9].

The deed administrators sought declarations that the claim was not provable or, alternatively, was postponed [144]. ING Investment Management LLC (ING), a creditor that held no shares, was named as a respondent [144]. Emmett J, the primary judge, declared that Mr Margaretic was a creditor and that his claim was not postponed [7], [100], [145]. The Full Court dismissed the appeals brought by Gwalia and ING, who then appealed by special leave [146].

After oral argument the Court asked whether the claim was provable, in particular whether its circumstances arose before "the relevant date" [147]. Hayne J held that they did, so the claim was within section 553 [176]. On his Honour's analysis, assuming the allegations to be true, Mr Margaretic suffered loss when he bought shares that a properly informed market would have judged worthless [175]. Gummow J [45]–[46], Callinan J [211], Heydon J [261] and Crennan J [265] agreed with that conclusion. Gleeson CJ and Kirby J did not decide the relevant date question, treating the dispute as one about section 563A [6], [102].

As the Court applied it, section 563A postponed payment of a debt owed to a person in that person's capacity as a member until debts owed to, or claims made by, persons otherwise than as members were satisfied [1]–[2]. Gleeson CJ, Gummow, Kirby, Hayne, Heydon and Crennan JJ held that section 563A did not postpone the claim, and Callinan J dissented [32], [45], [134], [206], [262], [273], [259].

Gleeson CJ said the section assumed a provable liability and subordinated it only if it was owed to the claimant in that capacity [6]. It did not embody a general policy that "members come last" [19]. The line was to be drawn by analysing the nature of the claim, not its effect on other creditors [28]. This claim did not rest on any right or obligation that Mr Margaretic had by virtue of membership, sought no paid-up capital and would have been the same had he ceased to be a member [31].

Hayne J reasoned that membership is a statutory concept, so the connection between an obligation and membership must be found in the legislation [202]. The statutory claims, as framed, rested on Gwalia's alleged contraventions and its liability to any person who suffered loss as a result, and any claim in deceit would stand apart from obligations the Act created for members [192], [206]. His Honour held that, even if the claim was a debt, it was not owed to Mr Margaretic as a member [193].

Kirby J said the criterion went to the character of the debt, not the identity of the claimant [119]. His Honour said that, on the face of things, the outcome seemed counter-intuitive, and felt more sympathy for the general creditors, but held that the statute did not sustain their case [104], [112]–[113]. He preferred the construction adopted by Gleeson CJ [134]. Gummow J agreed generally with Hayne J [46]. Heydon J agreed with Hayne J's reasons on this question [262]. Crennan J agreed with the reasons of Gleeson CJ and Hayne J [265].

ING had argued that a common law principle drawn from Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 barred a shareholder who had not rescinded from proving for damages at all [13]. Gummow J noted that ING pressed the point again in later written submissions [48]. Gleeson CJ said that case was never authority for so wide a principle [16], and Gummow J rejected any such principle in Australia [49], [98]. Hayne J said neither that case nor Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 established it [190]. Heydon J said counsel for ING abandoned the contention in final address but, if it was not abandoned, adopted Hayne J's reasons for rejecting it [264].

Gummow, Hayne and Heydon JJ said that Webb Distributors concerned admission to proof, not ranking [50], [182], [263]. On ranking, Gleeson CJ held that it neither required nor supported a different outcome under section 563A [32]. On provability, Hayne J said it did not dictate the result because the statutory definition of provable claims changed in 1992 [192]. Gummow J would not accept its reasoning as correct for the Act, and doubted its result [96]–[97]. Kirby J was inclined to agree with that analysis [104], and Crennan J agreed generally with Gummow J's reasons [265].

Callinan J found section 563A ambiguous and concluded that its context, history and the aim of coherence and fairness favoured Gwalia's construction [225], [259]. He would have allowed the appeals and declared that payment of the claim be postponed [259].

Each appeal was dismissed with costs [33], [207], [274].

Why it matters

In my view, the decision shows that, under sections 553 and 563A as the Court construed them, those acting for an administrator, liquidator or creditor could not assume that such a shareholder's claim ranked behind ordinary creditors. Readers should check the current text of both provisions before relying on the decision. It applied sections 553(1) and 563A of the Corporations Act 2001 (Cth) through this deed [137], [139].

The majority asked whether the obligation sued on arose from membership itself, not whether the claimant held shares [31], [119], [202]. Mr Margaretic bought on market [140], and Hayne J left open whether a subscriber's claim seeks the return of what was subscribed [190]. Even so, Gummow J said that, unless the mode of acquisition bore on the character of the debt, the distinction was difficult to maintain as a matter of principle, and Kirby J and Hayne J said the mode of acquisition did not itself change the answer [52], [121], [205]. Hayne J left room for an obligation grounded in money paid under the statutory contract, depending on the facts and very probably on the constituent documents, but said a subscriber's damages claim for misleading conduct inducing the subscription would not be such an obligation without specific legislation [205]. Gleeson CJ relied in part on the fact that this claim sought no paid-up capital [31]. Callinan J also saw no difference between subscribers and purchasers, but as a reason for postponing both [252]. A subscriber's claim should therefore be assessed on its own facts.

The decision was reached on assumed facts and does not decide whether such a claim will succeed [9].

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.