Hate waiting around in queues? Most people do. And queuing can be particularly irritating when you are waiting for money.
The long wait for cash is about to get longer for thousands of Australians hoping to get at least something from the assets of failed companies — unless they can show they were deceived when they invested in a sinking companies. A report by the Corporations and Market Advisory Committee released last week supports the claims of deceived investors to jump the line in the distribution queue. In the background to this rather dry question of insolvency law is a cast of notable players and a once-lucrative goldmine.
The question of the shareholder-as-creditor in Australia has been closely involved with a single mine near Leonora on the West Australian goldfields: Sons of Gwalia. Operations ceased at the mine in 1963 when it was thought to have been worked out. Incidentally, the mine’s most famous manager was Herbert Hoover, a cost-cutter who in 1897 began importing cheap Italian labour to work the ore and expanded the mine’s productivity markedly. He then went on to become US President in 1929 — just before the stock market crash which precipitated the Great Depression.
Sons of Gwalia was re-opened by Peter Lalor and his brother Chris in 1981 as the site was found to yield new-age treasures like tantalum, spodumene and lithium, as well as tin. Lalor, of course, is a direct descendant of his more famous namesake, who led the Eureka Stockade rebellion on the Ballarat goldfields in 1854.
The Lalors’ venture collapsed in 2004 after its chief financial officer ran up debts through unauthorised gold-hedging which ultimately amounted to more than $190 million.
The company’s collapse should not have caused undue headaches. It happens, after all, and the procedures followed when Australian companies fail were well established and relatively straightforward.
Commercial creditors, like a company that might have supplied pneumatic drills to a failed mining company, were traditionally given a place near the head of the queue when that failed company’s remaining cash was distributed. Investors, on the other hand, were mostly sent to the back of the queue. As part owners of the mining company they did, after all, have some responsibility to ensure that it did not fail in the first place.
What if a particular investor had been deceived when he bought his shares? That is essentially the question that one small investor, Luke Margaretic, raised after the collapse of Sons of Gwalia. The unlucky Margaretic purchased his shares in Sons of Gwalia just 11 days before the company went into voluntary liquidation in 2004.
He insisted that as he had been deceived, he should have the same status as the company’s ordinary, or commercial creditors. That is to say, he argued for his place near the top of the distribution queue, not down at the end of it, where he would be lucky to pick up any crumbs, at all.
Margaretic is a persistent man and he took his case to court.
In a six-one decision, delivered in January 2007, a full bench of High Court judges agreed with him, throwing the traditional distribution system into chaos.
John Stumbles, an insolvency specialist at Malleson Stephen Jaques, wrote that "unless the law is changed urgently, the [High Court] decision presents significant practical problems for the current insolvency administration and future administrations".
That comment now applies doubly, with Australian companies failing right, left and centre as a result of the global economic crisis. Legal and accounting firms pressed the Howard government in 2007 to change the law to restore the traditional order. However Howard did what prime ministers usually do when faced with a sticky issue: he asked an expert committee for advice.
That advice, from the Corporations and Markets Advisory Committee has just arrived.
The committee essentially recommends that the Government support the High Court’s decision. The Superannuation and Corporate Law Minister, Nick Sherry, said the Government would "closely examine" the committee’s recommendation. Effectively, though, the game is already over. The "deceived investors" have won.
The Government now would effectively have to overrule both the High Court and its own experts if it wanted to put things back the way they used to be. That simply won’t happen.
Losing money — on the share markets or at the racetrack — is always painful. Naturally, it is always someone else’s fault. As Australia slips into the now inevitable recession and the resultant distribution season gets into full swing, there will be no shortage of "deceived" investors joining the queues.
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