Explanatory Memorandum

Revised Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, The Hon David Bradbury MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Outline

The Corporations Amendment (Sons of Gwalia) Bill 2010 (the Bill) amends the rights of persons bringing claims for damages in relation to shareholdings under the Corporations Act 2001 (Corporations Act). The amendments contained in the Bill give effect to a decision of the Government to reverse the effect of the High Court's decision in Sons of Gwalia Ltd v Margaretic ^[[1]] and to make other amendments to streamline external administrations. The Bill contains three key measures:

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It provides that all claims in relation to the buying, selling, holding or otherwise dealing with shares are to be ranked equally and after all other creditors' claims.

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It removes the right of persons bringing claims regarding shareholdings to vote as creditors in a voluntary administration or a winding up unless they receive permission from the Court. They will also not be entitled to receive reports to creditors unless they make a request in writing to the external administrator.

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It eliminates any restriction on the capacity of a shareholder to recover damages against a company based on how they acquired the shares or whether they still hold the shares.

Date of effect: The Bill commences on Royal Assent. The Bill does not have retrospective effect.

Proposal announced: The measures are based on proposals announced by the then Minister for Human Services; Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP in a media release dated 19 January 2010.

Financial impact: The Bill has no significant financial impact on Commonwealth expenditure or revenue.

Compliance cost impact: Low. The measures will provide minimal additional compliance costs for those bringing subordinated claims who will be required to incur the cost of a written request to the external administrator for communications to creditors; and the cost of a court application should they wish to vote in an external administration. It is, however, very unlikely that such request or application will be made, as almost always, those bringing subordinated claims are very unlikely to be able to participate in any distribution to creditors due to there being insufficient assets to meet their claims. Any costs imposed on those bringing claims, in the rare circumstances where claims are brought, would be offset by the reduced costs of conducting external administrations. External administrators would have reduced costs, as unless a written request was made, they would no longer be obliged to provide communications to those bringing subordinated claims. Any reduced costs of an external administrator leads to greater returns for creditors.

Summary of regulation impact statement

Regulation impact on business

Impact : The amendments will have an ongoing regulatory impact on credit providers and corporations who obtain credit, shareholders and on the external administration of insolvent corporations.

Mainpoints:

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The amendments will facilitate the provision of credit to companies; the reduction of the risk premiums charged; and the extent of onerous terms and conditions imposed in order to offset the effects on non-subordination.

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The amendments will reduce the costs for insolvency practitioners to carry out external administrations; both costs that they ultimately bear themselves and those that they are able to pass onto creditors claiming in the administration (through reduced distributions).

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The amendments will improve the efficacy of external administration, both in terms of the reallocation of capital to productive uses and the promotion of business rehabilitation.