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Not All Shareholder Claims Rank Behind Creditors

The decision of Emmett J could have far reaching ramifications for debt financings in the Australian market.

In essence Emmett J decided that if a shareholder is able to demonstrate:


that he relied upon the conduct of a company in a contravention of a prohibition on misleading or deceptive conduct (for instance a company not complying with its continuous disclosure obligations under the Corporations Act and the Listing Rules of the Australian Stock Exchange);
and in doing so he acted to his detriment, albeit by buying shares in the company from a third party in a transaction to which the company is not a party
that shareholder will be regarded as a creditor of the company and, most importantly:

will rank equally with all other unsecured creditors for the amount of that claim; and
will not be subordinated to other creditors as would be the case for claims made by him in his capacity as a member.
Clarity as to a company's indebtedness and its leverage generally is fundamental to the decision making process of a lender or investor in the debt capital markets. Companies, particularly those in financial difficulty, often face claims for inadequate disclosure. Lenders may well find themselves more reluctant to lend at all or, lend further or re-finance in circumstances where they are unsure as to the amounts that might be claimed by shareholders for damages.

The decision also gives rise to a complex and expensive burden for administrators and liquidators who might have to adjudicate on the shareholder claims - potentially on a case by case basis. This will delay the return to creditors and increase the cost of administrations and liquidations.