Govt to dump court ruling on insolvency

The Australian Government will overturn a High Court ruling that ranked shareholders equally with unsecured creditors in corporate collapses under plans to give directors more protection when rescuing failing companies.

Financial Services Minister Chris Bowen said the 2007 ruling in Sons of Gwalia v Margaretic could increase the "cost of debt financing for companies" and have a "negative impact on business rescue procedures".

In the case brought against mining company Sons of Gwalia by shareholder Luka Margaretic, the High Court ruled that when an insolvent business goes into external administration, certain compensation claims by shareholders have equal footing with those of unsecured creditors.

Bowen said yesterday that the decision to overturn the ruling was part of a wider overhaul of Australia's corporate insolvency laws aimed at reducing the cost and complexity of insolvency administration.

"The Government is committed to ensuring that Australia's corporate insolvency laws are capable of meeting the challenges arising from the global economic downturn."

Australia is one of the few nations to have skirted the global recession, with the statistics bureau saying last week that employers added jobs for a fourth straight month in December at three times the pace economists had estimated. Reserve Bank governor Glenn Stevens has led central bankers worldwide in announcing an unprecedented three straight months of interest rate increases beginning in October.

The Government's move to overturn the Sons of Gwalia ruling was a "positive development" for Australian credit markets, Sydney credit analysts for Deutsche Bank AG led by Gus Medeiros said in a note yesterday.

"It would remove uncertainties associated with the High Court decision and the possibility of higher debt funding costs for companies," they wrote. The proposed changes to insolvency laws would "give company directors greater protection when attempting to rescue failing companies".

A discussion paper published by the Government yesterday examines how to rescue distressed businesses through "informal work-outs" rather than external administration. The Government suggests allowing companies to trade while insolvent under certain conditions as they internally work out their finances.

The Australian Financial Review said the proposed changes were a response to industry concerns that some directors liquidated companies that could be saved in order to avoid prosecution for trading while insolvent.

- BLOOMBERG