Sons of Gwalia: Navigating the Line between Membership and Creditor Rights in Corporate Insolvencies

Company and Securities Law Journal, Vol. 25, p. 7, 2007

26 Pages Posted: 12 Feb 2007

See all articles by Jason Harris

Jason Harris

The University of Sydney Law School

Anil Hargovan

University of New South Wales

Abstract

Purchasing shares in a company is an inherently risky proposition, which leaves the investor at the mercy of the vagaries of the market. However, one of the founding principles of modern capitalism is the ability of members to limit their liability to the unpaid value of their shares. The benefits of limited liability are well understood by market participants, but limited liability also has significant consequences for shareholders. It could be said that the quid pro quo for the statutory protection of limited liability conferred on shareholders is the deferral of their rights to claim a proportion of the company's assets in liquidation, which, in the case of an insolvent company, results in shareholders receiving no return on their investment. The boundaries of the rule that membership interests are deferred until after the creditors are paid in full (known as the rule in Houldsworth's case) have recently been tested by the Federal Court where shareholders have sought declarations that they were misled by the company into purchasing their shares on the market and therefore they are contingent creditors with an unliquidated damages claim.

This paper examines whether it is appropriate for members to be classed as creditors where the claim arises out of the circumstances that led to the purchase of their shares. The significant practical implications of such a classification for the efficient regulation of insolvency administration will also be discussed.

Keywords: Subordination, shareholders, misrepresentation, securities class actions

JEL Classification: K22

Suggested Citation

Harris, Jason and Hargovan, Anil, Sons of Gwalia: Navigating the Line between Membership and Creditor Rights in Corporate Insolvencies. Company and Securities Law Journal, Vol. 25, p. 7, 2007. Available at SSRN: https://ssrn.com/abstract=962496

Jason Harris (Contact Author)

The University of Sydney Law School ( email )

New Law Building, F10
The University of Sydney
Sydney, NSW 2006
Australia

HOME PAGE: http://https://sydney.edu.au/law/about/people/profiles/jason.harris.php

Anil Hargovan

University of New South Wales ( email )

Kensington
High St
Sydney NSW 2052
Australia

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