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

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