Investor protection for shareholders might come at a cost

Friday 19 October 2007

New Zealand's increasingly robust investor protection legislation may be good news for some aggrieved shareholders but could result in a slower, more complicated liquidation process and diluted returns for unsecured creditors, says Bell Gully senior associate Tim Clarke.

In New Zealand, if a company is liquidated shareholders rank behind creditors in the distribution of the company's assets and are therefore likely to lose all or some of their investment. However, shareholders who suffer loss because of the company's non-compliance with the regulatory regime (such as breach of the continuous disclosure rules) may have claims against the company and, to that extent, are considered contingent creditors as well as shareholders.

In a paper Tim presented to the annual Corporate Insolvency Conference in Auckland this week, he says this elevation of the status of aggrieved shareholders may appear to provide greater security for the investing public but the actual consequences might be less attractive.

Based on overseas experience, the improvement in the position of misled shareholders during the course of liquidation complicates the process. Evaluating all the information to determine whether the company complied with the regulatory regime is notoriously complex, and can involve delays and incur substantial costs.

Tim says that by elevating a shareholder's position to contingent creditor, aggrieved shareholders will swell the number of creditors so that other unsecured creditors may have their returns diluted.

In his paper, Tim cited a recent Australian case involving the collapse of mining company Sons of Gwalia in which the High Court of Australia allowed a shareholder to elevate its status to a contingent creditor during the course of liquidation.

Click here to read the paper

For more information, please contact:

Tim Clarke
Senior Associate