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Question:

Discuss about the Shareholder Claims of KWM.
 
 

Answer:

Introduction:

In the case of bankruptcy filed by a firm, the equity shareholders stand to lose the most as only rarely is any money recovered considering that liquidation proceeds are grossly insufficient to meet the claims of the lenders as well as the suppliers (Iwata, 2007). However, it is possible for the shareholders to initiate class action against the management if there has been misrepresentation in the financial statements with the objective of manipulating the stock price or breach of duties by the directors which have been outlined as per Corporations Act 2001.

With regards to HIH, after the collapse of the company, 1200 shareholders came together and filed a claim to the extent of $ 70 million against the company on the grounds that the company has misled the investors (plaintiffs) into making incorrect decision and hence the aggrieved shareholders need to be compensated. This was despite the fact that the shareholders may not have actually replied on the incorrect financial statements in order to reach the decision of making investment in the company at the first place (Platford et. al., 2016). However, the court upheld the indirect market causation in the verdict delivered in the HIH Insurance Limited (In Liquidation) and others [2016] NSWSC 482 and therefore the shareholders were granted compensation. However, it is noteworthy that this was only a very small fraction (6 to12.5%) of the money invested that the court considered they overpaid for the company on account of misrepresentation (Saville et. al., 2016). The option of class action is brought about only by shareholders having some substantial exposure which takes a lot of time and legal costs to recover only a small amount. Besides, there are no other avenues for recovery of money by the shareholders. Hence, in HIH Insurance bankruptcy, the losses to the investors has not been recouped as the current options remain limited (Iwata, 2007).

 

References

Iwata, E. 2007, Securities-fraud suits go global, ABC News, [Online] Available at https://abcnews.go.com/Business/story?id=3763355&page=1 [Accessed April 17, 2017]

Platford, C., Brady, S., Lynch, C. and Hard, C.  2016,  Class actions – have the floodgates just opened?, Gilbert Tobin,  [Online] Available at https://www.gtlaw.com.au/class-actions-%E2%80%93-have-floodgates-just-opened [Accessed April 17, 2017]

Saville, M., Forbes, R., Matthews, P. and Stockdale, L. 2016, Australian Court allows indirect causation for shareholder claims, KWM Website, [Online] Available at https://www.kwm.com/en/au/knowledge/insights/australia-court-allows-indirect-causation-shareholder-claims-20160426  [Accessed April 17, 2017]

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