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centro plauged by ghosts of gwalia

  1. 3,904 Posts.
    It may have been posted before but havent seen it - waayyyy too noisy a forum


    Alan Kohler

    Ghosts of Gwalia

    It seems one of the reasons the Centro reconstruction has been delayed, possibly even the main one, is that the High Court’s decision in Sons of Gwalia is scaring off potential investors.

    In fact, one of the key legal advisers to both Centro and Tricom says the SOG decision is proving a serious blockage to all corporate workouts.

    In a submission to the Government’s Corporations and Markets Advisory Committee (CAMAC), Arnold Block Leibler partner Leon Zwier has called for changes to the law to offset what he says is the seriously detrimental effect on corporate reconstructions of the SOG decision.

    It seems that potential new shareholders are being put off by the prospect that existing shareholders will rank above them in the event that things turn out badly and the company is put into receivership or liquidation, if they can demonstrate they were misled.

    In his submission Zwier uses Centro’s attempt to refinance $3.9 billion in debt as an example of his point. He says Centro is facing shareholder class action like those faced by Sons of Gwalia for allegedly misleading the market by the wrong classification of long-term debt that should have been classified as near-term.

    “The obvious commercial solution to any company in Centro’s current difficulty is an injection of capital," Zwier says.

    “The prospects of achieving a capital injection are materially lessened by the existence of the substantial unknown liability represented by the shareholder claims which, by reason of the SOG decision, rank pari passu (that is, 'without partiality', or equally) with all other creditors and in priority to equity.”

    Zwier says these threatened litigation claims are of “unknown quantum, severely harmful to the reputation of the Centro group and driven by reputable class action lawyers or litigation funders".

    He also suggests that the board of a distressed company, such as Centro, might now be more likely to put the company into a formal insolvency process because of the threatened class actions and a “perceived inability to meet those claims let alone the cost of defending them.”

    The problem is that the shareholders of Centro, or other distressed companies, might feel they have to little to lose.

    In many cases the injection of new capital dilutes existing shareholder equity to nearly zero, although it is not known how this is likely to work in Centro.

    In any case, existing shareholders are unlikely voluntarily to forgo legal rights conferred on them by the High Court.

    In his submission to CAMAC, Leon Zwier suggests an amendment to the Corporations Act limiting shareholder claims in a formal insolvency to a notional sum of $1.

    “This would afford shareholder claimants creditors’ statutory rights, including voting rights and the right to terminate a deed of company arrangement… while at the same time providing the commercial certainty as to the valuer and status of the claims, thereby enhancing the prospects of a successful reconstruction.”

    The impact of the High Court’s Sons of Gwalia decision has been the subject of intense debate in commercial legal circles since it was handed down. Nineteen submissions have been made to CAMAC on the subject, of which Leon Zwier’s is the latest.

    There is little doubt that the credit crisis and the current state of financial markets has meant that the SOG decision will become a key factor in what could be a growing number of distressed company workouts.

    And as companies like Centro attempt to raise new capital to meet the demands of creditors, the debate over the decision is only going to intensify.

    But the debate is unlikely to be resolved in time to help Centro.
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