The dispute arose between Swiss trader Glencore and Centennial Coal during a takeover bid for Austral Coal. Glencore used cash-settled swaps to secure more than 5% of Austral's shares, but failed to disclose its combined holding of shares and swaps had exceeded 5%.

The matter went before the Takeovers Panel, a peer review body set up five years ago to short-circuit litigation during takeover disputes. The panel had ruled "unacceptable circumstances" in that Glencore failed to adequately disclose the stake it had achieved in Austral.

Glencore decided to challenge the decision and argued that the panel itself was unconstitutional. The Australian Securities and Investments Commission (ASIC) represented the Takeovers Panel in court after Centennial decided not to mount a defence.

Both the panel and ASIC are against the use of swaps in takeovers because they can be used to bypass disclosure requirements, but at present equity swaps do not require disclosure.

Federal Court justice Arthur Emmett found the panel went beyond its mandate in trying to determine what rights should exist, rather than adjudicating existing rights. He quashed the unacceptable declaration and the ‘restoration’ orders. These orders required Glencore to sell back Austral shares to anyone who sold Austral shares during the non-disclosure period, at a price no higher than that the seller had sold them for.

He said the panel had made jurisdictional errors in its decision, but stopped short of endorsing the constitutional challenge to the panel's validity.

The Federal Court has ordered the matter be taken back to the panel for a review "according to the law". The matter leaves Centennial Coal unable to move to a compulsory acquisition of Austral.

The panel will have to decide whether any shareholders were affected by Glencore's disclosure and what those effects were.

The panel is expected to reconvene within days and could yet find a way to get Glencore to sell back some shares.