Overview
On 30 March 2010, the High Court delivered its decision in
Lehman Brothers Holdings Inc v City of Swan & Ors
[2010] HCA 11. The decision confirms the general understanding of
the scope and effect of deeds of company arrangement - that they
bind creditors only so far as creditors' claims relate to the
relevant company.
Background
In September 2008, Lehman Australia appointed administrators and
later executed a deed of company arrangement. The deed established
a separate pool of funds for distribution among 'litigation
creditors' who had claims arising out of investments in
collateralised debt obligations and other financial products
marketed by or acquired or purchased pursuant to services or advice
provided by Lehman Australia.
The deed provided first for a moratorium and then for a release
in respect of claims that litigation creditors had not only against
Lehman Australia, but also against other Lehman entities, arising
out of their investments.
Relevantly, section 444D of the Corporations Act 2001
(Act) provides that a deed of company arrangement
binds all creditors of the company so far as concerns claims
arising on or before the day specified in the deed.
Decision
The High Court confirmed the Full Federal Court's decision that
to the extent the provisions of the deed provided for a moratorium
in favour of the other Lehman entities and for a release of claims
against those entities, those provisions did not bind creditors of
Lehman Australia.
The court found that section 444 identifies who is to be bound
by a deed of company arrangement (namely creditors of the company)
and then proceeds to limit the extent to which those creditors are
to be bound. The court said there was no textual footing to include
claims against a person other than the subject company, Lehman
Australia.
The court observed that even if a creditor had interlocking,
even dependant, claims against one or more of the other companies
in the group, part 5.3A of the Act directs attention only to the
company under administration. It does not deal with groups of
companies.
Justice Heydon said that if part 5.3A operated in the way
contended by the Lehman entities, "it would follow that a deed of
company arrangement could validly provide that specialty debts or
simple debts owed by a person other than the company subject to
that deed to a creditor of that company can be cancelled",
resulting in "a significant intrusion into the individual rights of
creditors". His Honour concluded that the objects stated in section
435A are limited to objects relating to the relevant company and
its creditors and members, not other companies.
Alternative Schemes of Arrangement
In obiter, the court observed that part 5.3A "stands in sharp
contrast with part 5.1 of Ch 5 of the Act, which regulates
arrangements and reconstructions. Unlike section 444D(1), the
provision of part 5.1 which makes certain compromises or
arrangements binding on creditors does not qualify the extent to
which creditors are bound". However, the court noted that beyond
this contrast it was not necessary or appropriate to consider
whether part 5.1 could have been engaged to achieve the result
sought to have been achieved by the deed of company
arrangement.
The court did not expressly approve of Fowler v
Lindholm [2009] FCAFC 125 in which the Full Federal Court
found that a scheme of arrangement pursuant to part 5.1 could be
used to alter the legal rights between creditors of the scheme
company and third parties.
Comment
The decision is unsurprising and confirms the general
understanding of the scope and effect of deeds of company
arrangement - that they bind creditors only so far as creditors'
claims relate to the relevant company.
In large corporate structures where there is a multitude of
claims against one or more entities in the group, consideration
should be given to seeking court approval of a formal scheme of
arrangement if a broad release of claims is sought.
For more information, please contact:
Graeme Scott, Special Counsel
Phone (direct): +61 3 9608 2172
Email:
g.scott@cornwalls.com.au