By Insolvency Partner, Amanda Banton and Lawyer, Anna MacFarlane
Insolvency Partner, Amanda Banton and Lawyer, Anna MacFarlane summarise the High Court's judgment delivered on 14 April 2010 in which the Court held, as the Full Court of the Federal Court held in first instance, that, properly construed, Pt 5.3A of the Corporations Act (Cth) 2001 does not permit third-party releases within DOCAs.
The important features of the judgment:
- Third-party releases are not permitted in deeds of company arrangements (DOCAs).
- Third-party releases are permissible in creditors' schemes of arrangements.
- There may be scope for a DOCA to provide its administrator with sole control of claims by creditors of an insolvent company's policy.
Background to facts
On 15 September 2008, Lehman Holdings filed for Ch 11 Bankruptcy in the US. On 17 September 2008, Lehman Asia followed suit and appointed provisional liquidators. Then, on 26 September 2008, voluntary administrators were appointed to Lehman Brothers Australia Ltd (Lehman Australia), and the DOCA was executed on 12 June 2009.
Prior to entering into external administration, Lehman Australia sold collaterised debt obligations (CDOs) to the first to third respondents (the plaintiffs in the original proceedings) all of which are local government councils. It is that act which has lead to potential claims against entities related to Lehman Australia (Lehman Entities), including Lehman Holdings, and it is those claims that were the subject of the third-party releases in the DOCA.
Clause 7 of the DOCA gave the Deed Administrator sole conduct and control of any insurance claim of the plaintiffs in respect of the insurance of Lehman Australia or the Lehman Entities (excepting Lehman Asia). Clause 9 provided a moratorium on all claims of the creditors against Lehman Australia and the Lehman Entities for the duration of the DOCA. Clause 11 provided for a corresponding release of the Lehman Entities from liability upon termination of the DOCA.
Subsection 444D(1) of the Corporations 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 under section 444A(4)(i)".
It is this section which gives a DOCA its binding force. Lehman Holdings submitted that the inclusion of the words "so far as concerns" enable a DOCA to include third-party releases in respect of claims that have a connection or association with the claim against the company the subject of the deed. Further, it argued the claims of Lehman Holdings were connected with those of Lehman Australia because the claim arose out of the same transactions. Lehman Asia alternatively submitted that where the claims against the insolvent company interlock with other entities, the DOCA concerns a creditor's claim "if it provides for a regime of provisions which relate to that claim".
The joint judgment of Chief Justice French, Justices Gummow, Hayne and Kiefel held "there was no textual footing" for reading "claims" as including claims against any person other than the company the subject of administration. In reaching this conclusion, their Honours considered section 444A, and the corresponding regulations , schedule 8A clauses 5 and 6 which specifically direct attention to the company. In particular, clause 5 refers to the discharge of "debts or claims which [creditors] have or claim to have against the company".
While Justice Heydon similarly held that a DOCA cannot affect the debts of an entity other than the company the subject of the DOCA, he approached the question in a substantially different manner. His Honour held that in accordance with the principle of statutory construction as set out in Mabo v Queensland [No 2] "clear and unambiguous" words are required for a statute to extinguish property rights without fair consideration, and that "there can be no doubt" that the claims of the plaintiffs are proprietary rights. He went on to hold that while the words "so far as concerns" are "elastic words", they cannot be construed as permitting the inclusion of claims against entities other than the company because this would require clear and unambiguous words.
Schemes of Arrangement
The Court referred to the decision in Fowler v Lindholm, delivered by a differently constituted Full Court of the Federal Court approximately three weeks prior to the Full Court's decision in these proceedings. The Lehman Entities relied on Fowler v Lindholm in support of their submissions that third-party releases are permissible in DOCAs.
In that case, the Court held that it had power to approve the Schemes containing the provision for release and indemnity [of third parties].
The High Court explicitly stated that they should not be read as criticising the judgment in Fowler v Lindholm. It held that unlike section 444D(1), the provision of Pt 5.1 which makes certain compromises or arrangements binding on creditors (section 411(4)) does not qualify the extent to which creditors are bound.
The Court emphasised the differences between the wording of the two sections referred to above and, more particularly, the timing and extent of court involvement. While court approval is required prior to the commencement of a scheme of arrangement, no such approval is required to enter into the DOCA. Indeed there is no mandatory requirement of court involvement in relation to a DOCA at all.
Justice Heydon did, however, seem to invite an appeal on the issues of third-party releases under Pt 5.1.
For now, third-party releases under creditors' schemes of arrangement are permissible. However, the question remains open for examination by the High Court. Accordingly, should a scheme of arrangement require a third-party release, it would be advisable to include corresponding documentation between the third party and the creditor which provides for the release.
Administrator's control of the insurance claims of creditors
The joint judgment suggested that clause 7 of the DOCA might have bound the creditors in respect of their insurance claims against Lehman Australia. If this were correct, the Deed Administrator would have enjoyed sole conduct and control of those claims, the fruits of which would have been then formed part of the "Litigation Fund", which in turn would have been distributed to all of the "Litigation Creditors" on a pari passu basis. This is in direct contradiction to the situation in liquidation and possibly state law. Section 562 of the Corporations Act requires liquidators to apply the fruits of any insurance claim to the party in respect of whom the liability was incurred, to discharge the entirety of the liability. For example, in liquidation, if one Litigation Creditor was wholly successful in their claim but a second Litigation Creditor was wholly unsuccessful, the first would receive damages in the full amount of their claim and the second would receive nothing, whereas, under the procedure outlined in clause 7, the second creditor would receive payment to the same value as, and to the detriment of, the first creditor. While the comments of the Court are purely obiter, as the parties agreed that if it were held that clauses 9 or 11 were not binding on the creditors then the whole of the DOCA should fail, these comments will no doubt be the subject of much discussion.
Piper Alderman Partner Amanda Banton acted for the councils in these proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.