Australia: Can A Scheme Of Arrangement Extinguish A Creditor’s Claim Against A Third Party?
Insolvency Update

Before the court had published its reasons, Gadens Lawyers issued an update on the High Court's decision to dismiss the appeal of Swan & Co v Lehman Brothers Asia Holdings Limited (In Liquidation) [2009] FCAFC 130 (Lehman Decision).

Gadens Lawyers' earlier update can be found here. The High Court has now published its reasons for the Lehman Decision, which confirm that, while DOCAs cannot extinguish creditors' claims against third parties, schemes of arrangements may be able to do so.

DOCAs cannot extinguish creditors' claims against third parties

The Lehman Decision confirms that deeds of company arrangement (DOCA) do not bind creditors to give up their claims against third parties. DOCAs only bind creditors to give up claims against the company subject to the DOCA. This applies even if a majority of creditors (by value and by number) vote in favour of giving up their claims against third parties.

The Queensland Supreme Court recently applied the Lehman Decision in Boral Bricks v Davey [2010] QSC 131 (Boral Decision). In the Boral Decision, guarantors argued that a DOCA, which deemed that all of the company's liabilities had been paid, released them from any liability to pay a company debt. In applying the Lehman Decision, the court held that the DOCA could not bind creditors of the guarantors.

Schemes of Arrangement may be used to extinguish creditors' claims against third parties

The Lehman Decision also highlighted that (unlike DOCAs) Schemes of Arrangement may not restrict which creditors' claims can be bound. Beyond noting this contrast with DOCAs, however, the court did not consider whether a Scheme of Arrangement could bind creditors to give up their claims against third parties.

Accordingly, the court left open the prospect that a Scheme of Arrangement may be used to extinguish claims against third parties. This is the result that was achieved in the earlier Federal Court decision of Fowler v Lindholm, in the mater of Opes Prime Stockbroking Limited [2009] FCAFC 125 (Opes Prime Decision).

The Opes Prime Decision held that a Scheme of Arrangement can extinguish creditors' claims against third parties if there is sufficient compromise or compensation offered by the scheme company to the creditors in exchange for extinguishing the creditors' claims against third parties.