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)  FCAFC 130 (Lehman
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
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  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
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  FCAFC 125 (Opes Prime
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.
Businesses should review their standard form contracts for unfair terms to ensure they do not fall foul of the new laws.
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