Recent world events show just how serious and deep the impact of
this crisis is. Whilst Australia has so far weathered the problems
reasonably well, there has been impact locally and there will no
doubt be further impact.
To date we have seen shareholders in Allco Finance Group, Centro
Properties Group and MFS Ltd (now Octaviar) institute class actions
in an attempt to recover some of their losses as a result of the
credit crisis. Each company faces allegations that they failed to
disclose crucial information about their debt positions in the
period leading up to the credit crisis. The class actions allege
that these failures breached continuous disclosure rules in the
Corporations Act and constituted misleading and deceptive
It is reported that as many as 100 local Councils are
considering litigation against the Australian subsidiary of Lehman
Brothers which sold them Collateralised Debt Obligations
("CDOs") linked to the failed US sub-prime mortgage
market. NSW Councils alone are reported to have an estimated $400
million in unrealised losses. Wingecarribee Shire Council is the
first to mount a Federal Court action against Lehman Brothers,
alleging misleading and deceptive conduct in the management of its
investment portfolio. The Council is suing Lehman Brothers over a
$70 million investment but the future of that action is now far
from clear because of the Lehman Brothers bankruptcy. Charities,
churches, hospitals and even nursing homes across Australia are
also reported to be caught by the sub-prime-backed CDOs.
There have been few Court decisions dealing with the effects of
the US sub-prime crisis to date but insurers may yet see claims
emerging through PI and D&O policies. A critical feature of
much of the litigation will likely be that the developers and
promoters of the CDOs failed to make the investors aware of the
risks involved given many of these investments were very high risk.
We comment on this below in regard to the recent Basis Capital
decision. In addition, directors of distressed companies may face
potential exposures given the novel circumstance they face and the
difficult decisions that are having to be made. Significant
economic events take some time to work their way through the legal
system so it will be some time until the full impact on insurers is
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.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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