The recent High Court decision to dismiss the appeal in City
of Swan & Co v Lehman Brothers Asia Holdings Limited (In
Liquidation)  FCAFC 130 (Lehman
Decision) is a reminder that Deeds of Company Arrangement
(DOCAs) have limitations and cannot extinguish
creditors' claims against third parties. However, Schemes of
Company Arrangement may resolve this issue.
DOCAs cannot extinguish creditors' claims against third
In the Lehman Decision, the High Court's reasons for which
are yet to be published, creditors of Lehman Brothers Asia Holdings
Limited (In Liquidation) (Lehman) claimed that the
DOCA, passed by a majority of creditors (in value and number),
purported to extinguish their right to sue other members of the
Lehman Group. The creditors sought to have the DOCA set aside.
The Full Federal Court held that the DOCA was invalid and not
binding on Lehman's creditors as the DOCA purported to
extinguish the creditors' rights to sue other members of the
Lehman Group. In doing so, the DOCA went beyond the rights that can
be affected by a DOCA under Part 5.3A of the Corporations Act
The High Court's dismissal of Lehman's appeal against
the Lehman Decision is a reminder of Justice Stone's finding
that a DOCA 'has such force as statute provides and no
Importantly, the Full Federal Court held that, under Part 5.3A
of the Corporations Act 2001 (Cth), a DOCA can only bind claims
which creditors have against the company in administration (and not
claims against third parties).
The idea, however, that a DOCA can only regulate the legal
rights and obligations between a company and its creditors (and not
the rights and obligations of third parties) is not new.
In 1997, the Federal Court terminated a DOCA for similar
reasons. In M & S Butler Investments Pty Limited & Ors
v Granny May's Franchising Pty Limited & Ors 
FCA 901, a DOCA was terminated under s.445D(1)(f)(i) of the
Corporations Act 2001 (Cth). The DOCA purported to extinguish the
claims creditors had against the company's directors pursuant
to their personal guarantees.
Does a Scheme of Company Arrangement resolve this issue?
The Federal Court has taken a more flexible approach to Schemes
of Arrangement under Part 5.1 of the Corporations Act 2001
(Cth) in Opes Prime Stockbroking Limited  FCA 813
(upheld on appeal in Fowler v Lindholm, in the matter of Opes
Prime Stockbroking Limited  FCAFC 125) (Opes
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 the creditors' claims against
third parties being extinguished.
In coming to this conclusion, the court highlighted the
flexibility and broad nature of Part 5.1 of the Corporations
Act 2001 (Cth) to aid arrangements and compromises between
creditors and insolvent companies.
Pending the High Court's reasons in the appeal of the Lehman
Decision, Schemes of Arrangement appear capable of extinguishing
creditors' claims against third parties whilst DOCAs
This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
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