Third Party Claims And Deeds Of Company Arrangement

The Full Federal Court has recently handed down a decision as to whether a Deed of Company Arrangement (DOCA) can release third parties from claims which may be brought by creditors. The decision will have wide ramifications in relation to the rights of creditors claiming against third parties following the collapse of a company.

In City of Swan v Lehman Bros Australia Ltd [2009] FCAFC 130 (Lehman Australia), the court, constituted by Stone, Rares and Perram JJ, decided that a DOCA under Part 5.3A of the Corporations Act cannot operate to release third parties from claims which may be brought against them by company creditors.

1. Summary of facts

• The plaintiffs were all local government councils who invested in various financial products including Collateralised Debt Obligations (CDOs) which were sold to them by Lehman Bros (Aust) Ltd (Subject to Deed of Company Arrangement) (Lehman Australia). Lehman Australia is a subsidiary of Lehman Bros Holdings Inc (Lehman Bros).
• On 15 September 2008, Lehman Bros filed for Chapter 11 Bankruptcy in the United States. On 17 September 2008, provisional liquidators were appointed to Lehman Bros Asia Holdings Ltd (Lehman Asia).
• On 26 September 2008, administrators were appointed to Lehman Australia.
• In March 2009, the administrators published a report to creditors of Lehman Australia which included a proposal for a DOCA which was put forward by Lehman Asia.
• On 27 May 2009 the second meeting of creditors of Lehman Australia was held, however the meeting was adjourned to consider a further revised DOCA proposal from Lehman Asia.
• The revised DOCA proposal contained two essential elements, namely:

• At the reconvened meeting of creditors on 28 May 2009, the administrators recommended that the revised DOCA be accepted and put it to a vote.
• The resolution to execute the DOCA was passed at the meeting as follows:

• It is noted that of the 61 creditors who voted in favour of the resolution, 9 of these creditors included Lehman entities representing $245,160,674.20 in value.
• On 5 June 2009, the first two plaintiffs commenced proceedings against Lehman Australia and Lehman Asia. Soon afterwards, the third plaintiff and Lehman Bros were joined to the proceedings.

1. Decision of the Court

• At the heart of the DOCA were various release and moratorium clauses which were aimed at preventing the Litigation Creditors from claiming against or suing Lehman Australia and other Lehman entities in relation to the financial products sold by Lehman Australia and included:

• Following a review of the DOCA and the statutory framework of Part 5.3A of the Corporations Act, the court held that a DOCA, which included such release and moratorium clauses as described above, could not validly operate to release third parties from claims which may be brought by a company's creditors. According to the court, the purpose of a DOCA is to regulate the rights and obligations between a company and its creditors only, not between creditors and any third parties who are connected to or associated with the company.
• The court also found, as a matter of statutory construction, that there was nothing in Part 5.3A of the Corporations Act which could deprive a minority of creditors (either in value or by number) from bringing claims against various third parties if that is what is desired by them. According to Rares J:

• As a result of the decision, the DOCA was found to be void and was set aside.

1. The Opes Prime Decision

• The Lehman Australia case is to be contrasted with another recent decision of the Federal Court (both at first instance and then on appeal to the Full Court) in Re Opes Prime Stockbroking Ltd (Receivers and Managers Appointed) (In Liquidation) (2009) 258 ALR 362; Fowler v Lindholm [2009] FCAFC 125 (Opes Prime).
• In the matter, investors in the Opes Prime Group brought claims against ANZ and Merrill Lynch in relation to various financial products which were marketed and sold by the Opes Prime Group of companies. The liquidators of the group proposed a Scheme of Arrangement under Part 5.1 of the Corporations Act whereby ANZ and Merrill Lynch were to contribute a sum of money toward a fund in return for which unsecured creditors, each scheme company and the liquidators would release their claims against ANZ and Merrill Lynch.
• At first instance before Finkelstein J, the court held that a Part 5.1 Scheme of Arrangement could validly release a creditor's claim against third parties provided that there was an adequate "nexus" between the release or indemnity on the one hand and the relationship between the creditor and the company on the other hand.
• The decision of Finkelstein J was upheld by the Full Court.

1. Concluding Remarks

• Lehman Australia has now been wound up. Unless the decision in Lehman Australia is set aside on appeal, it is inevitable that there will be a spate of litigation against Lehman Australia and associated third parties (including the directors of Lehman Australia) in relation to the promotion and sale of the CDO's by Lehman Australia.
• However, following the two Full Court decisions in Lehman Australia and Opes Prime, it would appear, for the time being, that schemes of arrangement may well provide a more flexible way to deal with creditor's third party claims than under a DOCA.
• However, schemes are generally expensive and are court driven as opposed to DOCAs which are generally regarded to offer a lower cost and timely regime to effect a company restructure. As such, schemes may be more appropriate in relation to larger corporate failures where there may be significant litigation either on foot or contemplated against the company and associated third parties.
• Finally, given the divergence of the two decisions of Lehman Australia and Opes Prime, it may well be that leave is given by the High Court to appeal the Full Court's decision in Lehman Australia.

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