City of Swan V Lehman Brothers: Deed of Company Arrangements and Third Party Releases
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PA E-BULLETIN City of Swan v Lehman Brothers: Deed of Company Arrangements and Third party Releases The High Court of Australia is expected soon to hand down its judgment in Lehman Brothers v City of Swan. It is likely that this judgment will definitively determine whether Deeds of Company Arrangement under Pt 5.3A of the Corporations Act (“the Act”) are able to force creditors to give releases to third parties. Dispute Resolution lawyer, Anna McFarlane, discusses the decision of the Full Court of the Federal Court and provides a brief outline as to the possible outcomes of the High Court appeal. On 15 September 2008 Lehman Brothers “On payment in full of the Litigation Justices Stone, Rares and Perram all held Holdings Inc (“Lehman Inc”) filed for Creditor’s Final Dividend all Claims by the that properly construed this subsection Chapter 11 Bankruptcy in the US. On Litigation Creditors [including the plaintiffs] does not allow a DOCA to deprive non- 17 September 2008, Lehman Brothers against the Company or a Lehman Entity consenting creditors of their rights to sue Asia Holdings Limited (“Lehman Asia”) and all Insurance Claims except those third parties. In holding that a DOCA followed suit and appointed provisional that arise out of the Preserved Contractual of itself cannot provide for third party liquidators. Then on 26 September Rights are, for ever released discharged and releases, each member of the Full Court 2008 Voluntary Administrators were extinguished.” employed differing reasoning, yet each appointed to Lehman Brothers Australia shared elements of commonality. Each Limited (“Lehman Australia”). At the The Full Court was asked, in essence, to judge discussed the expression “so far as second meeting of creditors, the creditors determine firstly whether the DOCA seeks concerns”, and sections 444A, 435A, and voted in favour of executing the Deed of to extinguish the plaintiffs’ claims against 444J. Justices Rares and Perram both also Company Arrangement (“DOCA”); 61 Lehman Entities; and secondly, if it does, discussed the decision in Fowler v Lindholm ($256 million in value) to 58 ($72 million whether there is power under Pt 5.3A of and its relevance to Pt 5.3A. in value). The DOCA was executed on the Act to include such provisions. 12 June 2009. “so far as concerns” Power and Validity Prior to entering into external The fourth defendant submitted that administration, Lehman Australia sold Subsection 444D(1) of the Act provides: “”so far as concerns” meant “relating to”, Collaterised Debt Obligations (“CDOs”) “connected with”, “being of interest or “A deed of company arrangement binds all importance” or “affecting” claims against to the plaintiffs all of which are Local creditors of the company so far as concerns Government councils. It is that act which the company” and that therefore sub- claims arising on or before the day specified section 444D(1), properly construed, has lead to potential claims against entities in the deed under paragraph 444A(4)(i).” related to Lehman Australia (“Lehman binds creditors in respect of their claims Entities”), and it is those claims that are It is this section which gives a DOCA its that have a nexus with the company. the subject of the third party releases. binding force. The defendants submitted that Clause 11 of the DOCA provides: pursuant to this section, the DOCA bound creditors in respect of their claims against the company, insurers, other creditors and other third parties. www.piperalderman.com.au 1 March 2010 [PUBLICATION NAME] There are a number of previous judicial Sections 444A, 435A and 444J A similar point of difference in the decisions regarding section 444D(1) judgements of Justices Stone and Perram Given the reference to section 444A in however, as Justice Stone pointed out is found in their discussion of the influence section 444D, it is unsurprising that each of in her judgment, these decisions neither and effect of section 444J, which provides the judgments refer to section 444A. In fact deal with the phrase “so far as concerns” that guarantees and indemnities are not Justice Rares went so far as to state that: or “go so far as to read the section affected by the release provided in section “The significance of the provision of s 444A(4) as referring only to claims against the 444H in respect of DOCAs. This section (b) and (i) in the construction of 444D(a) is company”. Justices Stone and Perram was introduced following the decision in obvious.” His Honour then went on to hold explicitly, and Justice Rares implicitly, M & S Bulter Investments Pty Ltd v Granny that: considered that the phrase “so far as May’s Franchising Pty Ltd. In that decision, concerns” was ambiguous, in that it “The literal, grammatical, and common sense Justice Spender held that a DOCA “can was capable of meaning those phrases construction of s 444D(1) is that it refers to only deal with company property.” Justice referred to above, and also of the more claims of creditors corresponding to those Stone held the enactment of section restrictive interpretation proffered by the referred to in s 444A(4)(b) and (i)…” 444J does not adversely affect Justices plaintiffs, namely that it relates only to Spender’s judgment, but rather supports claims against the company. Justice Stone also considered these it. Conversely Justice Perram held that provisions relevant and that “claims” in the section 444J ‘merely ensures that a Both Justices Stone and Rares referred context of section 444A(4)(b) and (i) “clearly guarantor is not released’ because the to the “basic” principle of statutory refers to claims against the company”. Justice principle debtor is released; he did not construction namely that without “clear Stone further considered that the fact that discuss Justice Spender’s decision. words that are not capable of another in section 444A, and indeed throughout Pt construction”, a statute should not 5.3A, “creditors are referred to in their capacity Fowler v Lindholm be interpreted as interfering with the of creditors of the company”. Justice Perram Justices Rares and Perram held that the property rights of an individual. It is clear similarly held that the construction proffered Full Court of the Federal Court decision in that the third party releases provided by the defendants does not sit comfortably Fowler v Lindholm was not relevant to the under the DOCA sought to interfere with with the reference to 444A(4)(i) in 444D(1). operation of Pt 5.3A. Fowler v Lindholm the plaintiffs’ property rights pertaining was heard on 3 and 4 September 2009 to potential claims against those parties. All three judges considered that the and the joint judgment of Justices Emmett, Accordingly Justice Rares held, because objective of Pt 5.3 A, to provide for the Gordon and Jagot was delivered three “no express words in Pt 5.3A support”, business, property and affairs of an insolvent weeks prior to judgment being delivered the broad interpretation submitted by company, was relevant to the construction in City of Swan v Lehman Australia. In the defendants and this interpretation of 444D(1). Justice Rares held that, at a Fowler v Lindholm the Court held that in interferes with existing property rights, minimum, this objective is not reflective of relation to schemes of arrangement under it must be rejected. Interestingly, Justice Parliament intending a DOCA to permit the Pt 5.1 of the Act, “...the Court had power Stone went further to suggest that this majority of creditors to deprive a minority to approve the Schemes containing the principle applies to any “existing” right, of any rights or claims they might have provision for release and indemnity [of but ultimately held that “although this against entities other than the company in third parties].” principle still has life it is not … necessary administration. Justice Stone further held to rely on it.” that given this objective, section 444D At first glance the two judgments appear should be construed as referring to the to be disharmonious. The following facts claims of the creditors against the company. are common to both matters: Justice Perram, by contrast, held that at a high level of abstraction, minds could • the plaintiff was an investor legitimately differ as to the effect of section 435A on the construction of section 444D. • the entity through which the plaintiff invested had become insolvent www.piperalderman.com.au 2 March 2010 [PUBLICATION NAME] [PUBLICATION NAME] • the scheme of arrangement or Despite appearances to the contrary, it is There are a number of conclusions DOCA was entered into as a result possible for the decisions in City of Swan v open to the High Court. In relation to of the entities insolvency Lehman Brothers, and Fowler v Lindholm to the power contained in section 444D, exist harmoniously. The answer might lie the Court could decide that a DOCA • the claims which were the subject in reliance upon the court’s supervisory is capable of providing for third party of the release related to the plaintiff’s functions in relation to Pt 5.1 and in releases. It could agree with the Full Court investment particular those sections relating to the in City of Swan v Lehman Brothers that voting procedures. None of the judges in section 444D does not permit a majority • the release was to a third party City of Swan v Lehman Brothers referred to of creditors, pursuant to a DOCA, to • the plaintiff did not consent to the the differences in voting procedure between deprive the minority of their rights and release. Pts 5.1 and 5.3A of the Act. The two most claims against third parties.