Summary
Majority: French CJ, Gummow, Hayne and Kiefel JJ (Heydon J also dismissed the appeal).
Decision: Appeal Dismissed.
A Deed of Company Arrangement (“DOCA”) was entered into by a majority of creditors of Lehman Brothers Australia. The respondents were creditors who voted against the DOCA. The DOCA purported to require the respondents to release entities from claims other than the company which was the subject of the DOCA. The Court found that s 444D of the Corporations Act does not empower a DOCA to bind creditors with respect to claims against any entity other than the company under administration without their consent.
Facts
Lehman Australia and some related entities were involved in the sale, and in the providing of advice on the sale, of Collateralized Debt Obligations (“CDOs”) as financial products to investors. Following the Sub-prime Mortgage Crisis, this market collapsed causing the downfall of the Lehman Bros group of companies of which Lehman Australia was a part. In September 2008, Lehman Australia was put into voluntary administration under Pt 5.3A of the Corporations Act 2001 (Cth).
Among the creditors of Lehman Australia were the respondent councils (“the Councils”). In addition to being creditors of Lehman Australia, the Councils also had claims against other entities related to Lehman (“the Lehman Related Entities”).
Many of the Lehman Related Entities were also significant creditors of Lehman Australia.
At a meeting of creditors, the creditors adopted a Deed of Company Arrangement (“DOCA”), by majority vote. The Councils voted against the adoption of the DOCA.
In addition to providing a moratorium and release against Lehman Australia, the DOCA purported to require all creditors, including the Councils, to release the Lehman Related Entities from claims arising from their investment with Lehman Australia.
The Councils sought to have the DOCA set aside.
The Question and the Arguments
The question for the Court was whether a DOCA can force a creditor to release companies, other than the company which was the subject of the DOCA, from claims without the creditor’s consent.
The Majority considered that this question turned on the correct interpretation of s 444D of the Corporations Act which relevantly states:
Effect of deed on creditors
(1) A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).
(emphasis added.)
The important terminology in the Court’s view was the phrase “so far as concerns claims”. The creditor’s could only be bound without their consent if ‘claims’ in that section included claims against entities other than the company under administration.
One of the Lehman Related Entities, Lehman Holdings, argued that this section could bind the creditor to release claims against any party if there is “a connection or association between the claim in question and a claim against the insolvent company” (at [46]).
Another entity, Lehman Asia, argued that s 444D provides that a DOCA will bind a creditor in relation to any claims if the DOCA, properly construed, “provides for a regime of provisions which relate to” a claim or claims against the company.
These constructions of s 444D were rejected.
Findings
The Majority gave a thorough exegesis of the process of meetings in Pt 5.3A, and found that the statutory context of the section supported the argument of the Councils (at [48]), that the ‘claims’ to which creditors are bound under s 444D are claims to the company under administration only (at [55]-[56]).
The Majority concluded (at [53]):
Because creditors are bound under s 444D(1) only to the limited extent identified in that provision, the assent of some creditors (even a majority by number and value of those who vote) to giving up claims against another does not bind other creditors to do so. No creditor is bound to give up such claims because the Act does not bind them beyond the limit prescribed by s 444D(1). More particularly, the Act does not bind creditors to give up a claim against a person other than the subject company – here, Lehman Australia.
Heydon J in his separate reasons also found that s 444D did not extend to claims by any company other than the company the subject of the DOCA. However his Honour rested this interpretation on the presumption of statutory interpretation that the Parliament does not intend to remove proprietary rights (ie the causes of action) unless there is a clear indication.
The relevant part of the DOCA was therefore not enforceable against the Councils. In the absence of any submission by the appellants that the DOCA survived such a finding, the Court declared the DOCA void.
The appeal was dismissed.
Comment
One argument of the appellants was that the claims which were released were inextricably tied to claims of the company, in the sense that certain creditors would not be willing to make concessions releasing the company unless they were released from other related claims. I call this the ‘clearing house’ argument and it has a sort of utilitarian appeal, in that the chances of reaching a financially sensible resolution are greater if there is greater flexibility. If s 444D could not bind smaller creditors without their consent, this could lead to smaller creditors upsetting substantial financial compromises with international implications (of course the contrary argument is that if the creditors are really so small it would not upset anything substantial).
The Court categorically dismissed the ‘clearing house’ argument (at [50]-[52]).
One might say then that this could be an area for legislative change, to provide for greater flexibility. However, if this were to be the case, attention needs to be paid to the criticisms of the Court and in particular Heydon J. For example, Heydon J pointed out the dangers of such a scheme because the administrators of the Company are currently not under an obligation to provide information to creditors about those secondary claims (at [69]). There is also the danger of limited Court supervision.
In my view, if any proposed legislative amendment tried to incorporate protections to these dangers identified by Heydon J, the scheme would then become increasingly expensive and potential so similar to other insolvency mechanisms so as to lose relevance. Perhaps the conclusion to draw from all this then is that requiring creditor consent is the correct balance to draw.
[[UPDATE: Some people have queried whether or not consent by the creditor (ie voting in favour) would prevent a Court from setting aside a DOCA, given that the Court said (at [12]) “Although some attention was given in argument to the composition of the majority, and in particular to what was said to be the role of Lehman companies in procuring the Deed, that is not a matter that bears upon the issues that are to be decided in these appeals.”
My answer to that is as follows: I couldn’t imagine that this situation would arise too often, but in any event the answer is that consent by the creditor would prevent the DOCA being set aside. This is not necessarily because of the construction of s 666D, but because they would be bound to the DOCA in contract law (subject to potentially curly questions of consideration), or perhaps in some cases estoppel, and therefore there would be no need to rely on s 444D for the enforcability of that clause of the DOCA. ]]
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