Scope of deeds of company arrangement clarified
29 Apr 2010
On 14 April 2010, the High Court found that deeds of company arrangement (DOCA) cannot extinguish debts owed by parties other than the company in administration.
On 14 April 2010, the High Court delivered judgment in the matter of Lehman Brothers Holdings Inc v. City of Swan; Lehman Brothers Asia Holdings Limited (in liq) v. City of Swan (2010) HCA 11. The two appeals concern the application of part 5.3A of the Corporations Act to Lehman Brothers Australia Ltd (‘Lehman Australia’).
- Two other Lehman Brothers companies were parties to the proceedings in this court: Lehman Brothers Holdings Inc (‘Lehman Holdings’) and Lehman Brothers Asia Holdings Ltd (‘Lehman Asia’).
- Lehman Holdings is the ultimate parent company of both Lehman Australia and Lehman Asia. Lehman Holdings was the appellant in one appeal; Lehman Asia was the appellant in the other.
- In September 2008, Lehman Australia appointed administrators under part 5.3A of the Act.
- In June 2009, the administrators and Lehman Australia executed a deed of company arrangement.
- The Deed relevantly provided:
- 'Lehman Entity’ included Lehman Holdings and some related bodies corporate (including Lehman Holdings and Lehman Asia).
- By clause 9 - a moratorium in respect of a claim (or an insurance claim) by certain creditors against the Lehman Entities.
- By clause 11.5 - upon payment to those creditors of a final dividend the creditors released all claims against Lehman Entities.
- So, upon payment of some monies, Lehman Entities which were not subject to the administration sought to gain a release of any claims against them.
- Some creditors including the City of Swan who had obtained various financial products (including the ill-fated collateralized debt obligations which were at the heart of the sub-prime inspired Global Financial Crisis) asserted that the Deed was void and brought proceedings to terminate it.
The central issue in each appeal was whether creditors of Lehman Australia were bound by the Deed. If they were, then the provisions which extinguished any claim against the Lehman Entities not in administration would stand and the creditors would be barred from proceeding.
Section 444D of the Corporations Act was focal in the decision. It relevantly provides:
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).
The High Court held that:
- On proper construction of part 5.3A and in particular 444D, the section:
- identifies who is to be bound by a deed of company arrangement (‘all creditors of the company’);
- proceeds to limit the extent to which those creditors are to be bound; and
- as part 5.3A directs attention only to the particular subject company; it does not deal with groups of companies and does not operate beyond the company in administration.
(at paragraph 50)
- Critically s 444D(1) limits the extent to which a deed of company arrangement binds creditors. Creditors are bound ‘so far as concerns claims’ against the subject company – it does not go beyond that (at paragraph 52).
- Because creditors are bound under s 444D(1) only to the limited extent that they are creditors of the company, a resolution to pass DOCA cannot bind them in other respects (at paragraph 53).
- In the present case, the effect of section 444D is that creditors are not bound in respect of claims against Lehman Holdings or other Lehman Entities.
- Accordingly, the provisions of clause 9 and clause 11.5 of the Deed which provided first for a moratorium, and then for a release, in respect of claims against Lehman Holdings or other Lehman Entities, did not bind creditors and the Deed failed.
- (at paragraph 55)
So, the provisions of a DOCA can only operate to extinguish liabilities of the company in Administration and cannot operate to extinguish other claims.