HCA – s.444D Corporations Act – DOCA – Creditors & 3rd parties

Lehman Brothers Holdings Inc v City of Swan & Ors; Lehman Brothers Asia Holdings Limited (In Liquidation) v City of Swan & Ors [2010] HCA 11 (30 March 2010)


On 30 March 2010, the High Court dismissed the appeal of Lehman Brothers Asia Holdings Limited (Liquidation).

The reasoning is now available.

The central issue was whether the Deed of Company Arrangement (“DOCA”) was void and could not validly extinguish the rights of creditors of Lehman Australia from suing other Lehman entities.

The answer was to uphold the Full Federal Court decision and respond it was void.

The relevant provision of the Corporations Act 2001 (Cth) was s 444D(1), and in particular [para 41]:

Two provisions of Pt 5.3A identify the binding effect of a deed of company arrangement. Section 444G makes a deed binding on the company, its officers and members, and the deed’s administrator. Section 444D deals with the position of creditors. It 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).
(2) Subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security, except so far as:
(a) the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or
(b) the Court orders under subsection 444F(2).
(3) Subsection (1) does not affect a right that an owner or lessor of property has in relation to that property, except so far as:
(a) the deed so provides in relation to an owner or lessor of property who voted in favour of the resolution of creditors because of which the company executed the deed; or
(b) the Court orders under subsection 444F(4).
(4) Section 231 does not prevent a creditor of the company from becoming a member of the company as a result of the deed requiring the creditor to accept an offer of shares in the company.”

The determinative question in these appeals is what is meant by the provision of s 444D(1) that a deed “binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed” (emphasis added).

Construction of s 444D(1)


Their Honours were not assisted by the use of extrinsic material in the construction of the section. The controversial words in the section were “so far as concerns claims”, which were interpreted by the appellant as providing the connection to third parties.

Their Honours concluded:


In the Full Court of the Federal Court, some emphasis was given[39] to ss 444E to 444H and s 444J as indicating that a deed of company arrangement can deal only with claims against the subject company. It may be accepted that nothing in those sections points away from that conclusion. But the critical observation to make is an observation about the text of s 444D(1). That sub-section identifies who is to be bound by a deed of company arrangement (“all creditors of the company”) but at once proceeds (by the “so far as concerns” clause) to limit the extent to which those creditors are to be bound (“so far as concerns” identified claims). Contrary to the submissions of Lehman Holdings and Lehman Asia, there is no textual footing for reading the word “claims”, in the “so far as concerns” clause in s 444D(1), as including claims against persons other than the subject company. Even if it were accepted that, as Lehman Asia submitted, it would be sensible to recognise that a creditor of one of a group of companies may have interlocking, even dependent, claims against one or more other companies in the group, Pt 5.3A directs attention only to the particular subject company; it does not deal with groups of companies.


It may readily be accepted that any claims Litigation Creditors may have against Lehman Holdings or other Lehman Entities are claims that arise on or before the day specified in the Deed, and arise out of the same transactions as are the subject of those creditors’ claims against Lehman Australia. It may also be readily accepted that if a claim is made against Lehman Holdings or another Lehman Entity, that company or those companies would very likely make a claim against Lehman Australia. And in that way, both Lehman Holdings and at least some other Lehman Entities are likely contingent creditors of Lehman Australia. And as contingent creditors of Lehman Australia, Lehman Holdings and the relevant Lehman Entities would be bound by the Deed.


But none of these observations confronts the critical observation that 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 that arose before a specified date. And it is s 444D(1) alone which makes a deed of company arrangement binding on creditors.


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.

The controversy about whether a scheme of arrangement as opposed to DOCA could have achieved the result was left open, but with some encouragement in its favour:


In this respect, Pt 5.3A (and, in particular, s 444D(1)) stands in sharp contrast with Pt 5.1 of Ch 5 of the Act, which regulates arrangements and reconstructions. The provisions of Pt 5.1 (which derive ultimately from the Joint Stock Companies Arrangement Act 1870 (UK)) make[40] a compromise or arrangement binding on creditors (or on a class of creditors) if agreed to by a majority in number of the creditors (or class) whose debts or claims aggregate at least 75 per cent of the total amount of the debts and claims of the creditors (or class of creditors) present and voting, and if approved by order of the Court. Unlike s 444D(1), the provision of Pt 5.1 which makes certain compromises or arrangements binding on creditors (s 411(4)) does not qualify the extent to which creditors are bound. Beyond noting this contrast, it is neither necessary nor appropriate to go on to consider whether Pt 5.1 of the Act could have been engaged to achieve the result sought to be achieved by the Deed under consideration in these appeals. Nothing in these reasons should be understood as endorsing the criticisms made in this matter in the Full Federal Court of the earlier decision of the Full Federal Court in Fowler v Lindholm[41].

This leaves open the position Fowler v Lindholm  (Opes Prime) and preserves the effect of the decision, but does not expressly endorse it.

Justice Heydon delivered separate reasons reaching substantially the same conclusion, but emphasizing the statutory construction rules that property rights are interpreted not to be altered without compensation, unless the legislature expressly provides so.

Brisbane Barrister – David Cormack

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