Australian litigators are gearing up for a long battle after the Federal Court recently ruled in favour of three councils contesting a deed of company arrangement, that limited the creditors’ recourse to the assets of Lehman Brothers Australia. This ruling paves the way for the councils and other creditors to sue the company’s parent entities.
The full Federal Court ruled that the deed of company arrangement (DOCA) could not prohibit creditors from seeking damages from third parties. On Friday, Justice Stephen Rares made a winding-up order in respect of Lehman Brothers Australia, with the previous administrators becoming liquidators. Justice Rares said in the judgment that the Corporations Act “does not contain either express words of unmistakable clarity of language to lead to such a draconian interference with the proprietary rights of creditors against third parties or other creditors of a company in administration.”
Jones Day’s Sydney partner Philip Hoser said that the ruling will likely result in more work for litigators, as the councils look to recover millions of dollars they claim were lost after they invested in collateralised debt obligations (CDOs). “In this particular case I think it will lead to more litigation, because we not only have the three councils who are the plaintiffs with their claims but behind them there are scores of other councils and other people who bought these CDOs and so on, who may also seek to assert claims,” he said. “Each one of them will not only have to show there was a misrepresentation but will also need to establish what loss they’ve suffered.”
If the DOCA had stayed in place, there was a formula laid down which would have valued the councils’ claims – but Hoser said now that arrangement is not going to remain in place, all those claims will have to be litigated.“ There will probably be some sort of class action or representative action but to the extent that they differ that will need to be a question of individual litigation,” he said.
Hoser, who is working with Lehman Holdings on the case, said that many of the CDOs were still being held by the councils and were still paying dividends, so it would be difficult to determine what loss they have suffered. He expects litigation to take several years, by which time demand for the securities may have returned to the market. “If it takes three years for the litigation to come on, it’s not at all hard to imagine that in three years from now the market may have recovered very substantially,” he said.
This ruling differs from one handed down by a different full Federal Court bench in the Opes Prime case, which involved a scheme of arrangement (SOA). In that case, creditor Robert Fowler was denied the right to seek damages from ANZ Bank and Merrill Lynch under the scheme. The contrasting rulings could open the door for a High Court challenge.
“One of the very interesting things is there is now quite an important difference between what you can do under a SOA and what you can do under a DOCA and they’re both subject to a full Federal Court decision,” Hoser said. “The full Federal Court in Opes Prime said that under a scheme of arrangement you can have these third-party non-debtor releases and then this full court – in a way that casts some doubt on the reasoning of that other full court – has said that under a DOCA you can’t.”
Hoser said he has no doubt that if any party sought a High Court hearing, leave to appeal would be granted. Yet even if the Lehman entities were to succeed in an appeal the DOCA would not be safe because the councils could argue that it is unfairly cumbersome.
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