+ Deed of Company Arrangement and Third Party Releases

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On 25 September 2009, the Full Federal Court in City of Swan-v-Lehman Brothers Australia Pty Limited [2009] FCAFC 130, considered whether a Deed of Company Arrangement (DOCA)   purporting to extinguish the creditor councils’ rights to sue other members of the Lehman Group, for the councils’ financial losses, should be declared void under s445G(2) of the Corporations Act 2001.

The Plaintiffs, all of whom were creditors of the company subject to the DOCA, claimed that if the DOCA purported to extinguish their right to sue other members of the Lehman Group, then it was invalid and consequently of no force or effect.

Each of the three judges gave separate reasons but all came to the same conclusion.

Stone J referred to s444D(1) which states that a DOCA “…binds all creditors of a company so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).” It was not in dispute that a DOCA binds not only those creditors who voted in favour of the company entering into the deed but also those who voted against it.

Stone J noted at [25] that s445G contemplates the Court declaring void a deed which is not entered into in accordance with Part 5.3A or which does not comply with it. He said that therefore, s435A did not give administrators, the companies and its creditors a free rein in respect of what is included in a DOCA. He noted that there was no specific provision in Part 5.3A that either permits or forbids a DOCA to interfere with creditors’ rights against an entity other than the company. He then observed at [29] that: “There is a long established principle that a statue should not be interpreted as taking away an existing right unless it does so by clear words that are not reasonably capable of another construction: Sargood Bros -v- The Commonwealth (1910) 11 CLR 279 per O’Connor J.”

After analysing the DOCA, he commented that there was no suggestion that the DOCA was not executed in accordance with s444B and therefore it was a deed of company arrangement. But he concluded that the impugned provisions could not stand. He said they purport to impose obligations and restrictions on creditors that go beyond what was contemplated and permitted under Pt 5.3A. He concluded that they lack the necessary statutory force to bind the creditors.

Parren J at [154]-[155] stated that by reason of construction of the DOCA, the releases were “inextricably interconnected” with the establishment of a litigation fund set up under the DOCA and since the releases were invalid, it followed that the establishment of the litigation fund was too, and he concluded that “with those provisions excised from the deed, it no longer operates, if it operates at all, in a manner resembling its former self.” He then stated at [154] “Putting the matter more formally, crucial provisions in the deed are invalid and they are inseverable from its balance.”

Stone J agreed with this reasoning and also concluded that the DOCA must be declared void accordingly. He said at [44] “The language of Pt 5.3A does not lend itself to a wholesale adjustment of the rights and obligations of a company’s creditors. Whether a wider scope would lead to a better commercial outcome and whether it would be appropriate to provide for that expansion of Pt 5.3A is a question for the legislature not for the Court. “

The third judge, Justice Rares, noted the fundamental issue to be considered by the Court was whether the property of creditors, separate and apart from their rights to sue or prove against a company, can be appropriated by a majority of other creditors for the benefit of them or third parties. He was of the view that Part 5.3A does not contain either express words or “unmistakable clarity of language” to lead to such a draconian interference with the property rights of creditors against third parties or other creditors of a company in administration.

Justice Rares referred at [107] to the recent Part 5.1 scheme decision under s411 in In the matter of Opes Prime Stockbroking Ltd (recs and mgrs appted) (in liq) (2009) 258 ALR 362 where the trial judge held that s411 permitted the Court to approve the scheme of arrangement which required unsecured creditors of a company to release their claims against outsiders by authorising the scheme administrators to execute releases on the creditors’ behalf.

Its appeal Fowler- v-Linholm, in the matter of Opes Prime Stockbroking Limited [2009] FCAFC 125, did not disturb the finding of the trial judge on this point. However, Rares J said at [110]: “… I cannot accept the reasoning (in Fowler) as being relevant or correct in relation to the operation of Pt 5.3A…. The operation of Pt 5.1 is independent and distinct from the operation of Pt 5.3A. The latter was introduced as an alternative to the processes prescribed by Pt 5.1 and winding up under other parts of Chapter 5 of the Act. What may be achieved in an arrangement or compromise in Pt 5.1 does not bear on the construction of Pt 5.3A and the power it contains to include binding provisions in a deed of company arrangement. “

He continued at [111]: “Thus it is not necessary to decide whether (those decisions) correctly construed s411… However, the Full Court (in the Fowler appeal) did not refer to the basic principles of statutory construction that require interpretation of legislative provisions in such a way as will not affect individuals’ property rights without the clearest words: American Dairy Queen 147 CLR at 682-683… Nor did they examine the ratio of McLelland J’s reasoning in Re Glendale [1982] 2 NSWLR 563, that the Court order (which was) authorised by s411 of the Act (or its predecessors) does not give any validity to so much of a scheme as affects rights or liabilities as between an outsider and creditors of a company. “

Parties may apply to the High Court for leave to appeal from the Full Federal Court where specially constituted under s20 of the Federal Court of Australia Act, as this Full Court was. At the time of writing, the writer was not aware of any such application.

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