Schemes of arrangement

On April 14 2010 the High Court of Australia gave reasons for dismissing the appeals of Lehman Holdings Inc and Lehman Brothers Asia Holdings Ltd (in liquidation) with costs. The joint judgment of the majority and Justice Heydon's minority judgment held, as the Full Court of the Federal Court had held at first instance,(1) that, properly construed, Part 5.3A of the Corporations Act (Cth) 2001 does not permit third-party releases within deeds of company arrangement.


On September 26 2008 Lehman Brothers Australia Ltd appointed voluntary administrators. A deed of company arrangement was executed on June 12 2009.

Before entering into voluntary administration, Lehman Australia had sold collaterized debt obligations to the first three respondents, which were local government councils. Those sales formed the basis of the potential claims against entities related to Lehman Australia and those claims were the subject of third-party releases in the deed of company arrangement.


Section 444D(1) of the Corporations Act gives deeds of company arrangement their binding force:

"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 joint judgment held that "there was no textual footing" for reading "claims" as to include claims against any person other than the company that is the subject of the administration.(2) In reaching this conclusion, the court considered Section 444A and the corresponding regulations,(3) which specifically direct attention to 'the company'.

Although ultimately reaching the same conclusion, Justice Heydon reasoned that the principles of statutory construction require "clear and unambiguous"(4) words for the Corporations Act to extinguish the councils' proprietary rights without fair consideration.(5) He went on to hold that while the words "so far as concerns" are "elastic words", they do not clearly and unambiguously permit the inclusion of claims against entities other than the company. Accordingly, Section 444D does not provide for third-party releases.(6)

Schemes of arrangement

The High Court explicitly refused to criticize the judgment in Fowler v Lindholm, which held that third-party releases are permissible in creditors' schemes of arrangement under Part 5.1 of the Corporations Act. The High Court held that:

"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."(7)

The judgments also emphasized the differences between the timing and extent of court involvement:(8) whereas court approval is required prior to the commencement of a scheme of arrangement, no such approval is required to enter into a deed of company arrangement.


Lehman Holdings and Lehman Asia were ordered to pay the councils' costs. Heydon would have ordered Lehman Australia and its administrators to pay the councils' costs because they ultimately adopted the same view as the appellants, and had they taken an inactive role, the length and cost of the proceedings would have been substantially reduced.(9) While the plurality of the court did not adopt his approach, Heydon's judgment serves as a timely reminder to all insolvency practitioners of their duties to act in an impartial and cost-effective manner.


For further information on this topic please contact Amanda Banton or Anna MacFarlane at Piper Alderman by telephone (+61 2 9253 9999), fax (+ 61 2 9253 9900) or email ( or


(1) City of Swan v Lehman Brothers (2009) 179 FCR 243, per Justice Stone at 246 at [4], per Justice Rares at 279 at [117] and per Justice Perram at 286 at [151].

(2) Lehman Holdings v City of Swan [2010] HCA 11, per Chief Justice French, Justice Gummow, Justice Hayne and Justice Keifel at [50].

(3) Corporations Regulations 2001 (Cth), sch 8A cls 5 and 6; and supra endnote 2 at [34] and [69].

(4) Mabo v Queensland [No 2] (1992) 175 CLR 1, at [111]; supra endnote 2, per Justice Heydon at [63].

(5) Supra endnote 2, per Heydon at [59]-[68].

(6) Supra endnote 2, per Heydon at [71].

(7) Supra endnote 2 at [54].

(8) Supra endnote 2 at [54]; per Heydon at [73].

(9) Supra endnote 2, per Heydon at [76].

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