In Lehman Brothers Australia Limited, in the matter of Lehman Brothers Australia Limited (in liquidation) (No 2) [2013] FCA 965, the Federal Court again confirmed that schemes of arrangement are a viable restructuring tool to compromise claims involving a class of creditors and third parties.


Lehman Brothers Australia Limited (in liquidation) (LBA) was an Australian subsidiary of Lehman Brothers Holdings Inc, which had filed for Chapter 11 bankruptcy protection in the United States.

After its collapse, a number of former clients of LBA commenced a class action and sought compensation in connection with losses suffered based on advice given and products provided by LBA on the basis that those creditors had not been fully informed as to the inherent risks of those products (Class Action).  The Class Action is ongoing and there remained disputes as to whether some claimants may have priority against others.

LBA had the benefit of insurance policies that would meet part of its exposure to the Class Action and the liquidators had successfully negotiated a resolution with the insurers of the Lehman Brothers group of companies whereby approximately $50 million will be made available to meet the claims of the Class Action creditors.  It is a condition of the payment of these funds that a release be provided from the ultimate claimants.

On 22 May 2013, the Court made orders convening meeting of five separate classes of creditors of LBA to consider a scheme of arrangement between LBA and its creditors that would, amongst other things:

  • provide a third party release in connection with claims that gave rise to the Class Action;
  • expedite the resolution of all claims against LBA by dealing with them through the scheme of arrangement via a claims resolution procedure.

No vote was ever held on the original scheme as it became apparent that the US parent company of LBA (a major creditor) would not support it and accordingly, that the scheme would not pass.

Having been unable to reach a resolution with the parent company, the liquidators of LBA approached the Court with a revised scheme that would only effect a compromise of the claims of LBA creditors that were also members of the Class Action.

As in the earlier scheme, a critical feature was that the insurers would provide approximately $50 million to the liquidators in exchange for releases by the scheme creditors.  But compared to the earlier scheme, the revised scheme also had a number of key differences, namely that:

  • Only creditors that were a member of the Class Action would be bound by the scheme of arrangement.  Other unsecured creditors would not be bound, would not be entitled to vote on the scheme and would not receive a distribution under the scheme.
  • The “scheme fund” would consist solely of the insurance proceeds.  Other assets of LBA would remain under the control of LBA and would be realised by the liquidator in the winding up of LBA less what they received under the scheme.
  • Scheme creditors would receive their entitlements under the scheme in partial satisfaction of their claims against LBA.  Those creditors would still be entitled to prove in the winding up of LBA.
  • The appeal in the Class Action would continue unless and until a compromise was reached and agreed by the Court.


The issue for the Court was to determine whether the proposed scheme of arrangement constituted a “compromise or arrangement” for the purpose of the Corporations Act.  The Court noted that:

  • The terms “compromise” and “arrangement” are to be construed liberally and should not be given a narrow or pedantic interpretation.
  • A compromise or arrangement implies some element of give or take.
  • Almost any arrangement within the power of the company and not contrary to law which concerns the rights of the company or creditors may come within s411.
  • To be sanctioned by the Court, a compromise or arrangement must be reasonable.  It will not be reasonable if a creditor abandons a claim but does not receive some commensurate advantage.

The Court was satisfied that the proposed scheme was both a compromise and an arrangement for the purpose of the Corporations Act.  It was a compromise because the scheme creditors would forego any priority claim under s562 of the Corporations Act they may have in exchange for a pari passu distribution from the scheme funds.  Consistent with the earlier Lehman Brothers decision, it was an arrangement between the company and its creditors even though the true effect of the scheme was to deal with the relationship between the scheme creditors and third parties.

The Court also confirmed that it is appropriate for a scheme of arrangement to be used where the compromise in question affects the rights of a single class of creditors only and that where such a scheme is proposed, it is permissible for non-scheme creditors to be excluded from voting.


A scheme of arrangement offers flexibility that is not necessarily available in a restructure by a deed of company arrangement.  Earlier Lehman Brothers decisions had established that schemes of arrangements could be used to compromise creditors’ claims against third parties.  This decision takes that a step further and demonstrates that a liquidator may utilise a scheme of arrangement to deal with the claims of classes of creditors, while not compromising claims of other creditors.