Lehman Brothers Australia Limited (in liq), in the matter of Lehman Brothers Australia Limited (in liq) (Scheme Administrators Appointed)
[2016] FCA 826
•28 June 2016
FEDERAL COURT OF AUSTRALIA
Lehman Brothers Australia Limited (in liq), in the matter of Lehman Brothers Australia Limited (in liq) (Scheme Administrators Appointed) [2016] FCA 826
File number: NSD 1795 of 2010 Judge: RARES J Date of judgment: 28 June 2016 Legislation: Corporations Act 2001 (Cth) s 477(2B) Cases cited: Lehman Brothers Australia Limited v Lehman Brothers Special Financing Inc [2015] FCA 1529
Re Spedley Securities Limited (1992) 9 ACSR 83
Date of hearing: 28 June 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: No Catchwords Number of paragraphs: 12 Counsel for the Plaintiffs: Mr S Nixon Solicitor for the Plaintiffs: Clayton Utz ORDERS
NSD 1795 of 2010 IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED) ACN 066 797 760
LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED) ACN 066 797 760
First Plaintiff
STEPHEN JAMES PARBERY AND MARCUS WILLIAM AYRES IN THEIR CAPACITY AS LIQUIDATORS OF LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED) ACN 066 797 760
Second Plaintiff
JUDGE:
RARES J
DATE OF ORDER:
28 JUNE 2016
THE COURT ORDERS THAT:
1.Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the entry by Marcus William Ayres and Stephen James Parbery in their capacity as liquidators (liquidators) of Lehman Brothers Australia Limited (In Liquidation) (Scheme Administrators Appointed) ACN 066 797 760 (LBA), on behalf of LBA, into agreements substantially in the form of:
(a)the Release Agreement between, amongst others, Lehman Brothers Special Financing Inc. (LBSF), Lehman Brothers Holding Inc. (LBHI), LBA and Oberon Council, as exhibited at Tab 2 of Exhibit “MWA-5” to the affidavit of Marcus William Ayres sworn 27 June 2016 (Ayres affidavit);
(b)the Release Agreement between, amongst others, LBSF, LBHI, LBA and St Luke’s Medical and Hospital Benefits Association, as exhibited at Tab 3 of Exhibit “MWA-5” to the Ayres affidavit; and
(c)the Release Agreement between, amongst others, LBSF, LBHI, LBA and ANZ Nominees Ltd, as exhibited at Tab 4 of Exhibit “MWA-5” to the Ayres affidavit,
be approved.
2.The liquidators’ costs of the interlocutory process dated 27 June 2016 are costs properly incurred in the winding up of LBA.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(REVISED FROM THE TRANSCRIPT)RARES J:
This is a further interlocutory process by the liquidators of Lehman Brothers Australia Limited (In Liq) (LBA) for orders under s 477(2B) of the Corporations Act 2001 (Cth) for approval of their entry into three settlement agreements, on behalf of LBA, with all of the parties responsible for the issue and redemption of two series of the Federation Notes, being the A-1 and A-2 series, (to which I referred in my decision Lehman Brothers Australia Limited v Lehman Brothers Special Financing Inc [2015] FCA 1529 at [1]-[3]). Those agreements are proposed to be entered into with 18 former clients of LBA, being mostly local government councils.
The three proposed agreements
There are two proposed agreements, one involving Oberon Council and a second involving St Luke’s Medical & Hospital Benefits Association, in respect of each of their holdings of AUD500,000 worth of the 2007-1, Federation A-1 Notes (the A-1 notes). LBA held those notes as custodian. On about 30 October 2008, LBA received two repayments of AUD509,349 each in respect of the collateral and accrued interest for the note holdings of each of Oberon and St Luke’s. LBA paid those proceeds on to its sub-custodian, Citicorp Nominees Pty Limited, which in turn paid each of Oberon and St Luke’s the AUD509,349 sums that LBA had received from the holder of the collateral. The payments were triggered by the events of default when Lehman Bros Holdings Inc (LBHI), on 15 September 2008, and Lehman Bros Special Financing Inc (LBSF), on 3 October 2008, respectively, filed voluntary petitions for relief under Ch 11 of the United States Bankruptcy Code.
The proposed agreements with each of Oberon and St Luke’s contain detailed mutual releases given by all of the parties, save that in each proposed cl 6, Oberon and St Luke’s respectively, rather than releasing LBA from all claims that each may have against it, instead will covenant not to sue LBA in respect of those matters.
The third proposed agreement involves 16 other noteholders, including one which held Federation A-2 notes with a face value of AUD200,000. The 16 noteholders had a different custodian and sub-custodian in Australia, being ANZ Nominees Limited and FIIG Securities Limited, each of whom, sequentially on around 30 October 2008, was paid the total of AUD4,432,492.43 being the face value of the notes together with interest and then on-paid that sum to the respective noteholders in their proportionate entitlements due on the termination of the A-1 and A-2 notes. The third proposed release agreement contains similar releases and, relevantly, a covenant not to sue in cl 6 as appear in the proposed Oberon and St Luke’s agreements.
Clauses 7 and 8 of each of the three draft agreements provide that they are conditional upon the Court, or LBA’s committee of inspection, giving approval under s 477(2B). However, for the same reasons that I explained in Lehman [2015] FCA 1529 at [6], LBA’s committee of inspection has a conflict of interest because two of its three members are affected by the proposed compromises. One member is LBHI, which is a party to each of the three proposed settlement agreements, and the second is a solicitor who acts for each of the 18 noteholders, who are also to be parties to those proposed agreements. In those circumstances, it is not possible for a quorum of the committee to give any approval and, so, it is necessary for the Court to do so.
Each of the three proposed agreements also contains a confidentiality clause that provides that none of the parties should disclose the release agreement or its terms, including a settlement amount referred to in a letter that is not in evidence. The liquidators have given notice of today’s hearing, to all of the parties to the three proposed agreements and none has applied for a confidentiality order in respect of the terms of any of the draft agreements.
However, the amount of any settlement payment will be confidential. That is because, among other reasons, the adversary proceedings, to which I referred in Lehman [2015] FCA 1529 at [19], are still ongoing in respect of the balance of approximately AUD37 million worth of Federation notes of all series that had been issued but which have not been included either in the settlement that LBA realised on its own account, the subject of my earlier reasons, or the three proposed settlement agreements, the subject of these reasons. LBA is not a party to the adversary proceedings.
In effect, the three proposed settlement agreements will eliminate the possibility that any of the parties to them can be directly affected by the further conduct of the adversary proceedings. That is because, when the settlements become effective, LBHI’s and LBSF’s and the claims in those proceedings against each of the 18 noteholders will be dismissed “with prejudice”, the effect of that being similar to a judgment on the merits. That form of order would prevent any further proceedings being brought by LBHI or LBSF against the 18 noteholders in respect of the potential application of the “flip clause” in both series of Federation Notes, the effect of which I touched briefly on in Lehman [2015] FCA 1529 at [16]. This in turn will reduce any potential liability that the estate of LBA may have to any person in respect of the notes held by any of the 18 noteholders who will be parties to the three proposed settlement agreements. The settlements, however, leave the other noteholders who have not yet effected settlements exposed to what may happen in the adversary proceedings. That leaves open a potential risk, which the liquidators perceive could arise from those proceedings, that may impact on the estate.
Marcus Ayres, one of the liquidators, in his affidavit of 27 June 2016, explained that he considered that the claims that LBA proposes to release under cl 6 of each of the proposed settlement agreements are not sustainable or have nominal value, and that entry into each of the settlement agreements is in the best interests of the creditors of LBA. He explained why, in the liquidators’ opinion, the proposed settlement agreements were in the best interests of the creditors of LBA, namely because they would reduce the total potential exposure of LBA to any claim by the trustees of the A-1 and A-2 series of Federation notes. That reduction would come about by the removal of the risk of such a claim in respect of the 18 noteholders with whom the proposed settlement agreements have been made. That reduction of the potential exposure of LBA to claims against it by the trustees of the A-1 and A-2 series of Federation Notes, or others who may be found liable in the adversary proceedings, would occur because the two trustees will release, and cause a dismissal “with prejudice” from those proceedings of, the 18 noteholders who will be parties to the three proposed settlement agreements. Those 18 noteholders held a total face value of Federation notes of about AUD5.345 million.
Consideration
As I explained in Lehman [2015] FCA 1529 at [26]-[27], [36] and [37], for the purposes of considering whether it should approve entry into an agreement under s 477(2B), the Court ordinarily does not interfere with the commercial judgment of a liquidator to enter into such an agreement, unless there appears to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator’s conduct. The very considerations that motivated the liquidators to resolve the possible claims in respect of LBA’s holding of about AUD22.4 million worth of Federation Notes in its own right the subject of Lehman [2015] FCA 1529 at [19]-[21], also apply here in relation to the three draft agreements.
If approved, LBA’s entry into each of the three agreements will assist in the efficient winding up of LBA: Re Spedley Securities Limited (1992) 9 ACSR 83 at 85-88, esp at 85 per Giles J. The three proposed agreements engage s 477(2B) because each involves obligations of a party to it, being LBHI and LBSF, that may be discharged by performance more than three months after each agreement is entered into. That is because there is no date fixed for the dismissal with prejudice of the claims in respect of the 18 noteholders from the adversary proceedings and there will be continuing obligations of all parties to keep confidential the settlement amounts under cl 17 of each agreement.
For these reasons, I am satisfied that the commercial judgment of the liquidators in proposing to enter into each proposed settlement agreement, substantially in the form of the drafts exhibited to Mr Ayres’ affidavit of 27 June 2016, should be approved under s 477(2B).
I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate:
Dated: 20 July 2016
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