Lehman Brothers Holdings Inc v City of Swan

[2010] HCATrans 6

[2010] HCATrans 006

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S1 of 2010

B e t w e e n -

LEHMAN BROTHERS HOLDINGS INC

Appellant

and

CITY OF SWAN

First Respondent

PARKES SHIRE COUNCIL

Second Respondent

WINGECARRIBEE SHIRE COUNCIL

Third Respondent

LEHMAN BROTHERS AUSTRALIA LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)

Fourth Respondent

NEIL SINGLETON

Fifth Respondent

STEPHEN PARBERY

Sixth Respondent

LEHMAN BROTHERS ASIA HOLDINGS LIMITED (IN LIQUIDATION)

Seventh Respondent

Office of the Registry
  Sydney  No S362 of 2009

B e t w e e n -

LEHMAN BROTHERS ASIA HOLDINGS LIMITED (IN LIQUIDATION)

Appellant

and

CITY OF SWAN

First Respondent

PARKES SHIRE COUNCIL

Second Respondent

WINGECARRIBEE SHIRE COUNCIL

Third Respondent

LEHMAN BROTHERS AUSTRALIA LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Fourth Respondent

NEIL SINGLETON

Fifth Respondent

STEPHEN PARBERY

Sixth Respondent

LEHMAN BROTHERS HOLDINGS INC

Seventh Respondent

FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 9 FEBRUARY 2009, AT 10.16 AM

Copyright in the High Court of Australia

__________________

MR T.F. BATHURST, QC:   If the Court pleases, in the first of those matters, I appear with my learned friends, MR A.J. PAYNE, SC and MR E.A.J. HYDE, for the appellant and in the second matter I appear with my learned friends for the seventh respondent.  (instructed by Jones Day)

MR D.L. WILLIAMS, SC:   May it please the Court, in matter S362/2009 I appear with my learned friend, MR M.J. STEELE, for Lehman Brothers Asia Holdings Limited (In Liquidation).  That party is also the seventh respondent in appeal S1/2010.  (instructed by DibbsBarker Lawyers)

MR N.C. HUTLEY, SC:   If your Honours please, I appear with my learned friends, MR A.P. COLEMAN and MR D.R. SULAN, for the first and third respondents in each appeal.  (instructed by Piper Alderman Lawyers)

MR S.J. GAGELER, SC, Solicitor‑General of the Commonwealth of Australia:   If the Court pleases, with MR J.W.S. PETERS, SC and MR O. BIGOS, I appear for the Australian Securities and Investments Commission, which itself seeks leave to appear amicus curiae in both matters.  I should say, your Honours, if leave is granted, subject to one amendment we are content to rely on our written submissions. (instructed by Australian Securities and Investments Commission)

MR B.A.J. COLES, QC:   May it please the Court, I appear with my learned friend, MR P. KULEVSKI, for the fourth to sixth respondents in both matters.  (instructed by Clayton Utz Lawyers)

FRENCH CJ:   Is there any opposition to the intervention?  Yes, you have leave to intervene, Mr Solicitor.  Maybe we should just clarify that.  Mr Solicitor, are you seeking leave to intervene or to be heard as an amicus?

MR GAGELER:   Yes, I am.

FRENCH CJ:   Which one?

MR GAGELER:   I am sorry.  The Rules – at least the practice direction uses intervention to cover both.  I seek leave to appear amicus.

FRENCH CJ:   Yes, all right, thank you.  Yes, you have that leave.  Yes, Mr Bathurst.

MR BATHURST:   If the Court pleases.  May I take the Court to the deed of company arrangement in issue in the present case.  It commences at page 473 in volume 2 of the book.  Broadly speaking, it provides for a separate fund of $43,200,000 in respect of which litigation creditors are to be paid in priority to all other creditors.  The deed also provides for a partial subordination of claims that related entities of Lehman Brothers Australia have against that company.

FRENCH CJ:   That subordination was to the extent of $43 million.  Is that right?

MR BATHURST:   Yes - more accurately to the extent of some $52 million‑odd because there was a separate fund for general creditors who were paid 100 cents in the dollar.  I will show the Court the provisions in the deed.  If your Honours could turn to page 476 just below line 20 there is a definition:

“Claim” means any debt, claim or liability, present or future, certain or contingent, ascertained or sounding in damages against the Company –

The company is defined just below line 30 as “Lehman Brothers Australia Limited”.  Then there is a definition which the Court should note of “Financial Products” at line 40 on page 477.

“Financial Products” means the collateralised debt obligations and other financial products marketed by, or acquired or purchased pursuant to services or advice provided by, the Company prior to the Admissible Claim Date.

There is a definition of “General Creditors”:

“General Creditors” means all of the Creditors other than the Litigation Creditors and the Lehman Entity.

GUMMOW J:   At some stage we are going to have to understand what that definition of “financial product” means, with reference to, in particular, paragraphs 9 and following in your submissions.

MR BATHURST:   I will seek to give your Honour an explanation.

GUMMOW J:   In legal terms.

MR BATHURST:   In legal terms.

GUMMOW J:   Yes, not marketing terms.

MR BATHURST:   I was proposing to do it in marketing terms; I will attempt to do it in legal terms.  The definition of “Lehman Entity” your Honours will find at the foot of page 478:

“Lehman Entity” means Lehman Brothers Holdings Inc, and any body corporate not incorporated in Australia that was partly or wholly owned directly or indirectly by Lehman Brothers Holdings Inc at, or in 6 months prior to, 15 September 2008.

There is then a definition of “Litigation creditors” on page 479:

“Litigation Creditors” means the current or former clients of the Company that acquired or purchased Financial Products and who assert a Claim.

There is then reference to “Litigation Creditors’ Dividend” and “Litigation Creditors’ Final Dividend”.  There is then a reference to “Preserved Contractual Rights”:

any contractual rights against a Lehman CDO Counterparty in respect of a Financial Product.  To the extent that any Lehman Entity is a Lehman CDO Counterparty the Preserved Contractual Rights include any right to seek performance of a contractual obligation, or claim damages for breach of such obligation arising after the Admissible Claim Date.

Then clause 5 on page 482 - clause 5.1 there is the obligation on the administrator to get in the company property and establishing a fund:

to be used to make distributions to the Priority Creditors, the Litigation Creditors Fund, the Admitted General Creditors and Lehman Entity Creditors.

Clause 5.3 provides an order of priority.  First, there are priority claims such as the administrators’ costs and expenses.  Then going down to (d) on page 483:

(Litigation Creditors’ Fund):  Next, $43,200,000 to establish the Litigation Creditors’ Fund . . . 

(e)(Admitted General Creditors):  Next, by payments or distributions to the Admitted General Creditors, in proportion to their Admitted Claims, up to an amount which does not exceed $9,000,000;

(f)(Admitted Lehman Creditors):  Next, to the Admitted Lehman Entity Creditors, in full in proportion to their Admitted Claims -

So the priority, as I indicated to the Chief Justice, is some $52-odd million.  Then clause 6 provides for the creation of the litigation creditors’ fund.  It comprises the $43.2 million.  Your Honours will see that from 6.2(a), together with the proceeds of certain insurance claims as and when received by the administrators.  Clause 7 deals with those insurance claims and clause 7.1(a) on page 485 imposes an obligation on the administrators to:

realise and get in all the Insurance Proceeds -

and confers upon them:

the sole conduct and control of any Insurance Claim -

Clause 9.1 is of importance.  It is on page 486:

Subject to sections 444D and 444E of the Act (in respect of the Company) and clause 9.2 of this deed, there will be a moratorium in favour of the Company and the Lehman Entities from the Commencement Date until the Termination Date for all Claims, and during that moratorium a Creditor (whether the Creditor’s Claim is or is not admitted or established under the deed), must not –

wind up, institute proceedings or enforce the debt.  Then 9.2 deals with litigation creditors’ claims and provides that:

The moratoriums . . . include any application to a court by any Litigation Creditor for leave to proceed or any proceeding for a charge in respect of any Insurance Claim.

I do not think I need to take you to any of the other portions of clause 9.  Clause 11 contains the releases in question.

11.1    Release by General Creditors

On payment in full of the General Creditors’ Final Dividend, all Claims of the General Creditors against the Company, or a Lehman Entity, are forever released, discharged and extinguished.

11.2    General Creditors to accept entitlements

General Creditors must accept their distributions under this deed in full satisfaction and complete discharge of all Claims against the Company, or a Lehman Entity and each of them must, if called upon to do so, execute and deliver to the Deed Administrators such form of release of any Claim against the Company and or Lehman Entity as the Deed Administrators may require.

Then 11.5 contains a similar release in relation to the claims of litigation creditors:

On payment in full of the Litigation Creditors’ Final Dividend, all Claims by Litigation Creditors against the Company or a Lehman Entity and all Insurance Claims except those that arise out of the Preserved Contractual Rights are, forever released, discharged and extinguished.

11.6    Litigation Creditors to accept entitlements

Litigation Creditors must accept their distribution under this deed in full satisfaction and complete discharge of all Claims and all Insurance Claims except those that arise out of the Preserved Contractual Rights and each of them must, if called upon to do so, execute and deliver to the Deed Administrators such form of release of any Claim and any Insurance Claim as the Deed Administrators may require.

Now, in the court below there was some debate about whether those releases extended to the claims persons had against the Lehman entities, or litigation creditors had against the Lehman entities.  It was held that as a matter of construction they did and that is not an issue in the present appeal, of course.

Finally, page 492, I will just ask the Court to note that clause 15 on that page sets out a mode of ascertaining the litigation creditors and the method of admission to proof.  Now, so far as the general creditors are concerned such evidence as there is would tend to suggest none of them had claims against any Lehman entity, other than the company.

Those creditors in any event will be paid 100 cents in the dollar under the scheme, or it is anticipated that will occur.  The Court could pick that up from part of the administrator’s report of 28 May 2009.  The report commences on page 444.  If the Court goes to page 452 there is an “ESTIMATED RETURN UNDER DEED SCENARIOS” Lehman Brothers Asia Holdings deed proposal and this was the proposal that was ultimately adopted.  Your Honours will see looking down that “Employee Creditors” of $400,000 are anticipated to be paid in full.  You will see the amount owing in the first column and under the “Deed Low” and “Deed High” they get their money.  “Trade Creditors” $8.7 million” under both the Deed High and the Deed Low they get their money.  So the only real concern, of course, is the position of the litigation creditors.

FRENCH CJ:   I think the record shows that they all voted for the deed.

MR BATHURST:   That is right, yes.  Now, the litigation creditors’ claims arise out of the purchase of collateralised debt obligations.  To attempt to describe the matter in precise legal terms is somewhat difficult ‑ ‑ ‑

GUMMOW J:   That is why I was asking the question.

MR BATHURST:   ‑ ‑ ‑ because none of the swap agreements or any of the other agreements relating to it are in evidence and the construction and the rights of the parties, in any event, are at the present time subject to two divergent decisions, one of Sir Andrew Morritt, the Chancellor in the United Kingdom and the other of the United States Bankruptcy Court going to who is entitled to what are described as the collateral security given on the issue of the notes.

Can I, however, do as best I can with reference to paragraphs 8 and 9 of our submissions to explain at least how it is intended to work.  Paragraphs 8 and 9 of our submissions I should indicate to the Court are taken from paragraphs of an affidavit of my instructing solicitor which was filed in the court below, which was not reproduced in the appeal book but in respect of which we have given the Court only this morning, unfortunately, some additional material which contains it.  To the extent that it is contained elsewhere it is contained in an administrator’s report which is at page 214 in the book.

What in fact occurs is this.  A special purpose vehicle is created which issues notes carrying an interest component, a coupon, and generally redeemable, subject to events of default after seven to 10 years.  The issuer of the notes purchases what is described as collateral, to use what is unfortunately another marketing term, and probably misleading, what were intended to be, at least, gilt‑edged securities.  That is the first step in the process.  A swap agreement is then entered into.  The effect of the swap is that the swap counterparty assumes responsibility for the issuer’s obligations to the note holders in return for the yield on the collateral.  There can be further swaps taking place, as it were, down the line but they do not matter for the present purposes.

On an event of default which includes insolvency of a Lehman entity the swap can be unwound.  In effect, that means that the issuer assumes direct responsibility in the commercial sense for meeting the obligations under the notes.  It always had it in the legal sense but it was being performed under the swap agreement by the Lehman counterparty.  The issuer also gets the benefit of the collateral. 

Now, the sole asset of the issuer is of course the collateral which is secured in favour of the trustee for the note holders.  In the United Kingdom Sir Andrew Morritt has held that the rights of the trustee of the note holders in respect of its security takes priority over the rights of any other of the Lehman entities.  The New York bankruptcy judge in contrast held that the effect of Chapter 11 of the American legislation is that the property is protected for the benefit of the Lehman entities, so the trustee cannot get it. 

The property is presently situated in the United Kingdom but the ultimate fate of where it goes is still, with respect, an open question.  So any return to the note holders will depend on two things:  firstly, the trustee getting its hands on the securities; and, secondly, the value of the securities.

During the period surrounding execution of the deed, because of the worldwide financial conditions, those securities declined markedly in value.  There is no evidence of what the position is now.  In effect, what the administrator did and for the purpose of his assessment the administrator had a model produced which contained certain estimates of what the claims would be worth.  Whether that model is correct or not is inherently uncertain.  That is about the best I can do on the evidence with reference to the two judgments to which I have referred.

HAYNE J:   Could you just go back to the last sentence?  The administrator has had a model produced of what the claims would produce.  Can you expand on that?

MR BATHURST:   Yes, I can.

HAYNE J:   What claims are we speaking of?

MR BATHURST:   I am sorry, the claims of the holders of the notes ‑ ‑ ‑

FRENCH CJ:   Through the trustee.

MR BATHURST:   Yes.  Can I take the Court, to elaborate on it a little bit ‑ ‑ ‑

GUMMOW J:   What is the citation of the Chancery Division?

MR BATHURST:   Perpetual Trustee Company v BNY Corporate Trustee Services Limited [2009] EWHC 1912. The United States Bankruptcy Court decision is Lehman Brothers Special Financing Limited v BNY Corporate Trustee Services Pty Limited Case No 08‑13555.  I can make copies of these cases available if the Court wants them.

FRENCH CJ:   I think that would be helpful, Mr Bathurst.

MR BATHURST:   I have the American one to hand.  I will hand that up and make copies of the United Kingdom case available shortly.

FRENCH CJ:   So the Chapter 11 perspective held the asset to the issuer?

MR BATHURST:   Chapter 11 held the asset to the swap counterparty, the Lehman swap counterparty.  It does not get back to the issuer.  Can I take the Court to volume 2 of the book.  At the start of that volume there is the administrator’s report to creditors of March 2009 which commences at page 180.  At 214 there is a description of how the notes work.  At page 220 there is a summary of what are called “CONTINGENT CREDITOR CLAIMS”.  If the Court could go to the second column on page 220, you will see it is there recorded in the last full paragraph on that page:

A number of individuals, councils and local government authorities have lodged ‘belts and braces’ claims in the administration of the Company in relation to losses they allege were caused by the Company arising from the investment by the Company, on their behalf, in certain investment products.

They are then summarised in the succeeding pages.  Your Honours will see that there was a claim in negligence, that is 9.1.1.2 on page 221, the claim for breach of fiduciary duty and breach of contract referred to on page 222.  On pages 223 claims for unconscionable conduct and misleading and deceptive conduct and then in the second column on page 223, they refer to the remedies sought:

·Rescission of the IMP Agreements by restoring the claimants to their pre-contractual position by a payment of the full face value of the investments plus opportunity costs;

·Damages . . . 

·Orders under statue for the recovery of the full face value of the investments.

The problem with the remedies of rescission and damages asserted by the claimants is that whilst the claimants continue to hold the securities which they invested in, it is very difficult to determine what losses have been suffered.  Further, and until such time as the investments in question have been realised or returned and an amount of the loss crystallised, it is arguable that no loss has presently been suffered by the claimants.

However, and without reference to our views as to the merits of the contingent creditor claims, we have interrogated the Company records over the previous six months in order to allow us to develop a model which can put, as best possible, a reasonable assessment on the notional ‘universe’ of potential losses suffered by all parties that acquired CDO products from the Company as at the date of our appointment.

They then describe the model – I do not think I need to take the Court through it for present purposes but the Court should perhaps note at page 224, the last two lines on the first column:

The model reveals that the ‘universe’ of claims against the Company could be in the order of $625 million. 

HAYNE J:   Just pausing there, is the hypothesis on which this analysis proceeds that the note is now due or not due?

MR BATHURST:   The note is now due, that is the hypothesis.  I am sorry, can I withdraw that.  I was wrong in that.  The hypothesis is that the note will run its course and on redemption will be worth a certain amount.  However, the valuation took place as at the date of the administration.  You can pick that up on page 224 where the assumptions are described.  Firstly:

·A valuation of the CDO’s at 26 September 2008.  The Administrators consider this is the most appropriate date to value the CDO’s in view of persisting market volatility;

·The valuation of the CDO’s is based on the mid market valuation (the average between the high and low valuation) obtained from independent third parties derived by using models based on credit market spreads and correlations (the industry standard method . . . 

·A number of the Lehman originated CDO’s are expected as at the date of this Report to be unwound, which will allow the Trustee to distribute the underlying collateral to Noteholders.  Accordingly, the value of the underlying collateral (less a reasonable margin for Trustee costs) is the most appropriate valuation of these CDO’s.

·Losses of the Contingent Claimant Creditors are capped to the face value of the CDO product i.e. we have not included in the model any claim for consequential loss or for recovery of legal costs.

FRENCH CJ:   Do you know what is meant by the word “unwound”?

MR BATHURST:   Yes, what is meant by the word “unwound” is, as I indicated, the effect of the swap was that the benefit of the collateral went to the swap counterparty.  Unwinding is talking about the termination of the swap so the collateral goes back to the issuer in respect of the various series of notes and then goes to - I am sorry, to the extent it is there to the benefit of the note holders.

HAYNE J:   But the intervention of insolvency of one or more of the Lehman entities does not crystallise the debt and make it due and owing at once?

MR BATHURST:   No.  The liquidation of a legal entity was an event of default under the swap agreements ‑ ‑ ‑

HAYNE J:   But not under the note issue?

MR BATHURST:   That is correct, yes.  Mr Hutley correctly pointed out that if the American decision is correct and the swap cannot be unwound then there is a possibility of default under the note agreement, but that depends on the correctness of the American decision.

HAYNE J:   But the default under the note agreement being for want of payment of coupon, want of payment of interest due on the note?

MR BATHURST:   Yes.  That, unfortunately, is the best explanation I can give of how it works and that is the totality of the evidence in relation to it.  Because this was done by way of separate questions these issues were not explored in any detail whatsoever in the court below.  I hope that gives the Court a flavour of the nature of the claims ‑ ‑ ‑

GUMMOW J:   Is there material explaining the nature of the third party claims?

MR BATHURST:   Yes.  I will come to that in a moment.  There are two things I can take the Court to. Two of the Council respondents, if I can call them that, have lodged proofs of debt in the Chapter 11 bankruptcy and down below there was what was described - particulars of prejudice provided which were in the appeal book and we can take the Court to those in a moment.  Can I ask your Honours to go in that regard immediately to the bundle of additional materials we filed this morning?

HAYNE J:   Again – forgive me for being slow about this but I just want to understand it better than I certainly do at the moment.  The issuer of the notes - or is it accepted that the issuer of the notes is now insolvent or is at risk of being insolvent?

MR BATHURST:   The issuer of the notes is certainly at risk of being insolvent.  There is no evidence that it is presently insolvent.  The position is further complicated because there is more than one issue.  There is a whole series of these notes.

HAYNE J:   Of special purpose vehicles that were created.

MR BATHURST:   Special purpose vehicles, yes.

HAYNE J:   None of whom is a party to this litigation?

MR BATHURST:   That is correct, and, of course, this litigation did not or has not attempted in any way to ascertain the validity of the claims of the councils which, as the Court will see, are not simply a claim in debt in relation to any money due to them under the notes.

HAYNE J:   So the claims of councils are or are not in debt?

MR BATHURST:   Are not.

HAYNE J:   They are not in debt against any party that is in this litigation?

MR BATHURST:   That is correct.

HAYNE J:   They may have, or apparently would have claims in debt against special purpose vehicles?

MR BATHURST:   The special purpose vehicle, that is right, yes.  If the Court could go to the second document in that additional material which is an affidavit of Steven William Fleming.  At page 25 the Court will find the proof of debt lodged in the United States Bankruptcy Court by the City of Swan.  The basis of the claim is on page 27, Schedule A:

City of Swan Council (the Council) is a contingent creditor of Lehman Brothers Holdings Inc (LBHI).

LBHI was knowingly involved in contraventions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) by Lehman Brothers Australia Limited (ACN 066 797 760) (Lehman Australia) (a wholly owned subsidiary of LBHI).

The contraventions arose because Lehman Australia provided portfolio management and advisory services to the Council and in doing so Lehman Australia, on behalf of the Council, invested in collateralised debt obligations (CDOs) in circumstances where it, inter alia, misled the Council.

Council claims damages for at least the face value of the CDOs held by Council, as listed in the table below.

The table below demonstrates that there was – what I just said in answer to a question from your Honour Justice Hayne – that there was a whole series of notes and separate issuers.

FRENCH CJ:   Would those issuers created by the Lehman Brothers Group, in effect, fall within the description of Lehman entities as defined in the deed?

MR BATHURST:   They are excluded by the preserved contractual rights.  They may fall within the definition of “Lehman entities” but claims against them are preserved contractual rights.  They come in and then fall out.

HAYNE J:   At some point if it is important, Mr Bathurst, you will have to explain how that works under the deed.  I do not instantly pick it up from the deed about how that works.  If it is important that we understand it, I do not.

MR BATHURST:   I do not think there has been any contention made in these proceedings.

HAYNE J:   I am sure there has not, but that is a separate question, Mr Bathurst.  That is a very separate question

MR BATHURST:   Perhaps I should go back to the deed and show you how that works now.  I took the Court probably too briefly to the definition of “Preserved Contractual Rights” on page 479.

“Preserved Contractual Rights” means any contractual rights against a Lehman ‑

collateralised debt obligation -

Counterparty in respect of a Financial Product.

HAYNE J:   That is defined as the issuer and trustee of financial products marketed.  It was the reference to counterparty that slewed me.

MR BATHURST:   I should have taken the Court to that definition.  The exclusion of their claims, if the Court goes back to 11.6 at page 488:

Litigation Creditors must accept their distribution under this deed in full satisfaction and complete discharge of all Claims and all Insurance Claims except those that arise out of the Preserved Contractual Rights ‑

I took the Court to the proofs of debt.  As I indicated in answer to a question from Justice Gummow in the court below there were further particulars of the claim against the Lehman entity provided.  The Court will find that in volume 1 of the book.  At page 166 there is a document entitled “PARTICULARS OF PREJUDICE”.  Paragraph 2 reads:

So far as the plaintiffs are presently aware, the Dissenting Creditors have or may have the following claims against one or more of the Lehman Entities:

2.1The Lehman Entities (including so far as the plaintiffs are presently aware Lehman Brothers International (Europe) (In Administration), Lehman Brothers Special Financing, Inc. and Lehman Brothers Treasury Co. B.V.) were negligent in arranging the issue of CDO products ‑

Some particulars of that are given.  Then 2.2 on page 168 just below line 30:

Further, and in the alternative, Lehman Inc and Lehman Asia were negligent in marketing and selling CDO products to the Dissenting Creditors, resulting in the Dissenting Creditors suffering loss and damage.

Point 2.3 on page 169 reflects the proof of debt:

Further, and in the alternative, the Lehman Entities (including Lehman Inc and Lehman Asia) have contravened sections 12DA and 12 DB of the Australian Securities and Investments Act 2001 -

Turning over to page 170, 2.4 there is an alternative claim of accessory to liability in respect of Lehman Australia’s conduct.  At the foot of 2.5 the claim of knowing participation in “breaches of fiduciary duties”.  At 2.6 just at line 30:

Lehman Inc is liable to indemnify the Dissenting Creditors in relation to CDO products acquired by the Dissenting Creditors, pursuant to an irrevocable and unconditional guarantee for part of the performance of the CDOs, for the benefit of the holders of the CDOs.  Further particulars will be provided ‑ ‑ ‑

FRENCH CJ:   All these particulars were going to the question of whether the deed should be terminated or set aside?

MR BATHURST:  Yes. The nature of the guarantee under 2.6 was not explored in the court below. It certainly was not admitted and is not admitted and it is by no means clear what the guarantee is by reference to clause 2.6. Leaving aside clause 2.6 we would submit that on its face the nature of the claims are such that if, in fact, brought against the appellant and the other Lehman entities there would be a real likelihood of an entitlement for them on the one hand or, for that matter, Lehman Asia on the other hand, to claim contribution from each other either/or in the case of the tort claims and the statutory liability claims the proportionate liability provisions in the Civil Liability Act (NSW) and other equivalent statutes in other States of this country and under the ASIC Act.

What is essentially the short point in this appeal is whether section 444D(1) operates to limit the scope of a deed of company arrangement, the claims against the company simpliciter or whether, as we contend, the words in that section “so far as concerns” means that as a matter of power a deed can extend to deal with or release claims against third parties which are connected or intimately connected with a creditors’ claim against the company as in the present case.

Could I take your Honours to section 444D?  We supplied a printout of the relevant legislative provisions which was a common law composition which we checked as being accurate as at the relevant date, the date the deed was entered into.  If the Court is minded to use that it is accurate.  If, on the other hand, members of the Court wish to use the CCH compilation that does incorporate some inconsequential amendments which have been made to the statutes since that time but none of them affect the principal sections or the sections under consideration in the present case.  So that is a long way of saying use the CCH if you want to or use the ‑ ‑ ‑

FRENCH CJ:   The reprint or the CCH compilation current as at 1 January 2009 would be fairly safe, I think.

MR BATHURST:   Yes, it is safe.  Could I go to section 444D.  Section 444D(1) provides:

A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the date specified in the deed under paragraph 444A(4)(i). 

Now, we accept, although my learned friend Mr Coles does not, that “claims” in that section refers to claims against the company.  What we say though is that the words “so far as concerns claims” recognises that there must be a nexus between the relevant provisions in the deed and the claims which the creditors have against the company.  At its most simple, of course, the relevant nexus would be mechanical procedures for working out proof of debt and matters of that nature.  But we contend it goes further than that, and particularly in the present case where the claims against the Lehman entities are or appear to be in respect of the same transactions and the same amount.  The release of the third party concerns claims against the company. 

FRENCH CJ:   I suppose the problem with that broad test is to define its limits.

MR BATHURST:   There may be problems in certain cases in defining its limits.

FRENCH CJ:   It may require a judgment call on the part of the administrator and those who are participating in the voting process and so forth.

MR BATHURST:   Administrators make judgement calls on a regular basis.  There is a degree – or part of my learned friend, Mr Hutley’s submissions relate to the difficulties that administrators may have.  That was an argument that in a somewhat different context did not find very much favour with the court in Sons of Gwalia, for example.  But we would submit that there certainly may be cases at the outlying area where this matter would be – that the relevant nexus would be unclear, but that does not mean, in our respectful submission, that the – if one can identify a clear nexus, the section cannot operate. 

GUMMOW J:   Is there a question of construction at 444D(1).  It says:

A deed of company arrangement binds –

Binds who –

all creditors of the company –

Binds them in what way –

so far as concerns claims –

Do you not read the “claims” as hooked back into creditors of the company?

MR BATHURST:   You read the word “claims” as going back to creditors of the company, but the words that we place reliance on are the words “so far as concerns”.

GUMMOW J:   Yes, I know.  So far as concerns what?

MR BATHURST:   So far as concerns their claims.  In other words, the way we put it is there has to be a nexus between the claims of the company and the relevant provisions in the deed for the deed to bind creditors. 

HAYNE J:   Could you state that again?  I am not sure I follow it.

MR BATHURST:   We accept that the creditors in 444D(1) are creditors of the company and they are bound, so far as concerns – bound by the deed of company arrangement so far as concerns their claims ‑ ‑ ‑

GUMMOW J:   But claims against who?

MR BATHURST:   So far as concerns – the claims there, we accept, are the claims against the company.  If, however – can I take it back a step?  A deed in the normal course would not simply relate to the release or extinguishment of a claim.  It would relate to a whole host of other things – at its most simplest, the power to administer, in certain circumstances the power of the administrator to carry on the business of the company.

The creditors are bound because they are persons who fall within the timing provision contained at section 444D(1).  They are bound to the extent the provisions concern their claims.  If, as in the present case, their claims would be affected by statutory proportion of liability provisions or claims for contribution, which would have to be worked out in the overall administration, then the release of the third party rights in consideration for the subordination is something which, in our respectful submission, does concern their claims against the company.  That is how we put it.

HAYNE J:   Can I just start the question of construction presented by 444D(1) with an understanding of what you say is encompassed by the word “claims”?

MR BATHURST:   We say what is encompassed by the word “claims” is claims against the company arising before they specified the deed.

HAYNE J:   Is it an expression that encompasses everything of the kind with which 553(1) of the Act deals in liquidation?

MR BATHURST:   Yes, that was held to be the case in Brash v Katile and we do not dispute the ‑ ‑ ‑

HAYNE J:   So the premise for your argument is that claim, the word “claims” as used in 444D(1) goes to all claims, present, future, certain, contingent, ascertained or sounding only in damages to pick up 553(1)?

MR BATHURST:   Yes.

HAYNE J:   Does it therefore follow that a particular specie of claim which would engage 444D(1) would be a claim of the kind mentioned by the administrator in his report as a claim over by one of the other Lehman entities for indemnity or contribution from the company under administration?

MR BATHURST:   We would submit yes.

HAYNE J:   If that is right, what is the purpose served in the administration of – can I call it the debtor company, that is the company the subject of administration – what is the purpose served in the administration under deed of that company by releasing the third party?  The third party, you say, has no claim over against D Co because its claim over against D Co is caught by 444D(1).

MR BATHURST:   The purpose of releasing the third party is at a practical level an inducement to the third party to compromise the claim, in this case by subordinating its debts.  In other cases, for example, in the scheme context by paying money into a scheme fund it can be distributed to creditors.  That is the purpose of it.

GUMMOW J:   Is not the phrase “so far as concerns” really temporal in nature, that is to say it is saying binds all creditors if their claim arises on or before the day specified.  Is that not all the work it does?

MR BATHURST:   We submit no.  We submit “so far as concerns” can mean so far as relates to, for example, and if the necessary relationship to those claims could be established a provision in the deed dealing with that relationship can bind the creditors.

HAYNE J:   Thus, the “so far as” expression went further than had been proposed in the draft legislation in the ALRC Report.  That draft legislation in the ALRC Report in the section designated “VA32” – Voluntary Administration, section 32(1):

a deed of company arrangement is binding on all the creditors of the company as at the effective day or as at such earlier day as is specified in the deed.

The “so far as” clause is more than a temporal cut‑off, it is embracing relationship with what, the company, the claim?  What is the relationship which you say ‑ ‑ ‑

MR BATHURST:   Relationship with the claim is how we put it.  Looking at it, as it were, commercially – I know this is not the way to construe the statute but it makes sound sense if a creditor can wrap up all his or her claims in respect of one transaction in a – for want of a better expression - global manner.  The claims are related.  One can only recover 100 per cent once, of course, and if the various persons who may be liable are prepared to compromise then one can see the benefits of it and putting it that way shows what we submit the necessary connection is.

There has to be some relationship but in the present case – we do not have to go further than the present case – the requisite relationship is established because the claims arise out of the same transactions and are in the same amounts and amounts recovered from one company will affect the extent of the entitlement to recover from another.

HAYNE J:   But that last proposition, how does that sit with the acceptance of the proposition that the claim over, as I have described it, by the third party company is swept up by 444D(1)?

MR BATHURST:   Because whilst the claim by the third party is swept up by 444D(1), what would not be swept up, absent the release of the third party, would be the litigation creditors’ rights against that third party.

HAYNE J:   Are we to hypothesise that that third party is solvent or insolvent, or does it matter?

MR BATHURST:   It does not matter.

HAYNE J:   If it is a solvent third party, it seems to be a rather different case from foregoing rights against an insolvent third party.

MR BATHURST:   That may well be the case, we accept that, but that deals, in our respectful submission, not with the question of power, but rather whether or not the deed, for example, is oppressive to creditors.  If one had a proposition where nothing was put in by the third party, to take an example, or assume in Opes Prime that the ANZ Bank got their release for, without paying the $225 million, that would certainly go to the question of oppression, depriving rights that could yield some money, but in our respectful submission, it does not go to the question of power.

Can I take the Court further in that regard, first to section 435A which sets out the object and purpose of the legislation.  Section 435A(b) provides that:

The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

. . . 

(b)if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

If the deed of arrangement gives a better return by, for example, payment or subordination, than would otherwise be obtained from a winding up, then a deed such as the one in question here would give effect to that purpose.  The Harmer Report which led to the additional draft section to which your Honour Justice Hayne referred, emphasised of course the need for flexibility in these arrangements, and if the arrangement produces a better return in respect of the claim, the object is served.

Further, as I indicated, in our submission, creditors are protected against arrangements which operate fairly or oppressively.  First, the process leading up to the execution of a deed of company arrangement is under the control of the administrator.  He or she has an obligation under section 439A to indicate a view as to whether a deed should be entered into.  Yours Honours pick that up in 439A which deals with an obligation of the administrator to convene a meeting and to inform creditors.  At 439A(4):

The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:

(a)a report by the administrator about the company’s business, property, affairs and financial circumstances; and

(b) a statement setting out the administrator’s opinion about each of the following matters:

(i) whether it would be the creditors’ interests for the company to execute a deed of company arrangement;

and then going forward:

and also setting out:

(iv)    his or her reasons for those opinions; and

(v)     such other information –

So there is that protection.  Further, there is the court’s power to terminate a deed.  That is contained in section 445D:

(1)The Court may make an order terminating a deed of company arrangement if it is satisfied that:

(a)information . . . 

(i)was false or misleading –

. . . 

(f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be done or made would be:

(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii)contrary to the interests of creditors of the company as a whole; or –

That links up with the particular provision in section 600A, which would apply in the present case:

Subsection (2) applies where, on the application of a creditor of a company or Part 5.1 body, the Court is satisfied:

(a)that a proposed resolution has been voted on at:

(i)in the case of a company – a meeting of creditors of the company held:

(A)under Part 5.3 or a deed of company arrangement . . . or

(ii)in the case of a Part 5.1 body – a meeting of . . . the body held under 5.1; and

Then (b) if the vote or votes of the related creditors had been disregarded the resolution would not have been passed.  Then the court’s powers, at subsection (2):

The Court may make one or more of the following:

(a)if the proposed resolution was passed – an order setting aside the resolution;

(b)an order that the proposed resolution be considered and voted on a meeting of the creditors of the company or body, or of that class of creditors, as the case may be, convened and held as specified in the order;

(c)an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on –

the resolution.  So there is, we submit, very significant protection against deeds which operate unfairly and the paradigm case would be one where a solvent third party was getting a release in circumstances where he, she or it was plainly liable and where he, she or it had ample capacity to meet the creditors’ claim.  But that, in our respectful submission, goes to discretion, not to power. 

FRENCH CJ:   There is no specific provision under which a creditor, who knew he was on the losing side, as it were, of a proposed vote in relation to a deed of company administration could approach the Court to enjoin the resolution?

MR BATHURST:   Yes there is, we would submit.  If your Honours go firstly to 447B(2):

On the application of a creditor of a company, the Court may make such order as it thinks necessary to protect the creditor’s interests while the company is under administration.

Section 447E deals with the supervision of administrators:

(1)Where the Court is satisfied that the administrator of a company under administration –

is acting unfairly “the Court may make such order as it thinks just.” 

FRENCH CJ:   What was the preceding provision you referred to?

MR BATHURST:   Section 447B(2).

FRENCH CJ:   Thank you.

MR BATHURST:   So in the case which the Chief Justice postulated a creditor who was fairly plainly on the losing side could approach the Court under either of those sections – or, sorry under either of those sections if the administrator was supporting the scheme and under 447B if he or she was not – to enjoin the holding of the meeting.  One matter raised by the Solicitor‑General was that supervision of the court could be circumvented.  I will come back to that, but there is certainly power to make orders preventing the passage of a resolution as much as setting it aside after it had been passed.

We accept, of course, as this Court said in MYT v Mulcon that the expression “the deeds of company arrangement” was an allusion to the old form of arrangements in bankruptcy.  Your Honours will recall the deed of assignment/deed of arrangement provisions.  In our legislative bundle we provided the Court with Part X of the Bankruptcy Act as it appeared immediately prior to the introduction of what are now called personal insolvency arrangements. It is at tab 6. Could I take the Court to it for the moment to show the similarity between these provisions and the provisions in Part 5.3A. Your Honours will see on the first page behind that tab at page 51 a definition of “deed or arrangement”:

a deed (not being a deed of assignment, a deed in respect of a compensation or a deed executed for the purposes of a proclaimed law) providing for the arrangement of the affairs of a debtor with a view to the payment, in whole or in part, of his or her debts.

If the Court would go to page 62, section 204(1):

The creditors may, at a meeting called in pursuance of an authority under section 188, by special resolution:

. . . 

(b)require the debtor to execute a deed of assignment or a deed of arrangement -

Then at page 94, section 233 provides in subparagraph (1):

A deed of arrangement that is entered into in accordance with this Part and complies with the requirements of this Part is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor.

Finally, at page 97 there is power in the court under section 236 to terminate the deed –

(b)that the deed of arrangement cannot be proceeded with without injustice or undue delay to the creditors, the debtor or . . . the estate of the debtor; or

(c)that for any other reason the deed of arrangement ought to be terminated -

It was a somewhat similar scheme.  In relation to that scheme the courts held that it was a matter for the creditors to determine what was in the deed subject only to the provisions not being in conflict with the Act.  That appears from the decision of this Court in Gee v Schmutter 123 CLR 503. The issue in that case was whether a deed described as a deed of arrangement, which included part of the assignment of the debt as property, could only be done by deed of assignment and was invalid because the provisions related to such a deed had not been complied with.

Sir Garfield Barwick, with whom the other two Judges, Justices McTiernan and Windeyer, agreed pointed out at page 509, reading from the start of the last paragraph on the page:

On the other hand, the provisions to be included in the deed of arrangement are to be specified by the creditors:  s.204(2).  This section puts no express limitation on what may thus be specified.

Going over to page 510, his Honour said this, about halfway down the last full paragraph on the page:

I cannot see that the Act, or any policy which it expresses, is offended by an arrangement such as that contained in the deed in this case, even though the creditors thereby obtain access both to the divisible property and to the continuing efforts of the debtor.  It is of course a matter for the debtor and the creditors as to whether or not such an arrangement is acceptable.  There is to my mind no reason, grounded on public considerations, to deny efficacy to a deed such as the present, representing, as it seems to me, a sensible arrangement of benefit both to the debtor and to his creditors.

Then finally at page 511, at the foot of the page, last paragraph:

The deed was in its nature apart from any particular statutory provisions, a deed of arrangement.  It was arranging the affairs of the debtor so that on the one hand he could avoid imprisonment and bankruptcy, pay some amounts to the Crown which was not relevantly a creditor and carry on his business with a view to the payment in full of his creditors.  I cannot find anything in the provisions of the deed which would deny it the character of a deed of arrangement.  Nor can I find any provision of the Act which would preclude it being effective as such a deed.

That approach that, subject to any injustice to creditors, creditors and debtors could determine what was appropriate to go into deeds of arrangement was used by Justice Riley in Re Dowling 36 FLR 384, which your Honour will find at the front of the additional materials, to hold that a deed of arrangement under the Bankruptcy Act could operate to release third parties from their obligations.  If the Court could go to the headnote, you will see there, in the second paragraph of the headnote:

The terms of each deed contained a covenant by some creditors, including the first four respondents, not to take steps to enforce against B. any payment for which he was jointly liable with the debtors, and required the trustee, inter alia, to take steps to restrain any action brought to enforce such a payment.  The basis of the application in this case was that each of the first four respondents was bound by the deed of the arrangement, and precluded thereby from taking the proceedings.

His Honour held the deed of arrangement to be valid, dealing with the issue at page 389 in the last full paragraph on the page, the second paragraph on the page:

The Bankruptcy Act 1966 in s. 187(1) gives a wide definition to the term deed of arrangement: “A deed . . . providing for the arrangement of the affairs of a debtor with a view to the payment, in whole or in part, of his debts”, and leaves it to the creditors to specify provisions to be included in the deed, the only restriction being that their power is “subject to this Act”: s 204(2). In my opinion, the effect of those words is to perpetuate for the Act of 1966 the doctrine that the terms of a deed of arrangement may not in any way “subordinate, overrule or neutralize” the provisions of the Act –

and he refers to Gee v Schmutter:

“In my opinion, a deed of arrangement . . . may contain any reasonable provisions requisite to give effect to the purposes of the deed if they do not contravene those provisions of the Act made applicable to deeds under that Part”.

We accept, of course, that Part 5.3A has to be construed in accordance with its terms and that the Bankruptcy Act did not contain a provision equivalent to section 444D(1).  Having said that, it is our submission that cases in that area, and in relation to cases under Part 5.1, show that the approach of the Court has been to construe these provisions liberally, and we submit that a liberal construction should be given to the words “so far as concerned”.

The Full Court rejected that approach for a number of reasons.  The first reason common to all members of the court was that the legislation contained no express provision for dealing with releases of third parties.  Your Honours pick that up from the judgment of Justice Stone at page 548 at paragraph 39:

In s 444A and throughout Pt 5.3A creditors are referred to in their capacity as creditors of the company. The Part provides for a deed of company arrangement to alter the rights of the creditors and consequently adjusts the claims that they may make against the company. Conspicuous by its absence is any express provision having the effect of diminishing a creditor’s rights against entities other than the company. In fact the combination of ss 444H and 444J ensure by express words that a release of the company’s debt is limited to the provisions of the deed and does not affect the relevant creditor’s rights under a guarantee or indemnity.

Justice Rares dealt with the issue at paragraph 84 on page 573:

The detailed provisions of Div 10 of Pt 5.3A make no express mention of a deed of company arrangement applying to the rights of the company’s creditors against, not the company, but each other or strangers, except that in s 444J there is a limited preservation of creditors’ rights against sureties of a debt of the company released by a deed.

Then he refers to section 444E –

This statutory moratorium applies only to persons bound by a deed so far as they seek to affect the company, but it does not apply to third parties or other creditors.

Justice Perram at paragraph 151, page 597 just below line 20 also refers to:

Part 5.3A provides for a detailed reworking of that relationship –

that is the relationship between creditors and the company –

but is silent on the position of third parties.  The absence of that detail and the implicit and concomitant interference with vested property rights that would occur if third party releases were available is some indication that Parliament did not mean, by the language of s 444D, to permit such a provision.

I will come to the particular sections of the legislation that their Honours referred to in a moment.

GUMMOW J:   Is there any discussion by them of Re Dowling?

MR BATHURST:   Yes, there is by Justice Rares.

GUMMOW J:   Re Dowling was quite a celebrated event in its day.  It involved Patrick Partners.

MR BATHURST:   Yes.  Mr Baume, I think, was the gentleman in question.  Justice Rares deals with it in paragraph 106 on page 581:

After we reserved judgment, the Court invited the parties to make submissions on whether the word “arrangement” under the bankruptcy laws had significance in the construction of Pt 5.3A beyond the “allusion” referred to in MYT 195 CLR at 644 [13]. This resulted in our being referred to in the decision of Riley J in Re Dowling . . . There, he held that the creditors could resolve that a deed of arrangement under the then provisions of Pt X of the Bankruptcy Act1966 (Cth) include a binding release by creditors of a third party who had promised, by his own separate deed, to make payments to the trustee in bankruptcy. Riley J held that: “…there is nothing in those provisions that offends any provision of the Act”: Re Dowling 36 FCR at 390. However, the fact that additional matters may have been included in a deed of arrangement under the provisions of Pt X, does not support the conclusion arrived at by Riley J that those provisions operated as a statutory, as opposed to a consensual, arrangement. They do not.

With the greatest respect to his Honour, Justice Riley was referring to a deed of arrangement under Part X of the Bankruptcy Act which binds both dissenting creditors and creditors who voted in favour.  It would be immaterial if the four Patrick Partners had voted in favour of it or otherwise.  His Honour simply did not decide it on a consensual basis, on the basis of a separate contract made between those parties.  His Honour was the only judge who dealt with that matter.  Justices Stone and Perram indicated they agreed generally with his Honour’s reasons.

HAYNE J:   Do any of their Honours refer to the provisions of section 440J and the treatment in that division of 3A of liabilities of third parties?

MR BATHURST:   No, they refer to ‑ ‑ ‑

HAYNE J: It is said, I thought, at times in the judgments nothing in Part 5.3A deals with the position of third parties. Section 440J does. True it is, during administration but the consequence of the conclusion reached is that that which is statutorily provided for by 440J cannot be perpetuated in a deed of company arrangement. That conclusion may be right or wrong but that is the consequence of the view, is it not?

MR BATHURST: Yes. Can I go then to the particular sections their Honours did refer to? The first was section 444J which provides that:

Section 444H does not affect a creditor’s right under a guarantee or indemnity.

That section was inserted into the legislation in 2007.  As this Court is of course aware, it had long been established since prior to Hill v Anderson Meats that the entry by a company into a scheme of arrangement did not affect the guarantee, it being entered into by statutory force as distinct from a consensual variation.  There were apparently some lingering doubts as to whether that would apply in relation to deeds of company arrangement.

If your Honours go to the material filed by the Council respondents, tab 2 has the explanatory memorandum in respect of the Corporations Amendment (Insolvency) Bill which introduced the legislation, and your Honours will see on the third page behind the tab, it is the page numbered 92:

7.8      A DOCA releases the company from a debt in so far as the deed provides for the release and the creditor concerned is bound . . . In this way, it is said that the company’s debt is extinguished by the deed.

7.9      Third parties may act as guarantors or indemnify a creditor against loss for various debts owed by the company to creditors.

7.10    A possible view is that the acceptance of a DOCA extinguishes the liability of guarantors for debts of the company, by extinguishing the debt that is being guaranteed.  This argument would not apply to an indemnity, however . . . 

7.11 There is authority that supports the position that creditors’ adoption of a DOCA does not affect their rights against third parties, including their rights under guarantees. Recommendation 34 of the CAMAC Report (1998) stated that the Corporations Act should be amended to deal with the issue.

They indicate that:

Certainty in the area is desirable.

Then:

Item 30 will insert new section 444J of the Corporations Act that makes it clear that creditors’ rights under a guarantee or indemnity are unaffected where a debt is released by acceptance of the terms of a deed of company arrangement –

The CAMAC Report of June 1988 is not produced in the material.  Can I hand up copies of that material.  If your Honours go to the page there,  your Honours will see there is a reference to “Third party guarantees”:

The Legal Committee in its Discussion Paper noted a possible view that the acceptance of a deed of company arrangement extinguishes ‑ ‑ ‑

HAYNE J:   Where are you reading from?  What paragraph?

MR BATHURST:   I am so sorry, your Honour:  Paragraph 5.57:

The Legal Committee in its Discussion Paper noted a possible view that the acceptance of a deed of company arrangement extinguishes the liability of guarantors for debts of the company, by extinguishing the debt that is being guaranteed.  The Discussion Paper proposed that the law should make it clear that creditors’ adoption of a deed of company arrangement does not affect their rights against third parties, including their rights under guarantees or indemnities.

5.58    Most submissions supported the proposal.  Only the Law Council expressly disagreed . . . 

5.59    The Legal Committee considers that certainty in this area is desirable.  Creditors should be able to enforce a guarantee, provided that its terms permit them to do so in the event that the company (the principal debtor) goes into voluntary administration.

Recommendation 34. It should be made clear that a debt which is extinguished by entry into a deed of company arrangement, and which by its terms would have otherwise survived, is deemed not to have been extinguished for the purpose of enforcing a related guarantee or indemnity.5

That was the purpose of the section.  It does not in those circumstances, in our respectful submission, provide any assistance to the construction of section 444D.  The next section that was relied upon by their Honours, in support of their construction, was section 444H which provides that:

a deed of company arrangement releases the company from a debt only in so far as the deed provides for the release and the creditor concerned is bound by the deed.

Their Honours in effect adopted a submission on that section which is repeated here by the Council respondents, and it is conveniently encapsulated in paragraph 27 of their written submissions:

Section 444H is, however, silent as to the effect of, or the extent to which, a release with respect to third parties can operate or is binding on creditors or the company.  If the construction propounded by the appellants is correct, this failure has the potential to create perverse results.  For example, if the deed of company arrangement purported to authorise the deed administrator to execute a release of a creditor’s claim in favour of a third party, because of the operation of section 445H, that release would be effective irrespective of whether the deed was subsequently terminated.  In other words, unlike the position which attains between the company and its creditors, a previously executed release in favour of a third party would not fall away by operation of section 444H of the Act.  Again the result such a result is more expansive than that which is available between the creditors and the company.

We submit that the premise on which that argument is based is incorrect.  It may well be that if a release is executed prior to termination of a deed, and vested rights have accrued as a consequence, then section 444H would not operate to set it aside and sections such as 447A could not be called in aid, having regard to what was said in Australasian Memory v Brien.  But the same problem would arise equally, in our respectful submission, if separately to the deed, the deed of the administrator executed a release of the company’s debt.  If vested rights had arisen in relation to that, the same problem would exist.

As a matter of fact, in the present case, the hypothesis is simply not available.  In this case, both the release to the company and the release to the Lehman entities are contained in the deed and only arise on final distribution being made.  An order terminating the deed prior to that time would be effective to terminate a release which had not become operative.  Further, if one postulates a hypothesis that if the release was contained in a separate deed, executed pursuant to the deed of company arrangement, but conditional on file distribution, an order terminating the deed would simply mean that the condition subsequent to the release could never be fulfilled.

The only problem could arise is if a release was to have an immediate effect, irrespective of the performance obligations and that problem would arise in relation to both any release of the company and any release of the third parties.  I should indicate that in the present case the deeds do contemplate at least the possibility of separate releases being executed by creditors.  Your Honours could pick that up from clauses 11.2 and 11.6 on page 487 and 488 of the book.  I have read them before, but if I can just remind the Court that the last sentence in each of those provisions is in the same terms:

Creditors . . . if called upon to do so, execute and deliver to the Deed Administrators such form of release of any Claim against the Company and or Lehman Entity as the Deed Administrators may require.

HAYNE J:   That is the provision that follows substantially the form of the standard form provision, the prescribed provisions in Schedule 8A of the regulations?

MR BATHURST:   Yes.

HAYNE J:   Schedule 8A, pursuant to regulation 5.3A.06, prescribed provisions that should appear in the deed of company arrangement and one of those is to the general effect of that which you have just read.

MR BATHURST:   That is correct, yes.  We did not give your Honour a copy of the Schedule 8A, but we can make it available if the Court wants.  The problem that my learned friend adverted to is a problem that has been identified in other areas as a deficiency in this regime.  It has arisen particularly in relation to what are described as “creditors’ trusts” where the deed is, in effect, wholly performed by the establishment of the trust.  Vested rights, having accrued as a result, the courts have held they are powerless to intervene.  Justice Barrett dealt with the issue in the decision of Parkview Constructions v Tayeh, which is reported in – and only reported, I think – in 71 ACSR at page 65.  That case involved a creditor’s trust.  A summary of it is at page 70 of the report.  I think your Honours were given an internet report.  Paragraph [28], in any event contains a summary of the scheme:

(a)debts and claims of creditors of Sydney Civil having origins before 24 December 2008 have been extinguished and are incapable of being asserted or relied on;

(b)the persons who had those debts and claims against Sydney Civil immediately before their extinction are, as beneficiaries, entitled to participate in the trust fund held under the trust deed;

Then his Honour dealt with powers in relation to the trust deed in paragraph [68] and following, under the heading

What could an order under s 447A do?

[68] Let it be assumed, contrary to the view I have just expressed, that Parkview is entitled to press for and now seeks an order under s 447A that Pt 5.3A is to operate in relation to Sydney Civil as if the provisions of the deed of company arrangement had never become binding in the ways referred to at [14] above . . .

[69]     If the deed of company arrangement had never come into force, its cl 4.1 would never have become the source of any obligation.  There would not have arisen any requirement that Mr Sarkis and the administrators execute the trust deed and cause the creditors’ trust to be constituted.  There would never have been any requirement that the administrators commence to hold the administration fund on the trusts set out in the trust deed . . . 

[70] But, of course, all those things were in fact done – and they were done in such a way as to create independent sources of rights and obligations quite distinct from the rights and obligations created by the deed of company arrangement. An order that Pt 5.3A is to operate in relation to Sydney Civil as if the deed of company arrangement had never come into force would not change any of this. The independently existing rights and obligations are not incidents of the operation of Pt 5.3A.

He then deals in paragraph [71] with what this Court said in Australasian Memory v Brien, and the two classes of cases there referred to, and points out about halfway down the paragraph:

The case relevant for present purposes is that where, following actual termination of the administration (which did not entail either winding up or a deed of company arrangement), shares in the company were traded and the directors resumed management of the company and dealt with assets.  The distinct possibility that, in such a case, reinstatement of the administration might be beyond the power given by s 447A (or, at least, face “an insuperable discretionary obstacle”) was recognised at [32].  The possibility was seen to arise because reinstatement “may well be inconsistent with the rights which were created in the intervening period.”

[72]The same difficulty presents itself here.  Rights and obligations quite separate from those created by the deed of company arrangement arose on 20 February 2009 from the trust deed, the implementation deed and the charge.  Those rights and obligations continue.  Further new rights and obligations arise on an ongoing basis because of the existence and operation of those instruments.

His Honour in paragraph [76] warned administrators that they bore heavy burdens if they agree to arrangements of this nature.  I dealt with that because the problems to which my learned friend refer, do not resolve from the construction for which we contend, but rather from the fact that the Court is, in many senses, powerless once accrued rights have terminated, and to the deed.  The Australian Securities and Investment provision have put the position slightly differently, suggesting that by ensuring the deed is wholly performed, but prior to any Court application, judicial scrutiny could be circumvented.  If that be correct, it is a problem, regardless of what is in the deed, and it ignores ‑ ‑ ‑

GUMMOW J:   Where do we see in the ASIC submissions?

MR BATHURST:  Paragraph 13:

It is possible to circumvent the court’s supervisory jurisdiction in respect of deeds of company arrangement.  The court’s jurisdiction under s 445D and s 445G, and perhaps under s 447A, may cease once a deed is terminated by performance -

He refers to Parkview:

By ensuring that the deed is wholly performed prior to any court application, the proponents of a deed may circumvent judicial scrutiny, a situation that could not occur in relation to scheme of arrangement.

That submission was made in the context of answering the proposition that these arrangements were analogous to schemes.  But it does with the greatest respect ignore what Justice Barrett described as the heavy responsibility on the administrator.  It ignores the administrator’s ability to obtain directions from the Court – which is found in section 447D – and the powers of the Court in section 447B and section 447E to which I have already referred the Chief Justice.  For those reasons we submit that section 447H is not the impediment to the construction for which we contend that the Full Court concluded.

Each of Justice Rares and the Council respondents also point to section 444E in support of the proposition that there is no power to incorporate third party releases.  The reason for that is if the Court goes to section 444E it deals with moratoriums during the currency of a deed of company arrangement.  Your Honours will see that section 444E(1) provides that:

Until a deed of company arrangement terminates, this section applies to a person bound by the deed.

…

(3)      The person cannot:

…

(b)      begin or proceed with enforcement process.

except:

(c)       with the leave of the Court.

It is said that in the context of third party releases section 444E would have no application because third party releases are not covered by section 444E.  There are in our respectful submission at least two answers to it.  First, the section, on an application of a creditor, could be modified under section 447A to deal with the issue; and, secondly, there would be a more direct route under section 447B(2) to simply have the Court make an order on the application of the creditor if the bringing of such proceedings was necessary to protect the creditor’s interests.

That is an example of where what was specifically contemplated in these deeds, namely release of creditors, is directly dealt with but where there is provision, such as the ones I have referred to, to provide protection to creditors in relation to matters which are not specifically dealt with.

FRENCH CJ:   The legal effect of the what are called broadly the third party releases in the deed really derives from, does it, the word “binds” in 444D(1)?

MR BATHURST:   Yes.

FRENCH CJ:   It is all in there, is it not?

MR BATHURST:   Yes.  Now, Justice Rares also seemed to be influenced by the fact that, as he perceived it, the deed amounted to a confiscation of the creditors’ property.  Your Honours will find that at paragraph 74, page 569:

The defendants’ proposed construction of the power given to a meeting of a company’s creditors under Pt 5.3A to resolve that the company enter a deed of company arrangement is very broad. It would permit the majority of creditors to use their voting power to interfere with, indeed confiscate, the minority’s property rights and causes of action.

Now, with the greatest respect to his Honour, that is incorrect.  As would be the case with schemes, a mere confiscation of a creditor’s property would not be an arrangement.  That has been consistently held in relation to the scheme areas.  For there to be an arrangement there must be – as I think Justice Brightman put it – some element of give and take.  The subordination in the present case provides the necessary element, as does the acceptance by the administrator of claims of the litigation creditors which might otherwise be rejected.  Whether it is fair or not is a matter that can be determined by a court, but it is irrelevant to the question of power.

Now, we do seek support from what was said by the Full Court in Fowler v Lindholm 178 FCR 563. The scheme of arrangements could provide for third party releases. Could I just take your Honours to that decision for a moment ‑ ‑ ‑

FRENCH CJ:   Just before we go to that, accepting it is not a confiscation, there is non-consensual extinguishment, at least so far as dissenting creditors are concerned, of rights.

MR BATHURST:   That is correct.  There always is in these deeds.  The fact that some creditors may prefer to take their chances on liquidation with a liquidator doing investigation and maybe recovering more property there is always an extinguishment.  The question is the courts have held and Justice Hayne, I think, said it in Sonodyne and Lord Brightman in NFR, that if there is a necessary element of give and take, there is an arrangement.  Whether or not the arrangement is fair or oppressive would be determined by the courts under the provisions of the legislation to which I have already taken the Court.

FRENCH CJ:   This goes to the question of construction and whether absent clear words the power to enter into a deed of arrangement which extinguishes on a non‑consensual basis the rights of creditors against third parties, albeit for a quid pro quo, whether the statute can properly be so construed. 

MR BATHURST:   The principle is, and Justice Rares relied on it and to a lesser extent Justice Stone, that clear words are required to take away accrued rights.  There has been a debate as to the extent of that principle in recent cases, but ‑ ‑ ‑

FRENCH CJ:   That is just two dicta of Justice McHugh’s, is it not?

MR BATHURST:   Yes.

HEYDON J:   He was not talking about expropriation.  He was talking about other common law rights.

MR BATHURST:   I accept that, yes.  These schemes of their very nature will deal with expropriation because in that sense the rights of creditors against the company will be subsumed into their rights in relation to the deed.  There is, we would submit, a substitution as distinct from an expropriation and at the risk of repeating myself the fairness of the substitution can be determined by the courts under section 444H.

HAYNE J:   Are the third parties to whom you refer in this case all contingent creditors of the company, the subject of the deed?

MR BATHURST:   All contingent creditors, or at least in respect of claims for contribution and in certain cases, the case of my client and Mr Williams’ clients actual creditors who subordinated their debts.

HAYNE J:   So the third parties concerned in this case are other creditors of the company?

MR BATHURST:   Yes.

HAYNE J:   Understanding creditors in that large and extended sense of, is it 553(1), whatever the relevant provision is.

MR BATHURST:   The only reservation I would have to put on that is that there is a possibility – I put it no higher than that – in respect of some of these issues of notes.  The persons who acquired them would be fully reimbursed so there would be no claim by those issuers and no claims for contribution, subject to that qualification, yes.

If I could then go to Fowler v Lindholm 178 FCR 563, their Honours in a joint judgment dealt with the issue in question in the context of schemes in paragraphs 66 and following, page 578:

Doubtless there are limitations on the extent to which a scheme of arrangement purporting to be between a company and its creditors or a class of its creditors can purport to affect the property of the creditor that has no connection with the company or with the relationship between the creditor and the company as creditor and debtor.  The mere fact that a person or entity is a creditor of a company would not, of itself, justify an arrangement between that person or entity on the one hand and the company on the other whereby property of the person or entity were confiscated without any benefit to the person or entity.  Such an arrangement would not be approved by the Court pursuant to s 411(4)(b).

A purported scheme of arrangement must involve some arrangement in a sense that is to be construed liberally. No narrow interpretation should be given to the expressions “compromise” or “arrangement”. An arrangement within the meaning of s 411 connotes some element of give and take. A proposal that conferred no benefit on creditors and constituted the mere confiscation of interests would not be an arrangement within the meaning of s 411. An arrangement must involve some bargain giving benefit to both sides. However, there is no reason to construe the term in s 411 as restricting in any way the nature of the bargain that might be made between company and creditors . . . subject only to the additional requirement that the arrangement must be within the power of the company and not in contravention of the Corporations Act.

A scheme of arrangement between a company and its creditors or a class of creditors is no more than a proposal to vary or modify the company’s obligations in relation to its debts and liabilities owed to the creditors or class of creditors.  There is nothing to prevent the company from posing, as part of the arrangement, a term to the effect that, in consideration of what the company has provided under the scheme, the creditors will discharge not only the debts and liabilities of the company, but also the liabilities of, for example, sureties for the same debts and liabilities of the company.

That passage, in our respectful submission, is somewhat resonant of what was said by Sir Garfield Barwick in Gee v Schmutter in the context of the bankruptcy legislation. Part 5.3A was intended as the Full Court of the Federal Court said in Commissioner of Taxation v…..to be a streamlined alternative to schemes of arrangement.  If the legislation prohibits or prevents these types of provisions binding creditors, so be it, but the legislation, similarly with schemes, in our respectful submission, should not be construed narrowly.

HAYNE J:   One of the differences that is subsumed in the favourable term “streamlined” is that in a court‑ordered scheme one might well be ordering meetings of classes, and here there is no division of creditors into classes, as for example a class of creditors who gain the benefit of a release as well as the extinguishment or compromise of any debt owed to them.

MR BATHURST:   Subject to, of course, the provisions of section 600A, which empowers the court in cases where matters are passed by related parties to order class meetings.  If your Honours could go to section 600A:

(1)Subsection (2) applies where, on the application of a creditor of a company or Part 5.1 body, the Court is satisfied:

(a)that a proposed resolution has been voted on at:

(i)in the case of a company – a meeting of creditors of the company held:

(A)under Part 5.3A or a deed of company arrangement executed by the company; or

(B)in connection with winding up the company; or

(ii)in the case of a Part 5.1 body – a meeting of creditors, or a class of creditors, of the body held under Part 5.1; and

(b)that, if the vote or votes that a particular related creditor, or particular related creditors, of the company or body cast on the proposed resolution had been disregarded for the purposes of determining whether or not the proposed resolution was passed, the proposed resolution:

(i)if it was in fact passed – would not have been passed; or

(ii)if in fact it was not passed – would have been passed; or the question would have had to be decided on a casting vote; and

(c)that the passing of the proposed resolution, or the failure to pass it, as the case requires:

(i)is contrary to the interests of the creditors as a whole or of that class of creditors as a whole, as the case may be; or

(ii)has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable having regard to:

(A)the benefits resulting to the related creditor . . . 

(B)the nature of the relationship . . . 

(C)any other relevant matter.

(2)      The Court may make one or more of the following:

(a)      . . . an order setting aside the resolution;

(b)an order that the proposed resolution be considered and voted on at a meeting of the creditors of the company or body, or of that class of creditors, as the case may be, convened and held as specified in the order;

(c)an order directing that the related creditor –

not to vote.

GUMMOW J:   The section bundles together a number of situations, does it not?

MR BATHURST:   That is right.

GUMMOW J:   This expression “class of creditors” where does that relate back in subsection (1)(a)?

MR BATHURST:   The whole section is predicated ‑ ‑ ‑

GUMMOW J:   It relates to a 5.1 body.

MR BATHURST:   It relates to both.  One would have thought, with respect, there was not much reason to have it relate to a section 5.1 body because of the class procedures, but it does.

GUMMOW J:   What is there in section 600A within itself to provide a criterion for the segregation of a class of creditors?

MR BATHURST:   It does not.  It confers on the Court a discretion if certain pre‑conditions are met.  The first pre‑condition is in effect, that the resolution is pushed through, as it were, on the votes of a related company.  And that it is prejudicial or unreasonable, having regard to the benefits resulting to the related creditor.  The class would be informed by that, we would submit, and at its most simple it would be the class constituted by persons other than the related creditor.

HAYNE J:   Well that is overcomplicating it, is it not?  Under 600A(2) the power is (a) “setting aside”:

(b)an order that the proposed resolution be considered and voted on at a meeting of the creditors –

Not by class, (c) direct the related creditors not to vote.

MR BATHURST:   Except (b) at least envisages voting by a class.

HAYNE J:   Yes, and thus 600A could be, could it, engaged in respect of some meetings held in connection with winding‑up where there is a necessary division into classes, could it not, I think?  Perhaps I am mistaken about following that through.

MR BATHURST:   Yes, it would.  600A(1)(a)(i)(B), in connection with the winding‑up we would accept that, with respect.

HAYNE J:  Yes. In the events that have happened here it would be open, would it? We have a resolution voted on at a meeting of creditors held under Part 5.3A or a resolution that a deed be executed. The votes of the relateds have been counted as part of the votes of those voting in favour.

MR BATHURST:   Yes, and the resolution would not have been passed had those votes been counted, yes.

HAYNE J:   But for?

MR BATHURST:   Yes.

HAYNE J:   And it would be open to the Court under 600A(2) to order a meeting of creditors at which relateds not vote.

MR BATHURST:   That is correct.  The real difference, in our respectful submission, between Part 5.3 and Part 5.1 is that the power, as it were, to implement the arrangement is left in the first instance to the creditors and the administrator who is presumably an experienced insolvency practitioner, with the supervisory role of the Court, being in certain circumstances at the other end of the spectrum.  That does not mean, in our respectful submission – that is a choice made by the legislature in the context of this, particularly in the context of creditor’s schemes where prompt action would often be necessary to save the company or achieve a return.  That fact, contrary to what was said by the Full Court should, in our respectful submission, mean that these provisions are more narrowly construed.

That was the reason that her Honour Justice Stone gave for rejecting the analogy. That appears at page 544, paragraph 23 at the foot of the page, where you will see that her Honour refers to the “significant supervisory role of the Court”. Justice Rares, although he agreed with Justice Stone, added an additional reason which seems to be, with respect, that Part 5.3A only applies to insolvent companies. That appears at page 568, paragraph 71:

That argument can only be valid if, on its proper construction, Pt 5.3A creates such a power. The circumstances in which compromises and arrangements can be made under Pt 5.1 differ significantly from administration of a company under Pt 5.3A. For a company to enter into administration under Pt 5.3A it is essential for its directors to resolve that they, or the majority, hold the opinion that the company is insolvent or likely to be insolvent at some future time (s 436A(1)). No such precondition exists for a compromise or arrangement to be proposed for a company under Pt 5.1…

72 And, the objects of Pt 5.3A in s 435A focus on providing for the administration of the business, property and affairs of an insolvent company. That administration is driven by consideration of alternatives to the actual or likely insolvency at the hands, not of the company, but of the creditors, assisted by the administrator’s opinions.

Then he deals with the short timeframe.  With respect, the fact that it only deals with insolvent companies is a distinction without a difference.  Creditor’s schemes have been common since the passing of the original legislation, which I think was in about 1870 in the United Kingdom.  There is no reason and - Fowler v Lindholm itself was a creditor’s scheme.  With the greatest respect to his Honour, that does not provide a reason for rejecting the analogy.

Justice Perram rejected it for two reasons.  First, that it was not recognised in 1992 that a scheme could affect third party releases.  That appears at page 594, paragraph 141:

The state of the law in 1992 was, therefore, that there was one case, Re Buildmat, whose ratio decidendi established that a scheme of arrangement could not achieve a third party release; two cases – both called Re Glendale – that contained considered obiter dicta to a similar effect; one decision of no particular importance – Bridges v Herson – which expressly did not decide the question –

Whether or not it was established in 1992 really does not matter, in our respectful submission. If the analogy is appropriate, it now having been recognised that schemes can affect third party releases, there is no reason to give a more limited construction to the Part 5.3A provisions. The second reason his Honour gave appears at page 595 at paragraph 145 where his Honour says:

Even if it were known in 1992 that a scheme of arrangement could be used to achieve a third party release I do not think that would especially assist in discerning the meaning to be given to Part 5.3A. The relevant inquiry is to discern what Parliament intends . . . The language of Part 5.3A is not couched, as the language of Part 5.1 is, in terms of “arrangements” or “compromises”.

He refers to what this Court said in Mulcon.  The difficulty with that proposition is that if its derivation is deeds of arrangement in bankruptcy, they were given a wide import and in Re Dowling, of course,

Justice Riley indicated that what is being sought to be done here could be done.  They are our submissions, if the Court pleases.

FRENCH CJ:   Thank you, Mr Bathurst.

MR BATHURST:   Can I, before I sit down, hand up the decision of Sir Andrew Morritt in Perpetual Trustee v BNY Corporate Trustee Services.  With respect to his Lordship, that explains in far greater detail and precision than I was able to do so how these operations work. 

FRENCH CJ:   Yes, Mr Williams.

MR WILLIAMS:   In light of the submissions that have already been made, the principal matters which I will be dealing with in my oral address are, firstly, the extrinsic materials, in particular the relevance of those materials to the construction of section 444D, and the relevance of Part 5.1 to the construction of Part 5.3A. Secondly, I will be dealing with the notion that changes in the way in which court supervision occurs as between Part 5.1 arrangements and Part 5.3A arrangements provides some inference that Part 5.3 arrangements ought to be construed more narrowly, or to put it as ASIC does, that the justification for schemes permitting third party releases is the upfront judicial supervision. We will be contending that when one looks at the court supervision that is available under Part 5.3A there is no reason for providing such an inference.

The third matter is the construction of section 444D itself.  In light of the submissions of my learned friend, Mr Bathurst, I can confine my other remarks to some miscellaneous additional matters.

FRENCH CJ:   Those first two matters you mentioned all converge upon the construction of 444D(1), do they not – the meaning of “binds” and ‑ ‑ ‑

MR WILLIAMS:   Of course.  All matters that I propose to address the Court on go to that issue ultimately.  I think they can be usefully divided up in that way.  So far as the extrinsic materials are concerned, what may not have emerged sufficiently from the written submissions is that there are in fact three stages to the extrinsic materials before we get to the legislation.  The first stage is the Harmer Report; that was in 1988.  The second stage is the February 1992 exposure draft and explanatory paper and the third stage is the explanatory memorandum and Bill in 1992, that third stage of course leading to the legislation being passed in that year.

So far as the extrinsic materials are concerned we submit that they are of assistance in these ways.  First of all they make it abundantly clear that what was intended in this legislation is the implementation of the Harmer recommendations.  Secondly, we submit that they display no intention to depart in any significant way from the Harmer recommendations.  By that I mean in the three stages of the extrinsic materials, even though there are drafting changes that do occur, the fundamental principles set out in the Harmer Report are kept intact.

The third point we wish to make about the extrinsic materials is that they make it apparent that the new Part 5.3A deals with arrangements. I particularly focus on that word in this context removed from the ultimate composite expression, deed of company arrangement. Your Honours will have observed that in Part 5.3A as ultimately enacted the expression “deed of company arrangement” is used throughout. However, the explanatory materials and the other extrinsic material demonstrate that in finally utilising that composite expression the legislation was not intending to provide for arrangements of a lesser width or a different type than those that were permitted under the old Part 5.1.

In some cases – and I will show your Honours some examples of this – the explanatory memoranda and other materials actually refer to the new Part 5.3 arrangements as schemes of arrangement; in other words picking up the old nomenclature from Part 5.1.

The final matter which is tied up with the last one I mentioned is that the use of the composite phrase “deed of company arrangement” interchangeably in those explanatory materials with the word “arrangement” or “scheme of arrangement” is not intended to denote some limitation in scope but rather a new, flexible way of achieving the arrangements that Part 5.1 permitted.

Dealing first with the explanatory memorandum, that is to be found in volume 2 of 2, behind tab 14 – I am sorry, that is volume 2 of the materials file in accordance with paragraph 7.1.  Now, the explanatory memorandum, this is to the Corporate Law Reform Bill 1992, tells us in paragraph 2 how the bill addresses three major law reform reports.  The second bullet point, the General Insolvency Inquiry (Report No.45), commonly known as the Harmer Report.  Paragraph 5 tells us that:

The Bill implements a wide range of recommendations from the Australian Law Reform Commission report.  Perhaps the most significant of these is the introduction of a new procedure –

which has come to be known as Part 5.3A. Paragraph 9 tells us that:

The Bill was released as an exposure draft in February 1992.

There were a number of submissions, a number of amendments.

By far the majority of these are minor technical and drafting matters.  There have, however been some important amendments and these are outlined below under the heading ‘Main Changes to Exposure Draft’.

That is a reference to the second stage of the extrinsic materials to which I earlier adverted.

GUMMOW J:   Are you taking us through all this to counter what was said by Justice Perram in paragraphs 140 and following of his reasons, dealing with the situation in 1991 and the Glendale decisions?

MR WILLIAMS:   In part, but there are other purposes for it as well, which I sought to articulate at the beginning of what I commenced.  Could I refer to paragraph 22?

GUMMOW J:   Is there any reference in the Harmer materials to the Buildmat decision or the Glendale decision?

MR WILLIAMS:   No, there is not. Could I refer to paragraphs 21 and 22, where the proposed Part 5.3A is referred to as an implementation of the Harmer Report’s recommendations ‑ ‑ ‑

GUMMOW J:   It seems to be a myopic exercise in all ‑ ‑ ‑

MR WILLIAMS:   It took a long time, but the point that we would seek to make to your Honours is that when one looks at that law reform process, that which ultimately emerged was that which was originally ‑ ‑ ‑

GUMMOW J:   If I was a law reform agency enfaced with these questions and Justice Needham had said something and Justice McClelland had said something on the subject, and I wanted to change it, I would think carefully and say what I was doing.

MR WILLIAMS:   Yes.  In paragraph 22, we make the point that in the second dash point, there is a reference to:

allowing the administrator up to 35 days to develop a proposed scheme of arrangement.

In other words, an allusion to the type of arrangement that was being considered as part of Part 5.1.  Then in the next bullet point:

giving force to the arrangement.

Then in the third last paragraph on the page:

providing that a secured creditor who opposes a scheme of arrangement is not bound by it.

Then finally in the last bullet point, the additional reference to a scheme. Now, I am not going to take your Honours to all of the references throughout these explanatory materials that follow this same course, but the point that I would wish to make, and I will give your Honours some paragraph numbers in a moment, is that throughout these reports the draftsmen are speaking of a new way of implementing an old Part 5.1 arrangement. They are talking not about circumscribing the nature of an arrangement that would be permitted under Part 5.3A. It is all about making it easier, more flexible, cheaper and quicker.

In tab 3 of the further extrinsic materials we get a bit that is missing from the extracts that appear behind tab 14.  Behind tab 3 of the bundle entitled “Further extrinsic material filed and serviced by the appellant” is that part of the explanatory memorandum that deals with the drafting changes and what it does at paragraph 47 is identifies significant amendments that have been made to the draft exposure Bill and if one looks through them none of those significant amendments are in relation to matters that bear upon the current question.  In other words the drafting changes that existed were not intended to operate in such a way as to change the essential nature of what had originally been envisaged.

GUMMOW J:   Was there an issues paper?  Sometimes, as the Chief Justice remarks, they are fuller.

MR WILLIAMS:   I am sorry, I missed that?

GUMMOW J:   Sometimes there is more scholarly material in an issues paper than there is in the rather anodyne final reports.

MR WILLIAMS:   Yes, the answer to that question is I am not sure, but we do know that there is the interim stage that is the explanatory memorandum and the draft Bill.

FRENCH CJ:   They are talking about this in the context of the Harmer Report, that is all.

MR WILLIAMS:   They do.  It is particularly relevant to a question that arose from Justice Gummow in connection with the earlier form of section 444D as it appeared in the Harmer Report annexure and as to the changes that occurred in the drafting style thereafter.  One of the matters that your Honour Justice Gummow was interested in is whether 444D and the words “so far as concerns” might merely be a reference to a temporal aspect of what was intended – I am sorry, a temporal matter in section 444D rather than reflecting a qualification to the types of ‑ ‑ ‑

GUMMOW J:   I think Justice Hayne referred you to VA32.

MR WILLIAMS:   Yes, that is right.  The submission is this, that when one goes through the changes from VA32 through to the exposure draft and then the explanatory memorandum and Bill one finds some tinkering with the drafting of that section, but the explanatory materials demonstrate that there was no intention to change in any material way what was intended by the section.

So, we start off in Harmer territory with VA32 which has not been, I do not think, included in the extracts that your Honours have been given but we are able to hand up a copy.

FRENCH CJ:   I think we have that already.

MR WILLIAMS:    If your Honours do, that is not necessary.  Could I hand up some extracts of the Corporate Law Reform Bill and the Public Exposure Draft & Explanatory Paper which is not part of the bundles at the moment?  The original provision that ultimately became 444D is in VA32, but VA32, as one can see, also includes concepts that became other provisions in the final legislation. 

If we go to VA32, it is relatively clear, we would submit, that at least at that stage there was no intention that that section – that is VA 32(1) operate in any way other than a temporal way.  Could I, for your Honours’ benefits, indicate that subsection (2) of VA 32 appears to be what ultimately appears as section 444E.  Subsection (3) has parallels with section 444D(2).  Subsection (4) with 444D(3), and subsection (5) with 444F – sorry, (5) to (8), I should say parallels with 444F.

So that was apparently the original intention of the Harmer Report and demonstrated in the draft legislation that the 444D provision that we are concerned with was originally intended only in a temporal way.  It appears that there may have been some concerns as to whether this is inference rather than anything that is contained in the materials themselves.

There may have been some concerns as to whether VA32 in that form would have an unintended application insofar as there might be creditors who were creditors, as at the effective day, but also became creditors subsequently as well.

HAYNE J:   That explanation is advanced in the judgment in Brash v Katile.

MR WILLIAMS:   I am sorry, your Honour?

HAYNE J:   That explanation for the drafting change is advanced in the judgment of the Supreme Court of Victoria in Brash v Katile.

MR WILLIAMS:  Yes, and we would submit that it is one that should be accepted. What we have when we get to the change in the draft from VA32 to its next emanation in the public exposure draft and explanatory paper is a change that is somewhat more similar to what we end up with. In the bundle that I have handed to your Honours it consists of three parts. There is the introduction, the proposed Part 5.3A and parts of the clause by clause commentary. If your Honours go to the middle part of that there is a page 169. Your Honours will see how this was attempted to be dealt with in the exposure draft. What we do not have in the public exposure draft and the explanatory paper is the remotest suggestion that what was being sought to be done is to make the scope of arrangements, which had previously been considered for Part 5.3A, as narrower in any way than the Part 5.1 arrangements, that were thought to be too cumbersome and slow.

FRENCH CJ:   That might be a convenient moment, Mr Williams.  We will adjourn until 2.15 pm.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.16 PM:

FRENCH CJ:   Yes, Mr Williams.

MR WILLIAMS:   I was asked before lunch what was the purpose of taking the Court to this extrinsic material.  Amongst the reasons are what appear to be fairly central parts of the reasoning process of each of Justices Rare and Perram in connection with the scope of the word “arrangement” when used in the composite expression “deed of company arrangement”.  At paragraph 98 of the judgment, page 578, Justice Rares said this:

Contrary to Lehman Asia’s argument, the use of the word “arrangement” in the composite expression “deed of company arrangement” did not import into Pt 5.3A all, or sufficient, of the attributes of an arrangement in Pt 5.1 ‑

There is a reference to MYT.  Similarly, Justice Perram, at paragraph 145 – this is appeal book 595, notes in about the fifth or sixth line:

Indeed, the word “arrangement” appears only in Part 5.3A in the expression “deed of company arrangement”.

It makes a reference then to MYT Engineering.

FRENCH CJ:   Paragraph 145, I think.

MR WILLIAMS:   Yes - and says, towards the foot of the page – I am sorry, you might have a different printout – towards the foot of the paragraph:

it leads me only to conclude that the word “arrangement” is probably not an allusion to an arrangement under Part 5.1.

We would submit that an examination of the extrinsic materials would reveal quite the contrary, in the sense that what was sought to be achieved in the legislation that followed on from the Harmer Report is a streamlined procedure by which Part 5.1 arrangements could be implemented. In other words, there was no intention of the legislature when enacting Part 5.3A to provide for arrangements of a narrower scope than those which had existed under Part 5.1.

The references to which I have taken your Honour today and the additional references which we have in our written submissions to the extensive use of the word “arrangement” and “schemes of arrangement” within the extrinsic materials supports that contention.  That submission is also supported by the form the drafting took in the public exposure draft which is the document that I have handed to your Honours.  The second part of that bundle includes some of the extracts from the exposure draft.

If your Honours look at page 152 one sees that in the exposure draft for section 438A the exposure draft in 438A(b)(i) actually used the word “arrangement” rather than the composite expression that came later to be utilised.  Similarly, the exposure draft in section 439A(4) on page 154, when dealing with the administrator’s notice in subsection (4)(b)(i) utilised the word “arrangement”, as did the provisions of subsection (4)(c).

FRENCH CJ:   This is all a kind of swirling constellation of hints and indications.  There is no gleaming arrow pointing us in the direction of a particular construction, is there?

MR WILLIAMS:   The point is this.  What was intended by this newly introduced part was to provide for the same forms of arrangement to be achieved by a different, more streamlined means.  It was well known at the time that the term “arrangement” had been given a very broad and liberal interpretation.

GUMMOW J:   Stopping there for a minute, has anyone at any stage in this litigation looked at Professor Ford’s book, the sixth edition, in 1992, as an indication of what was known and thought?  At page 682, dealing with schemes, he says:

The scheme must be between the company and its members or its creditors, otherwise the court lacks jurisdiction -

and he refers to a South Australian decision of Chief Justice Bray in A & C Constructions [1970] SASR 565. Then he goes on to say:

But provided that it is satisfied, the scheme can involve another person -

and then he refers to an article by the youthful Mr Santamaria in (1985) 3 C&SLJ 7.

that other person cannot be bound by force of the court’s order but can be bound by a contract connected with the scheme made with the company members and creditors:  see Re A & C Constructions Pty Ltd, disagreeing with Wallace P in Bridges v Hershon [1968] 3 NSWR 47. See also Re Glendale –

which we have been given, and another decision of Justice McClelland, Re Buka Minerals NL (1983) 8ACLR 507. If one looks at Buka Minerals one sees that Justice McClelland talks about the outsider principle, whatever that might mean.  That seems to have been the view of educated people in this field in 1992.

MR WILLIAMS:   I did not quite catch all the phraseology precisely.

GUMMOW J:   There was a debate.

MR WILLIAMS:   But I think there is some relevance.

GUMMOW J:   Putting it at its highest in your favour there was a debate.  Putting it at its lowest there was not.

MR WILLIAMS:   I think the extract your Honour just read to me referred to the word “bound”.  There is a world of difference between whether a third party is bound by an arrangement such as this as compared to whether it may receive a benefit.  The person that is bound is the creditor.  If the creditor is bound by the deed then that incidentally, obviously, confers a benefit.  But that does not mean that the proposition we are putting to your Honour cuts across those cases that say that a third party cannot be bound.

Your Honour Justice Gummow asked me just before the luncheon adjournment whether there was any issues paper; there is.  It only goes a little way, but it helps us.  May I provide some extracts?  I do not need to spend any time on this because the assistance is relatively small but it is consistent with the explanatory memorandum, paragraph 577, to which we have referred at some length in our submissions.  The only point that I seek to take your Honours to is on page 14 under the heading “Schemes of Arrangement”.  We have just given your Honours the introductory section and the chapter that deals with corporate insolvency.  Under the heading “Schemes of Arrangement”:

For the insolvent (or near insolvent) company the ‘arrangements and reconstruction’ provisions of the companies legislation does offer some medium of negotiation with creditors.  The ultimate aim is to effect a compromise of the claims of creditors.  It may take almost any form.

That, of course, echoes what we see in the explanatory memorandum to the legislation itself in paragraph 577, which is behind tab 14 of volume 2 of 2.  This, of course, is the introductory paragraph to the whole of “Proposed Division 10”, that is, the “Execution and effect of deed of company arrangement”, and in that paragraph your Honours will see the extract that we have referred to in our submissions about:

The new Part 5.3A will not seek to limit in any way the scope for a company and its creditors to reach an arrangement suitable to all parties.

So we would submit that what the legislation following the Harmer Report was seeking to do was merely transpose the same types of arrangements into a Part 5.3A process, as were available under Part 5.1, whatever they may be. Can I leave the extraneous materials now and go directly to section 444 ‑ ‑ ‑

FRENCH CJ:   Extrinsic materials, I think you meant to say.

MR WILLIAMS:   Yes, I did mean to say that.

FRENCH CJ:   But you might be right.

MR WILLIAMS:   Yes.  Section 444D.  It is fair to say, of course, that the expression “so far as concerns” is one that is difficult to construe in the context of this section ‑ ‑ ‑

GUMMOW J:   “So far as concerns” what?  Claims with a particular character as to when they arose?  It is a matter of ordinary English, is that not so?

MR WILLIAMS:   May I approach it in this way?  Section 444D has a number of thoughts or aims intermingled within it.  There are at least two, and possibly three.

The first is that all unsecured creditors are to be bound, irrespective of whether they vote for the arrangement.  The second is a temporal element that is that it only relates to claims arising after a particular date.  The third is the potential that it also is seeking to confine the types of either claims or deeds of company arrangement with which one may be concerned.  The words “so far as concerns” when one looks at the legislative history and the provisions that preceded it, the drafting that preceded it rather suggest those words were intended to have a temporal element.  The initial draft that the Harmer Committee put forward provided for that result, in our submission, and there is nothing in any of the subsequent materials to suggest that what was sought to be achieved was something fundamentally different.  Rather, it seems to have been a drafting exercise designed to achieve the same matter.

So, when one comes to construing this clause one could adopt a number of different approaches.  The “so far as concerns” could be intended to be temporal only.  One could conceive of a construction along these lines that involves asking these questions:  does the deed of company arrangement concern claims against the company?  If so it is binding.  Were the words “so far as concerns” intended to reflect the temporal element that the previous drafts made clear were involved?  One could think of an interpretation that worked along these lines:

(1)a deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day –

But not those arising after the day.

FRENCH CJ:   Anyway your contention is?

MR WILLIAMS:   My contention is that the words “so far as concerns” do not operate so as to confine the types of arrangements that bind all creditors to ones that have no release.  In other words there is nothing in the terms of the section which preclude a deed of company arrangement containing a third party release from being binding on creditors.

KIEFEL J:   Could the words “so far as concerns claims” et cetera be taken as a description of the creditors who are bound?

MR WILLIAMS:   Yes it could.

The submission we would make is that we are talking about an ambiguous section here, and when one examines the extrinsic materials, as one is entitled to do, it rather leads to the conclusion that there was not an intention here to preclude company arrangements from containing third party releases.  That submission is supported, we would submit, by a purposive approach to the interpretation of the section.

GUMMOW J:   What does that mean?

MR WILLIAMS:   That an approach ‑ ‑ ‑

GUMMOW J:   If it is used by counsel it means an approach that helps me, and then they say it is purposive.

MR WILLIAMS:   Well, I would not be making the submission otherwise, it does help me.

GUMMOW J:   We hear this at least a couple of times every sitting.

MR WILLIAMS:   What it means in this context is that when one looks at the scope and purpose of the part as a whole ‑ ‑ ‑

GUMMOW J:   Well, that is the very debate.

MR WILLIAMS:   ‑ ‑ ‑ as expressed in section 435A, and contemplates whether a construction that would permit third party releases as opposed to one that would forbid it, better serves the objects and purposes that the legislation describes.  We would submit that a construction that permits third party releases is better able to achieve the objects and purposes in 435A, and that is because when one is seeking to involve oneself in the rearrangement, or an arrangement, to achieve one of the twin objects that are set out in that part, one is better able to achieve that result if the power to include a third party release exists; that is because, particularly in large corporate insolvencies that involve groups of companies, it is desirable that an arrangement in order to achieve 435 ‑ ‑ ‑

GUMMOW J:   You may well be right about that, but one of the problems of this legislation is that it does not deal perhaps adequately with notions of group insolvencies, and to that extent it may be lagging behind commercial realities.

MR WILLIAMS:   All I can put to your Honour in that regard is that the construction for which we contend better facilitates either the chances of a company continuing ‑ ‑ ‑

GUMMOW J:   If the legislation were to deal with group insolvencies, it would have to grasp the nettle, because it would be a complicated subject.

MR WILLIAMS:   We submit that the legislation has grasped the nettle in an overall sense by the ingenuity of the parties to come up with an arrangement that might achieve the objects of the part, and providing for a number of protections for creditors whose rights might be adversely affected.  Those include the Court’s supervision that my learned friend Mr Bathurst took your Honours to, but it also includes, and importantly in the context of this part, the interposition of an independent professional administrator who is charged with responsibilities that do not exist on any party, or any person, in the provisions of Part 5.1.

I will not take your Honours to the parts of the explanatory materials that demonstrate this, but what we see is that both in the Harmer Report and the legislation that follows it, a concentration and focus on the importance of the impartial independent administrator.  Unlike in a 5.1 situation where the court has upfront supervision, here we have the administrator who comes into the arena, even before a DOCA is proposed, and he or she is charged with a responsibility of investigating the company’s affairs, its business property affairs and financial circumstances, and then making a recommendation to creditors as to whether it is in their best interests to go the “deed of company arrangement” route, or another route.  That administrator is of course able to – he has specific power to go and seek court directions at any stage, of either the administration or whilst the deed is on foot.

FRENCH CJ:   I think we have been taken to all these propositions, really, by Mr Bathurst already.  Is there anything that you are adding to that, since you are in the same cause?

MR WILLIAMS:   Only this, that the suggestion that the change in the supervisory role of the court should warrant a different conclusion as to whether particular arrangements are within the scope of Part 5.3A compared to Part 5.1 is not attractive in light of the additional role that the

independent administrator has, coupled with the other supervisory role of the Court.  That is all I wish to say on that matter.

Finally, so far as sections 444H and 445H are concerned, my learned friend Mr Bathurst has dealt with most of the matters we wish to raise, but there is one that I would seek to add, and that is this.  It may be that section 445H contains some difficulties in terms of the operation of the division as a whole, but those difficulties are capable of arising both in respect of deeds that contain third party releases, deeds that contain releases of the company and deeds that contain no releases at all.

The explanatory materials when dealing with section 445H in its earlier emanations rather suggest that it was supposed to have a more limited operation than a literal reading might suggest.  The explanatory materials suggest it was designed to prevent somebody who had acted on the faith of the deed from being prejudiced by that.  If there is a problem there, there might be a problem there but it is not a pointer to whether or not third party releases are permitted.  My learned friend Mr Hutley, in his written submission, seeks to utilise 445G with 444H, so as to gain an inference in favour of the contentions that he advances.

Can I just draw your Honours attention to this matter that section 444H is not dealing with claims it is only dealing with debts.  This part, as is the case with other parts of the Corporations Act, including 533 draw a distinction between debts and claims.  Indeed, if one goes back to section 444A(4)(d), the instrument that is the deed of company arrangement must specify:

to what extent the company is to be released from its debts -

It does not deal with the extent to which a company is to be released from claims which are a wider concept than debts.  Indeed, section 444A(4) is silent as to releases of claims, whether they be against the company or against third parties.

I am sorry, there is one matter I overlooked on the supervision point and that is this.  There is nothing in the legislation or the extrinsic materials that suggest that there was a trade‑off between the change in court supervision on the one hand and providing for a lesser scope to the word “arrangement”.  If the Court pleases, they are our submissions.

FRENCH CJ:   Thank you, Mr Williams.  Mr Coles.

MR COLES:   If your Honours please.  Much has already been put to the Court, both orally and in written submissions in relation to matters of context, legislative purpose and the like, which it would be, I think, appropriate for me to attempt to avoid repeating.  One would merely wish to emphasise that a central ‑ ‑ ‑

HAYNE J:   Appropriate or not it may be safe, Mr Coles.

MR COLES:  It may indeed, your Honour. A central object and purpose of Part 5.3A, of course, is to in effect put the face of the insolvent company into the hands of its creditors and to repose in them under, as has been pointed out and from scratch, the skilful guidance of an expert practitioner. Consideration about what is the best means, if the company cannot otherwise continue, of those creditors getting out of the company the best return they can in satisfaction of the claims that, at a particular point in time, have accrued to them against the company. Now, a vitally significant feature is that, of course, the power and the authority to make the relevant resolution that the company should execute the deed of company arrangement is, of course, the power conferred on the creditors to make that resolution followed up - that is section 439C – followed up under section 444A by the requirement that the deed of company administration is to be executed embodying the terms upon which the creditors are to resolve.

Then there are some relatively, we would respectfully think, minimal requirements generally in the interests of certainty, which are set out also in section 444A.  Then there are the, in effect, discretionary matters which Justice Hayne referred to by reference to Schedule A this morning, which will be in the deed of company arrangement, unless its provisions otherwise provide.  They also come about because of 444A.

The essential authority to make and require the company to make, or to resolve upon and require the company to make the deed of company arrangement, reposes in the creditors.  No doubt with the legislative expectation the creditors are, or may be supposed to be, people who will bring to bear, apart from the expert guidance they may get externally, matters of their own independent commercial judgment and rational commercial perception.  In other words, it is not likely to be attributed to the legislature an expectation the creditors will act in a frivolous or expropriatory way when they are coming to decide.

GUMMOW J:   The significant creditor would be a revenue authority, would it not?

MR COLES:   Very often.  But a reasonable expectation one may fairly attribute to the legislature is commercial commonsense on the part of creditors in working out what are suitable arrangements and no legislative intervention at all of relevant consequence as to the form, shape, detail or content which those arrangements may take. 

Your Honours have been taken already to extrinsic material supporting a suggestion that flexibility was intended and that there should not be particular fetters and the like and I do not stay to repeat those, but the basic requirement is that what the creditors come up with is something that can go into a deed which records the mechanism which the relevant majority of them has required the company to join in a deed reflecting which will deal with what up to that point were the disparate claims of individual creditors, claims ordinarily in debt and the like, and will ‑ ‑ ‑

FRENCH CJ:   There was one set of claims that were not disparate here, those were the nine Lehman entities that voted for the ‑ ‑ ‑

MR COLES:   Yes.  Well, the individual creditor’s claims will be simply causes of action that they have against the company.  Once, of course, the company makes a deed, those claims fall then to be treated by the deed and become not – typically not claims which are able thereafter to be asserted simply against the company, but claims which fall to be addressed and satisfied to the extent capable by the terms of the arrangement which the deed reflects. 

Now, it is not beyond legislative contemplation, and certainly not beyond commercial contemplation, that suitable arrangements which creditors may decide to adopt could rationally involve the subject matter of imposing upon themselves inhibitions or constraints on their freedom of action against third parties.  Indeed, even to the point of imposing upon them, if the case is an appropriate one, as an appropriate transaction or an appropriate scheme of mechanism – appropriate scheme, if you like, or an appropriate arrangement – a set of mutually interrelated plans of action or courses of administration which are directed to giving effect to what were the creditors’ individual causes of action against the company but which are now to be effectuated by means of a particular structure or a particular plan or scheme. 

It is not, in our respectful submission, beyond legislative contemplation that that could rationally have included the need to circumscribe – leave questions of fact and degree to one side – creditors’ freedom of action to some degree, even to an extensive degree depending on the circumstances, against third parties.  Such is inherent, in our respectful submission, in the nature of the sort of arrangement which it might be anticipated commonsense commercial people, acting fairly reasonably and with regard to their own interests and not intending to act oppressively in relation to the interests of others, might agree upon.

HAYNE J:   But the validity of a proposition stated at that high level of abstraction need be considered if, but only if, it is a problem presented by this particular deed.  Is that right?

MR COLES:   Indeed.  I think that is right, your Honour.

HAYNE J:   The point at which inquiry starts is, or includes, does it not, what is the particular inhibition created by this deed which is said to take the deed beyond the reach of Part 5.3A?

MR COLES:   Yes.

HAYNE J:   Can I understand a little better than I presently do what that inhibition is said to be?

MR COLES:   Can I attempt to answer it, perhaps in several ways, but in this way?  What the effect of the Full Court’s judgment does is really to impose a set of anterior per se prohibitions upon what may be considered by creditors, what may be, for example, examined by administrators or recommended, what may be debated amongst creditors in effect by saying that on the proper construction of the statutory provisions or their scope and purpose, to use a very general expression adopted in the judgments, you simply cannot per se as it were have a deed of company arrangement which will not be void if it circumscribes the entitlements of creditors so far as they might otherwise have operated unrestrictedly against third parties and does so without any ‑ ‑ ‑

HAYNE J:   Yes.  Now, the bite in that proposition, if there is a bite, depends on the content given in connection with this deed to the notion of third party and the claim which is inhibited.  To speak generally of releases of third party liability may be obscuring quite a deal.

MR COLES:   It may indeed, your Honour.  May I, when I come to it, deal with that?  Inherent in the proposition is one of our criticisms about particularly really what happened as a consequence of the answer to paragraph 7.2 of the separate question.  Can I come back to that if that is convenient, your Honour?  Shortly, to finish the present point, if it can be accepted as a matter of commercial reality and accepted as within legislative contemplation that there could be beneficial arrangements between a company and its creditors which might have as one of their attributes the circumscription of creditors’ complete freedom of action so far as third parties are concerned, if that is accepted as a general proposition, then in our respectful submission, the interpretation ascribed to the operation of the provisions and in particular the view taken at section 444D simply excludes from any potential, possible, consideration by creditors of any such beneficial scheme ‑ ‑ ‑

FRENCH CJ:   You speak of prohibitions and freedom of action but we are really concerned here, are we not, with the extent to which the statutory power will run to make the deed binding on everybody, including those who do not consent to it?

MR COLES:   Absolutely.  The question really is whether section 444D operates on its construction to exclude such a provision; in other words, imposes what I have described for convenience as a per se prohibition on the content of a deed – not an unimportant per se prohibition because as we have seen its effect in this case is to bring the deed down, but can I test it with an example?

Suppose the creditors were minded to – at a meeting of creditors were minded to adopt a “deed of company arrangement” which involved a very substantial injection of money from a person who preferred to have a deed, because for example, it was desired not to have the company go into liquidation because that might call into question transactions of a preferential kind or avoidable kind, or the like, and creditors all thought that this was a very, very good idea, that it was a benefit to them and as it turned out, by the contribution from a third party, they would be benefited but they were required and were agreeable, 100 per cent of them were agreeable to a deed of company arrangement which released that third party.

Now along comes a person who was not at the meeting, does not have a claim against that particular person anyway and says, “You cannot have a deed of company arrangement that does this”.  That is per say, prohibited, proscribed and forbidden, and I, although unaffected by the particular constraint against me because I never had a claim against that person anyway, I can point to the fact that as a matter of law, such a proscription in a deed is simply forbidden and this is no deed at all.

That in effect means that such an interpretation of the Act has this consequence, that it is more likely than not to strike down those deeds of company arrangement which creditors thought were beneficial than otherwise because for those deeds of company arrangement which for example contained third party releases, which is the particular concentration where the complaint lies, those deeds of company arrangement which can take third party releases which were unfairly prejudicial or unfairly discriminatory or oppressive are going to be struck down anyway, or terminated under 445D, so that you have got, in our respectful submission, a rather anomalous situation.

All those matters that are oppressive and non‑beneficial can be struck down before 445D, but you cannot make a deed of company arrangement which might be beneficial, which would not be struck down before 445D because the proper construction of the legislation forbids the recording and binding effect of an arrangement because, and for the reason only that, their legislation is not able to extend the operation of the binding effect, so as to inhibit or limit creditor’s rights of action against third parties.  In our respectful submission, shortly, 444D should not be construed to have that effect because it is unnecessary for the effective workings of the statutory provisions that it should do so.

One bears in mind, and I do not want to repeat what has been said about 445D more often than I suppose I need to illustrate the argument but one bears in mind the very recognition of those provisions in 445D embodies the concept that a deed of company arrangement may have provisions which are perhaps discriminatory and in some respects, prejudicial.  That will not of itself bring the “deed of company arrangement” down, because the relevant subsection of 445D requires that they should be unfairly prejudicial or unfairly discriminatory, so there is a tacit acknowledgement that there may be disparate treatment, but the question is whether in the overall…..and of course a question merely because a deed of company arrangement is not in the interests of an individual creditor, will not suffice seemingly bring it down, because a ground of avoidance is the ground that it may be identified as not being in the interests of the creditors as a whole.

So, in our respectful submission, once one recognises the commercial reality of an arrangement which may involve an unrestricted and unfettered class of agreements, dealings, methods of evaluation, methods of timing, an entire panoply of material which is both unnecessary and undesirable, and indeed, in our respectful submission, impossible to prescribe in advance, the very fact - may we add that there is no definition of “a deed of company arrangement” other than that it is a deed executed in effect in accordance with the Act, suggests that the legislature is not being concerned to prescribe too much what should be in it.

We ask, and here we agree with our learned friends, but when one sees that all is required by comparison, for example, whether a deed of arrangement in the former provisions of the Bankruptcy Act or a scheme of arrangement under sections 4 and 11 of the Corporations Act, all that the law has ever required is that it should embody an arrangement not otherwise offensive either to the statute or some other principle, which is an arrangement which deals with the method of addressing and satisfying or effectuating the claims of creditors affected by it. 

One would see realistically no proper reason for differentiating between any of the classes of arrangement that the legislation has in contemplation, and to suggest that a preferable construction, for example, of 444D is that it is seeking as an object of its expression to draw attention to particular claims of creditors against the company, which undoubtedly it is, and thereby to draw a stark distinction, a distinction which must on some sort of expressio unius principle, therefore exclude the prospect of regulating claims against third parties as a matter included in the deed, in our respectful submission is not an interpretation of the provision which advances its objective, and we say tritely your Honours but it is probably worth repeating, that whenever there is an interpretation which advances the objective of the legislation it is desirable to adopt it. 

The matter is, as has been pointed out many times already, already the subject of regulation by provisions such as we have emphasised, 445D, terminating the deed, or in a different sort of case, 445G which deals with the procedural questions of the deed.  Why, therefore, should one adopt construction of the statutory provisions which authorises the avoidance of a deed in ways that are not explicitly provided for in the Act itself, but are to be, in effect, gleaned by a process of construction is, in our respectful submission, a difficult question. 

After all, in point of principle, when a statute provides particular remedies in particular cases there is, generally speaking, no obvious or necessary reason for finding another way of avoiding a deed because one does not like what is in it and one can infer or can construe a particular provision which serves its own purpose as if it contained, by implication as it were, a prohibition. 

So our respectful submission is 444D is not to be understood as containing any instruction as to the power of creditors otherwise unconstrained by the text of the legislation to include anything they like in the deed, bearing in mind they will be acting rationally and bearing in mind the court ever sits to oversee and regulate those cases which are abuses, those matters which are confiscatory, draconian and the like.

A difficulty, of course, in the present case is no one has been able to say, let alone demonstrate or prove that any of these provisions, the provisions which have been relied upon by the Councils to bring this deed down do or would or can or are likely to operate in any particularly draconian or any particular confiscatory or whatever one may describe it way.  They could have the potential to do so, but equally that self‑evidently would be a matter of evidence and why ‑ ‑ ‑

FRENCH CJ:   But there were contentions of that character in the points of claim, but they were never tested.

MR COLES:   Never tested, no, which serves to illustrate the point I made by reference to the illustration.  You have 100 per cent of the creditors in person and both present and in an absolute majority in dollar and number want to have the deed and are willing to accept the benefits being put in by an external contributor, against whom they have claims.  A person who missed the meeting, but because of the effect of the legislation is bound by the deed, but does not like it for some other reason or may be able to perhaps arrange some commercially advantageous position by doing so comes along and says, “But even though I am not affected, even though I had no claim against the person purportedly released by the deed, this is not something which, according to the Full Court of the Federal Court you can ever do.  This is outside the scope and purpose of a deed.

True it is beneficial and true it is the creditors adopted it, but it cannot bind because you can only bind creditors in respect of their claims against the company.  But, in our respectful submission, that simply overlooks the simple proposition that a deed of company arrangement will be, in effect, a package deal.  It will have give and take, it will have swings and roundabouts; it will have some people who perhaps do better than others and some people who might think, on balance, they are not so well advantaged. 

So be it, in our respectful submission.  Such is the life blood of compromise.  Such is the essential ingredient of an arrangement, which is capable of being adopted to effectuate the means of access to the limited resources which a company might otherwise be able to contribute.  Again, we cannot avoid emphasising, why would one go beyond that, when one has in the statutory provisions to which we have all referred, ample court supervision to step in where there is oppression or step in where the, in effect, processes of the legislation have been abused, simply to confiscate someone’s rights or the like.

The point is if one has a per se rule of annihilation because one says you can never have a deed of company arrangement which embodies that sort of compromise, however beneficial, when one, of course, does not have to identify any victims, so that those who just do not like the deed can come along and say, “Well, that is the end of that” even though those who had the claims, which are now foreclosed, were very happy with it.  Those who did not can still point to the fact that in law it must not be a deed because a construction of 444D denies it.  In our respectful submission, to put it at the risk of repetition, that does not advance the statutory purposes.  To the contrary it retards and frustrates them.

It makes, also in our respectful submission, life a little difficult at the coal face, as it were.  Insolvent company administration is, in our respectful submission, a fairly practical and down to earth activity.  Administrators, as has been pointed out, have a role to play and bring to bear all manner of technical capacity to fathom and divine appropriate mechanisms to address the insolvent company’s problem.  It is not unimportant it seemed to us that from the very moment of their appointment the first thing the legislation tells them to do is start thinking about a deed of company arrangement.  That is before the first meeting of creditors and even before they have got the director’s report as to affairs; you see that in section 438A.  As soon as practicable after their appointment the administrators have got to start thinking about this sort of thing.

HEYDON J:   That is not surprising considering the whole division is about deeds of company arrangement.

MR COLES:   Indeed.  That is its emphasis.

HEYDON J:   Mr Coles, are we not going around in circles somewhat repetitively?

MR COLES:   There are two more matters I want to put to your Honours.  I did want to illustrate the point by reference to one of the impugned clauses in the deed of company arrangement, which is the insurance clause.  Mr Bathurst took your Honours to it earlier morning.  Just for reference, I am seeking to avoid repetition.  Can I invite your Honours in due course of reflection to bear in mind that what the Full Court has said is that each of the three impugned clauses is invalid and void, and for the reason of respective invalidity and voidness the deed of company arrangement is void.

That would seem to us to follow – and this creates, in our respectful submission, real practical concerns for those who put together the company arrangement where they want to regulate sometimes purely administrative matters.  I do not ask your Honours to go back to where Mr Bathurst took you this morning, but suffice it to recollect that the provisions of clause 7.1 commence at page 485 of volume 2 of the appeal book.  In substance, as has been pointed out, the administrator is to:

realise and get in all the Insurance Proceeds and . . . have the sole conduct and control of any Insurance Claim –

and to pay the proceeds into the particular fund which will be for the benefit of the litigation creditors.  That follows as you have been shown from clause 7.1.  Then paragraph 8.3 records that the insurance proceeds paid into that fund will be dealt with in accordance with the provisions which would otherwise be applicable in a winding up; that is to say, they go the 562 route, they go to those creditors whose claims have generated the insurance recovery.

Importantly one then goes to clause 9.1, the moratorium provision, and sees that clause 9.1(b) contains a prohibition or a limitation on creditors except for the purposes provided in the deed instituting or prosecuting legal proceedings “without the express written consent of the Deed Administrators”.  For the purposes I am seeking to point out, can I draw attention to clause 9.2(a), the deed extends to provide that:

The moratoriums referred to in clauses 9.1(b) and 9.1(e) include any application to a court by a Litigation Creditor for leave to proceed or any proceeding for a charge in respect of any Insurance Claim.

As your Honours know, in certain States, principally New South Wales, I think also in the ACT, there are provisions which allow when a company goes into liquidation, amongst other things – these other provisions were not included – I should hand up to your Honours copies of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946. The short effect – I will not state it to trouble your Honours in detail – but in a case like the present where the company is not in liquidation there is no direct right of access to the insurance money, as it were, to effectuate the charge which section 6(1) of the Act provides. The matter really I wanted to just simply draw your Honours’ attention to is when your Honours look at 9.2, one sees very well there is a fetter on an application which would need to be made in any event under the Law Reform Act for leave to proceed, by 9.2(b), but however is only for a period of 24 months and by 9.2(c), after the period expires, the litigation creditors may go about their business in the ordinary way.

The only point we make is here of course, and again I will not trouble your Honours with the detail, but here as in many cases, there is insurance cover but the insurance pool, as it were, or the pot, is modest.  It is hardly surprising that an administrator could and should be taking an active part in processing insurance recoveries.  If it were a liquidation, he would be doing the same thing in his duty as a liquidator to get in the assets of the company.  In his unremarkable and in the extreme, in our respectful submission, that an appropriately formulated arrangement between a company and its creditors might contain, at least for some period of time, an appropriate limitation on creditor’s rights, even limited rights, of seeking access or making their own application to seek the leave of the Court to proceed against the insurer directly and that simply protects the company under the deed of administration as it would protect the company appropriately in liquidation from having to distract the attentions of those who are administering the scheme by having to meet occasional or sometimes random court applications.  It may give a breathing space, it may facilitate negotiations with insurers and the appropriate actualisation of the recoveries that are due and the like.

But surely, in our respectful submission, whether such a provision is lawfully to remain or survive or be incorporated in a deed of company arrangement which creditors have adopted, should be judged by the criteria which the statute has laid down for termination.  That is to say, it should be judged – and this brings me back to a matter your Honour Justice Hayne raised – really by its factual impacts in a given case, in a given deed of company arrangement on a case‑by‑case, one at a time basis, by reference to its particular impact on a particular creditor who is able to assert and demonstrate, by evidence, a particular claim to conduce the statutory conclusion that indeed this is oppressive.  Unless that is made out, in our respectful submission, one would say why is there a need to impose a limitation on what may be in a deed and a fortiori why is there a need to declare a deed void, and the outcome of the Full Court’s decision, in our submission, would be if the provisions I have been drawing attention to in clause 7.1 about getting in the insurance moneys, and having sole control for the two year period, were the only impugned provisions in the deed, then on the Full Court’s reasoning, that would suffice to bring the deed down.

HAYNE J:   Where do I most conveniently find in the Full Court reasons a conclusion that clause 7.1 is not binding upon creditors for want of engagement of 444D(1)?

MR COLES:   That is not the way they approached it, in our respectful submission.  There was, of course, as your Honours readily understand, there was not before the court – or not yet before the court in the determination of the separate question – any consideration of the factual matters that would enliven and decide the outcome of a proceeding under section 445D(1).  That is for another day on the part of those who would go that route.

GUMMOW J:   Where do we find the voting provision, Mr Coles?

MR COLES:   Voting provision?

GUMMOW J:   Yes.  We are told that they are 256 million worth voted in favour and that 245 are Lehman people.

MR COLES:   I think in a number of places ‑ ‑ ‑

GUMMOW J:   Where do we find the legislative voting structure?

MR COLES:   We recorded this in our submissions in reply, but factually – and I will give you the references – the administrators – at the meeting the requisite majority of creditors voted 61 by number in favour, including we note seven of the litigation creditors, and all of the voting trade and employee creditors, and 57 against.

GUMMOW J:   I know.  Where is the requisite?  Where is the statutory requisite in the voting procedures?

MR COLES:   That makes a simple majority the ‑ ‑ ‑

HAYNE J:   It is in the regulations, is it not?

GUMMOW J:   It is not in the statute, is it?

MR COLES:   No. Well, it is in the regulations. The numbering of the regulations, as your Honours recollect, follow the scheme in the Act itself, so regulation 5.6 of the Corporations Regulations deals with meetings – or 5.6 deals with winding‑up generally and applies 5.6.11(2) applies the relevant regulations to meetings inter alia under Part 5.3A.

GUMMOW J:   Sorry, what is the regulation you just read out?

MR COLES:   I am sorry, 5.6.11(2), meetings to which regulations 5.6.12 to 5.6.36A apply states that subject to subregulation (3) and some others the identified regulations apply to the meeting and conduct of voting at a series of meetings including a meeting convened under 5.3A, 5.4 ‑ ‑ ‑

HEYDON J:   What is that number again of the regulation?  Did you say 5.6?

MR COLES:   Regulation 5.6.11(2) and then one goes forward into the regulations to see which 5.6 ‑ ‑ ‑

HAYNE J:   You start at 5.6.19, I think, which is voting on the voices.  There has to be a demand for a poll and ultimately you get to 5.6.21.

MR COLES:   That is right and a resolution is carried if a majority of the creditors voting vote in favour of the resolution and the value of the debts owed to those voting in favour is more than half of the total debts. 

GUMMOW J:   It talks about debts.  The value of debts, not claims.

MR COLES:   Debts has been taken to, I think to speak generally ‑ ‑ ‑

GUMMOW J:   We have been told that there is a big difference.

MR COLES:   Yes, sometimes, yes.  Well, your Honour knows that is a problematical question of when debts means debts, as opposed to claims or when debts and claims are used interchangeably.  There is, everyone I think agrees, a certain if not laxity, at least indeterminacy of legislative purpose to be drawn.

FRENCH CJ:   5.6.23(1)(a) says:

A person is not entitled to vote as a creditor at a meeting unless:

(a) his or her debt or claim has been admitted wholly or in part by the liquidator or administrator –

So presumably one would read 5.6.21 as referring to debts admitted by the administrator.

MR COLES:   Yes, for the purpose of voting at the meeting, yes.

GUMMOW J:   What is the regulation‑making power?

MR COLES:   I do not have the number of it.  Can I have that turned up, your Honour?

GUMMOW J:   Because it is this regulation that brings about the circumstances of which Mr Hutley’s clients complain.  What about through the operation of the regulations, namely the fixing of a particular form of voting?

MR COLES:   I think, for the purposes of the separate questions, the matter of which the particular complaint – they have, as your Honours know, a variety of ways of articulating complaints, but for the purposes of the separate question, of course, they were complaining about the inclusion of the particular impugned clauses within the deed.  I think their complaints about voting may be in play, but not ‑ ‑ ‑

GUMMOW J:   Yes, but the regulations do not require classes.

MR COLES:  No. Indeed, Part 5.3A does not authorise or require meetings of classes of creditors and, in that respect, it is in contra‑distinction to or is different to 5.1.

GUMMOW J:   The power seems to be section 1364.

MR COLES:   Section 1364 is the power to make regulations, including in sub‑paragraph (2) that are left for the convening conduct and procedure in voting at meetings.

FRENCH CJ:   In a sense the crowd majorities feed back in to give content to resolution, do they not?

MR COLES:   Yes.  I have been putting to your Honour a short but general proposition that one would need to proceed.  Just to finish the point I was making before I moved to the last and shortest point, a construction of the Acts that brought down or avoided a deed of company arrangement, not pursuant to any express power provided for, for that effect, but because of a construction as to the limitations inherent in what may be put into a deed, a construction which had that effect when the impugned clause was but a regulatory or administrative one.  One would, to put the matter shortly, be cautious about accepting a construction which compelled the outcome that a deed might per chance stumble and fall because of genuine and well conceived efforts to devise an administratively sensible scheme, such as the way in which, in our respectful submission, the dealing with insurance claims appears to be.

The fetter that the inhibition which this must then put upon those who are minded to propose schemes, and those whose obligation it is, and those who, as has been described, assume the heavy responsibility for reporting on them, will not be without significance and will not be without cost.  That, in turn, we say is something which is less likely to serve the objects of the legislation, or less likely to promote them, than otherwise.  The last point we wish ‑ ‑ ‑

HAYNE J:   Just before you come to that, do we find at page 177 of the appeal book volume 1, the last version of amended questions for separate determination?  That is, is this the document that we should look to in identifying what those separate questions were?  The next question is, if you look at the defined terms and most notably the defined term “claims”, what one notes is omitted there, but appears in the definition of “Claim” in the deed of company arrangement, is in the DOCA it reads:

any debt, claim or liability . . . ascertained or sounding in damages –

against the company at the admissible claim date.

MR COLES:   That issue was resolved in the now no longer controversial construction questions which are the answers to questions 1, 3 and 5.

FRENCH CJ:   “Claim” has shifted its meaning in relation to the release provision.

MR COLES:   Yes, that is right.  The last matter then ‑ ‑ ‑

HAYNE J:   But the purpose of my inquiry is this, Mr Coles.

MR COLES:   I am sorry.

HAYNE J:   The impugned provisions are clauses 7.1, 9.1 and 11, are they not?

MR COLES:   That is right.

HAYNE J:   At least some of those, perhaps not all of them, but at least some of them hinge about the notion of “claim”, claim against the company, and at least in respect of 9.1, perhaps in respect of some elements of 11, these are matters that are at a level of detail to which we have not yet descended.  Take 9.1:

there will be a moratorium in favour of the Company –

that is the company the subject of the deed –

and the Lehman Entities -

It is the inclusion, is it not, of the words “and the Lehman Entities” which presents the issue that is at the heart of the presently relevant questions for separate determination.

MR COLES:   Yes, quite.

HAYNE J:   But the claims in issue, in respect of which there will be a moratorium are, are they, claims as defined in the deed of company arrangement, namely claims meaning any debt, et cetera, against the company which is to say, Lehman Australia.  Is that right?

MR COLES:   That I think harks back to the construction question.

HAYNE J:   So what is the premise on which we begin?  The construction issues are not at large before us ‑ ‑ ‑

MR COLES:   The construction issue has been resolved by the – can I just take your Honours to what the answers to the separate questions on the construction question – removes that subject from – the orders of the court can be found, perhaps, in other places too, at 535 in volume 2, to take the question.

Question 3 by way of example was whether clause 9 on its proper construction operates to provide for a moratorium against a general creditor and/or a litigation creditor in respect of a claim or an insurance claim in favour of a Lehman entity.  Answer:  yes.

HAYNE J:   That I understand but what is the claim against a Lehman entity?

MR COLES:   A claim against a Lehman entity - factually one does not know what, if any, particular claim any particular person has against any particular Lehman entity.  That is a factual given.

HAYNE J:   That is a level of abstraction which masks these issues and the masking is not reduced by the adoption of the general short form of third party releases.

MR COLES:   In our respectful submission signals caution in whether it is appropriate for the Court to avoid a…..in such circumstances, a point I rather feel I have made.  While your Honours have pages 535 to 537 - the court’s answers or the court’s order answering the questions, your Honours will see that question 7 asks:

If the answer to any of the questions 2, 4 or 6 is ‘no’:

7.1      Is the DOCA a ‘deed of company arrangement’ ‑

Their Honours said, “Yes; it is a deed of company arrangement to which – that should be 445G, I think – “and 447A may apply.”  Importantly, 7.2 then said, by reference, of course, to the preface in question 7 itself:

If the answer to any of the questions 2, 4, or 6 is ‘no’ –

and, of course, the answer to each of questions 2, 4 and 6 was no then –

7.2      Is the DOCA void and of no effect?”

Answer  Yes

HAYNE J:   If contrary to the premise for much of the oral argument you have advanced the question is not to be presented as one of whether the part prohibits or proscribes the inclusion of certain terms, if rather the question is to be approached as one of determining what is the binding effect for which 444D(i) provides, how far does it reach, what is its binding effect?  How are we to answer that or are we to answer it on an assumed footing as to the operation of this deed as to claims and if so, what is that assumed footing?

MR COLES:   Can I attempt to respond this way?  One has to work out the content of 444D first, in our respectful submission.  That is the object of the exercise and, indeed, the subject matter of the appeal.  Lest there be ambiguity about it, it is our respectful submission that the function, purpose and text of 444D has this effect, that it makes the deed of company arrangement binding on the creditors in the way in which the deed will bind the creditors, that is to say so far as concerns the claims they have of the company are against the company identified at a particular date, that is to say it is concerned with binding creditors.

Its function is to bind the creditors to the deed in the way the deed is operating because the deed is operating and only operating in relation to the claims the creditors had which are now absorbed into the deed, and may even as a result have ceased to be claims.  Indeed they have.  They have become entitlements which are now, as I have put, effectuated or accessed through the mechanism of the deed. 

But what 444D says is you creditors, having resolved upon this deed, having been drawn up by the administrator as required by 444A and executed and made binding upon that execution by the administrator and the company, are bound by that deed.  In our respectful submission, that means that the creditors are bound by the deed in terms of the arrangement or the scheme or the deal or the set of transactions or interdependent obligations which the deed records, including those, if necessary, against third parties, and as I have already put the source of that capacity to be bound lies in the fact that the creditors are given the function of making the deed, and that is the effect of 444D.  It makes the deed of arrangement binding on the creditor.

HAYNE J:   I understand that is your submission, but in respect of claims which, for example, Mr Hutley’s client makes against Lehman Australia which qualify it as a creditor of Lehman Australia, the administrators noted in their report that that may lead, or be associated with, claims by those same persons against other Lehman entities.  If there are claims against other Lehman entities, those Lehman entities may have a claim back against Lehman Australia.

MR COLES:   Yes.

HAYNE J:   We therefore have, do we, one class of creditors of the kind typified by Mr Hutley’s client, who, if the deed is effective would be limited to recovering a proportionate part of what is 43 million, whatever the number is, but other future or contingent creditors, namely the Lehman entities, would also be bound by the deed, I think, was the submission by Mr Bathurst.  Is that right?

MR COLES:   I am not sure Mr Bathurst was concerned to say other Lehman entities would be bound by the deed. 

HAYNE J:   They are creditors of.

MR COLES:   Yes, in their capacity as creditors, of course.

HAYNE J:   In their capacity as creditors.

MR COLES:   I am sorry, absolutely.

HAYNE J:   And in their capacity as creditors against Lehman Australia for their claim over against Lehman Australia for relief arising from the claims made by the Council.  Now, is then the release which hitherto in argument has been described as third party release, also capable of being identified as a release by one group of contingent or future creditors of claims against another group of contingent or future creditors?

MR COLES:   As a practical matter it might be but, in our respectful submission, the legislation does not, for reasons we have noted, distinguish between classes of creditors.  It confides to the creditors ‑ ‑ ‑

HAYNE J:   I understand that, but if we are in the territory of who is bound and we begin from a premise that it is persons having claims against the company who are bound, in respect, so far as their claims ‑ ‑ ‑

MR COLES:   So far as it concerns their claims, yes.

HAYNE J:   So far as concerns claims, et cetera, at least as to part, perhaps not as to all.  I wonder and I simply do not know the answer, but I wonder whether what we are seeing is if you want to put it spatially, a vertical transaction, not a horizontal transaction.  A vertical transaction in which, as between groups of creditors, there are releases as well also as releases of the debtor company.

MR COLES:   Well, it is possible, your Honour, but because the matter was confided to the ‑ ‑ ‑

HAYNE J:   If you are not going to explore it, Mr Coles, I am not.

MR COLES:   The difficulty being, your Honour, of course that questions of that kind may be informed by issues of fact and the like.

HAYNE J:   Well, they might be informed by what deed we are dealing with, and giving abstract answers to abstract questions about the reach of deeds of company arrangement, which are not necessarily presented by the particular deed in question, is a course that may not be without its hazards.

MR COLES:   In our respectful submission, your Honours have the particular deed in question.  Our concern is that one is able to, in effect, stigmatise the operation of any particular provision of it, without, amongst other things, knowing precisely what, if any, discriminatory or prejudicial or oppressive effect that it may have in a given case; that is the only thing, we confine ourselves to a rather limited point in that respect.  Your Honours, the last point I wanted to deal with draws attention to the fact, of course, or has as a matter of importance, at least to them, the fact that the deed of company arrangement binding all creditors, of course, means that there are persons who are not simply Lehman entities who may be entitled to assert the benefit of constraints in their favour, or Councils who may or may not be able to prove their position, the factual aspects of their own claims and the like, but the fact that there are, of course, in this administration, quite a considerable number in number and amount of creditors who have uncontroversial and accrued claims and who, generally speaking, supported the deed and are entitled to, we would respectfully submit, through the administrators there being no one else to do it, to draw attention to some of its features.

I was pointing out to your Honours that the effect of the Court’s order is that the recognition or the negative answers to questions 2, 4 and 6 produces the outcome that the deed of company arrangement is void and of no effect.  Necessarily, why that should be so is a question that I have raised in another context, but there is one other matter to which we wish to draw attention.  This is controversial so far as Mr Hutley is concerned because he says correctly that neither of the appellants themselves relies on it, but it is relevant to the contention, in our respectful submission, that each of the appellants contends for a different answer to paragraph 7.2.

I will state the matter shortly, your Honour, it needs only to be drawn to the Court’s attention.  Your Honours will have seen, and it is identified most particularly in the judgment of Justice Perram, where he said the deed must be avoided for the reasons – because of the impugned schemes, and he drew attention particularly – what his Honour asserted was the – and I will not read them out to your Honours.

Paragraphs 154 and 155, in short, record his Honour’s conclusion to the effect that if you identify the third party constraints or releases as unauthorised or beyond the scope or ambit or in effect forbidden by the legislation, then to simply declare those clauses themselves as inoperative would in effect dismember the deed in an unacceptable way.  In our respectful submission, that conclusion requires considerable ‑ ‑ ‑

HEYDON J:   I was just going to ask, when you finished making this point.  You complete what you were going to say.

MR COLES:   I am sorry.  What it is necessary, in our respectful submission, to note is that the deed makes its own provision, in our respectful submission, in that respect, and that is contained in clause 28, which your Honours will see recorded on page 500 of the appeal book.  There is a severance provision.  One might suppose its wording speaks for itself, but in our respectful submission, that was a matter which has a bearing on whether one should simply strike down the whole of the deed, and it is a matter as I say ‑ ‑ ‑

HEYDON J:   Mr Coles, was this point put to the Full Court?

MR COLES:   No.  Indeed, the Court – not developed anyway.  In the debate before the Full Court, the debate concentrated rather on matters before one got to question 7.2.  I am afraid that the day allotted for the disposition by the Court of the question evaporated without one getting to a precise analysis of what should be the consequences of the particular answers, but in our respectful submission, those who are not simply Lehman entities and those who are not simply councils are entitled to have notice taken of the severance provision contained in the deed, which is as much binding in our respectful submission as any other provision of the deed, inasmuch it is part of the reciprocal entitlements, promises, rights, mechanisms for adjustment and the like, which the deed confers.  If your Honours please ‑ ‑ ‑

FRENCH CJ:   Mr Coles, just before you sit down ‑ ‑ ‑

MR COLES:   I am sorry, there was another matter.

FRENCH CJ:   You do not contend, I take it, that the Lehman entities who were admitted as creditors and voted as creditors are in any sense exhaustive of the definition of Lehman entity in the deed of company Arrangement?

MR COLES:   No, a Lehman entity, I think, is ‑ ‑ ‑

FRENCH CJ:   Indeed, it picks up special purpose vehicles, does it not, albeit contractual rights are preserved?

MR COLES:   A Lehman entity is Lehman Brothers Holdings and any body corporate, in effect, outside of Australia that was – no, I do not.

FRENCH CJ:   Partly or wholly owned, direct or indirect – yes, thank you.

MR COLES:   Yes.

HAYNE J:   But hence the importance of understanding what are claims.  You cannot just look independently at the fact that there is a very large class of other Lehman entities.  What the deed deals with is claims.

MR COLES:   Yes, I should draw your attention to what was recorded.  This was really put by my learned friend Mr Bathurst.  You will see it in

paragraph [23] at page 516. This arose in the course of the judgment by Justice Rares which is reported in volume 73 ACSR 86 and reproduced in full commencing at page 508 in volume 2, and at paragraph [23] on page 516, his Honour records this:

Lehman Bros argued that a number of judgments tended to suggest that, in analogous statutory contexts, courts had allowed companies involved in re‑organisations or arrangements to stipulate that their creditors give releases to third parties.  Lehman Bros argued that it will be necessary to consider the whole factual context in order to be able to come to a conclusion about whether, in the circumstances established at a trial, the impugned provisions could have been included in the deed.

Importantly, in paragraph [24] the argument put by Mr Bathurst on that occasion on behalf of Lehman Brothers was that:

there may be relevant facts, such as the existence of joint or joint and several liability on the part of one or more of the Lehman companies with Lehman Australia, that could affect how the court would determine the extent of the power under Pt 5.3A to authorise the making of a deed to bind creditors in respect of their rights against third parties. Lehman Bros argued that because of the need to have regard to a variety of potential factual contexts, it was impractical to order a separation –

Important – to again, in our respectful submission, the relevant connection between, for example, a constraint that binds a creditor, or constrains a creditor in proceedings against the third party must be seen really from the deed as a whole and the impact on a particular creditor which the particular provisions of the particular deed involve and in our respectful submission that is why the Court should shrink from endorsing any per se prohibition or sorts of clauses that may or may not be inserted in the deed.

HEYDON J:   Unless you are going to appeal against Justice Rares’ separate question orders, we have to decide something however imperfect the material is going to be and however much we have to put our thinking caps on as distinct from looking at some concrete sets of circumstances.

MR COLES:   Your Honours are, in our respectful submission, in a position, given the way the issues have been deployed, to decide this appeal.  In our respectful submission, the proper order is that the appeal should be allowed.  If your Honours please.

FRENCH CJ:   Thank you, Mr Coles.  Yes, Mr Hutley.

MR HUTLEY:   If your Honours please.  We, of course, rely on our written submissions.  We propose to address the issues and appeals following the order in our written submissions.  The only point in respect to the issues before this Court was the point adverted to by my learned friend, Mr Coles, which is, in effect, his last point which seeks to challenge the finding of the Full Court that in the event that it is correct that the relevant impugned provisions are invalid to the extent they seek to inhibit creditors of Lehman Australia in pursuing rights or claims - and I will come to your Honour Justice Hayne’s concern shortly - against third parties, the deed was invalid. 

Now, that is a point that is not advanced by either of the parties who seek special leave. In fact, it is expressly – they support the finding that the effect of the findings by the Full Court as to the limitations of Part 5.3A has upon the deed. Now, I do not know whether your Honours propose to allow – to entertain that point. If so, that leads to the potential of a notice of contention which we referred to in our written submissions.

HEYDON J:   It would need a new question to be propounded, would it not ‑ ‑ ‑

MR HUTLEY:   Well, potentially yes, but, your Honour, one would also need a ground of appeal which your Honours could direct the matters to.  There is none because my learned friend, Mr Coles’ client, although they hinted at a special leave application at the special leave application, decided not to pursue that and therefore we take the matter as not before your Honours, but of course we have prepared in case your Honours consider it an appropriate matter to address.  Is it best that I proceed and return to that where I would deal with it in the ordinary course and your Honours can indicate what course to pursue at that point?

HEYDON J:   You must ask the Chief Justice these questions.  I am as nothing when it comes to that sort of thing.

FRENCH CJ:   Yes, Mr Hutley.

MR HUTLEY:   Little need be said about the facts referred to in Part III of our submissions beyond noticing that the structure of the claims upon the company as reflected in paragraph 9 of our written submissions allowed for the passage of the relevant resolutions and that structure of the indebtedness and debts and claims of the various Lehman entities dictated the form of the proposed deed of company arrangement put before the meeting.

Whilst not directly relevant to the question of law which confronts your Honours, it does exemplify the sorts of deeds which can exist if our opponent’s submissions are correct.  Such a deed may have operative effect without any mediation of the Court, and to speak of it as my learned friends speak in constant terms of the give and take of a meeting is, of course, having regard to the structure which their case would allow, a meaningless concept.  There was a determination, in effect, by the Lehman entities as a clan, to make an offer to the general run of creditors who are small but numerous, and in effect in the Corleone sense of an offer they could not refuse, namely 100 cents in the dollar, that gets them the numbers to get over 50 per cent.  They then, as part of the give and take, release – and I will come to it – or purport to put forward a deed which prevents any person pursuing any of these companies around the world - if Lehman have a share in them – prevents them from, forever effectively, releases upon the conclusion of the administration, every one of those entities from any claim.

I want to come to what your Honour said in a moment, and your Honour’s point is, as always, with respect, well taken, but we would say it points up exactly why your Honours would not come to the construction that our learned friends advance.  It is because the inchoate nature which your Honour refers to is the very problem which exists at the time that these sorts of deeds have to be structured.  In essence, to make this work, Lehman has to, in effect, put forward a deed which releases everything and it was the critical matter for their point - I will come to that in a moment.

So as part of the give and take, the Lehman entities contribute about $40 million, and as part of that price, force upon the other creditors – other than the people they need for numbers – a complete bar upon pursuing claims which, if one allowed the claims upon Lehman Australia, which was $650 million, and in effect the sorts of causes of actions which were being talked about was in effect that one had been sold a pup with respect to these CDOs, and in effect the progenitor of the pup was in the United States, some other parts of Asia and the like.  They in effect, by sort of a simple bit of arithmetic and shrewd give and take, procured a complete release, complete inhibition on doing it.

One might say - our learned friends might say, but you can go and you can complain and all that and we understand all that, and I am going to come to that.  This is a case about hundreds of millions of dollars, but a moment’s reflection sees how this could be used, and used very effectively,  in your run of the mill grubby little group that has claims upon one company and they want to clean it up by in effect doing a scheme through one company and getting a lot of individuals who may have little claims which can go to the Local Court for $30,000 or $40,000 or something like that, who in effect suddenly find they have given it up, and will say they can give it up sight unseen, et cetera.

There a whole lot of reasons, and we say that once one analyses the structure of this division, before one gets to section 444D(1), which your Honours have heard read to you enough that I will just say relatively little about, at least when it comes to reading it.  The whole structure of this division is a structure which does not contemplate that, and in fact deals with matters in a way which we say are extraordinary if our learned friend’s submissions are right.  We say the facts are in effect instructive of what can happen, and one does not have to express it in hundreds of millions of dollars, you can in effect divide it by $100 million and then imagine how this could operate.

At that point my learned friend, Mr Coles, makes the submission is how horrendous this would be.  Just imagine if all the people who were bound by that, that is, every council came along and voted unanimously and one unsecured creditor who was getting 100 cents in the dollar, but for some perverse reason decided to bring it all down.  Now, if all the creditors who it was sought a release from agreed you do not need a deed of company arrangement, you just do it by agreement there is no problem.  So my learned friend, Mr Coles’s, example is not an example.  The whole structure of this and the approach to this division has to proceed on the basis of, in effect, barring people from pursuing that which they want to pursue.  People who wish to pursue it can enter into consensual arrangements.  It is a matter for them.

Can we now turn to Part IV of our submissions dealing with the statutory construction of Part 5.3A. Whilst the Court had been taken to a number of the provisions at Part 5.3A and we do not wish to go to them at great length, we do propose to make a number of points with respect to provisions throughout the division. In the Full Court the relevant, as it were, structure of Part 5.3A was discussed particularly in the judgment of Justice Stone at paragraphs 19 to 14 in her Honour’s reasons and Justice Rares at paragraphs 50 to 61.

We say that one should start at the beginning of Part 5.3A with section 435A. I will not read it to you. My learned friend, Mr Bathurst, did so, however we say that the object disclosed by that section is to deal with the business properties and affairs of an insolvent company in a way which concerned that company and its creditors. No mention is made of the affairs of other companies which may have an intimate or any relation with the insolvent company.

Now, section 435C(2) deals with the three outcomes of the administration which are described as normal and it is not without significance what those are said to be.  That is 435C(2) which says:

The normal outcome of the administration of a company is that:

(a)a deed of company arrangement is executed by both the company and the deed’s administrator; or

(b)the company’s creditors resolve under paragraph 439C(b) that the administration should end; or –

and that is the company continues to trade –

(c)the company’s creditors resolve under paragraph 439C(c) that the company be wound up.

If the company is wound up, there is nothing to preclude the company then proceeding, under section 411, to a scheme in any form that the law permits or with respect to it. Nor, for that matter, insofar as one is dealing with a group of companies, to have a reconstruction – some form of reconstruction under section 413. So there is no dichotomy between Part 5.3A and Part 5.1. Now, the part – that is Part 5.3A can be activated in one of three ways and those are provided for under section 436A, B and C. So, in effect, they can come out of a company’s resolving, a receiver taking steps and the like.

What we submit is that a feature of the part which is demonstrated in many provisions is that speed is required, or the desired aim of all significant steps, and that is all significant steps.  The first such provision to take up that approach is section 436E which provides for a meeting relating to the appointment of a committee of creditors “within 8 business days” of the commencement of the administration; “commencement” your Honours will find defined in 435C(1).  The role of the committee, if appointed, is spelled out in sections 436F and 449E, the later dealing with remuneration, essentially, of the administrator.  One of the points to be noted is that the committee of creditors in an administration has a very limited role, being a role which reflects the short‑term nature of the administration contemplated by the legislation.

That is to be contrasted with the position of a committee of inspection in a liquidation, and your Honour - I will had it up in a little while - we have the practice book explaining the extent of the role of a committee of inspection in liquidation to contrast its strength.  The effect of the appointment of administrator upon the affairs of the company is addressed in Division 3 and following, and under 437A of the Act the “Administrator assumes control company’s affairs” and the nature and breadth of those powers were considered by this Court in the Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia 195 CLR paragraph 1 and the relevant paragraphs are 52, 60 and 61.

The consequences of the appointment of administrator for the conduct of the affairs of the company on its officers and others are spelled out 437C to E, broadly prohibiting the Acts without participation or consent of the administrator or an order of the Court, and a similar effect is imposed upon dealings with the capital of the company under 437F.

Now, Division 4 of the part deals with the investigation of the affairs of the company.  Under section 439A, as soon as practicable after the administration begins, an administrator is required to do a number of things, and I think Mr Bathurst took you to the provision.  Basically they are to investigate “the company’s business, property, affairs and financial circumstances”, and form an opinion about certain matters, generally the matters which are the normal outcome which I took your Honour to.  They are the three matters. 

Now, the administrator’s weapons to undertake that investigation are limited, and if your Honours go to 438C – I am sorry, 438B deals with the obligations of the directors to assist the administrator.  Those obligations are to assist the administrator broadly with respect to the affairs of the company, not with respect to the affairs, interests, positions of any other company, similarly, with respect to the administrator’s rights to the company’s books under 438C.

Could I take you to one aspect of 438C, which reflects another theme which goes through the division?  Section 438C(2) exempts secured creditors from the obligation to deliver up their books to the administrator, although access to them is afforded.  One aspect of the division which, if our learned friends’ submissions are correct, is extraordinary, is this – the position of secured creditors of the company are particularly favoured, and I will take your Honours through them.  In essence, their position cannot be ultimately destroyed except with their consent.  I will take your Honour in a moment to the J section that your Honour took, and explain how that came about and what it is directed to.

We say that a necessary aspect of our learned friends’ constructions is that security provided by third parties in respect of claims upon the company must be in a position not privileged in the same way as securities given over the company’s assets, and secondly, securities granted in favour of creditors of the company in respect of claims or rights or entitlements against third parties, which have the relevant nexus with the claims upon the company, which are variously advanced by our learned friends, must be in a similar disadvantaged position in comparison to security granted by the company over its own assets.  We say that ultimately is a necessary consequence of our learned friend’s position.

GUMMOW J:   Which paragraphs are these in your submissions, Mr Hutley?

MR HUTLEY:   We have referred to the positions of the judgment.  Justice Rares dealt with it ‑ ‑ ‑

GUMMOW J:   No, in your written submissions.

MR HUTLEY:   In the written submissions; about the actual security positions, we do not refer to them, your Honour.  We refer to other provisions, but the way they are now putting their position it seems that they necessarily have to say that securities granted in respect of claims of the requisite type are covered.

GUMMOW J:   You are responding to something new is what you are saying, I think.

MR HUTLEY:   When I say responding to something new, your Honour, we appreciated this when we were going through the detailed preparation on the day.  It is particularly focused ‑ ‑ ‑

GUMMOW J:   All I am suggesting to you is it might be useful if you put what you have been saying to us in the last 10 minutes on a sheet of paper overnight, that is all.

MR HUTLEY:   Overnight, happy to, your Honour.  But Justice Rares adverts to it in his judgment ‑ ‑ ‑

GUMMOW J:   See if you can hand it up tomorrow morning.

MR HUTLEY:   I will, your Honour.  Justice Rares adverts to it in his judgment, but we say that is necessarily entailed by the way they put their case.  To return to the scheme of the Act, in Division 5, which commences at 439A, 439A provides that within no more than 25 business days, and more commonly 20 business days, or such further period as the court allows, the administrator must convene a meeting of creditors with such meeting to occur within five days of the end, either way before or after, of that convening period.  Under 439B that meeting can be adjourned, but only up to 45 business days.  Provision is provided with respect to notice to as many creditors as is reasonably practicable, and together with newspaper publicity of that meeting.  If your Honours go to 439A, subsection (4) provides for the content of the notice.

GUMMOW J:   What is your destination in looking at 439A?

MR HUTLEY:   My destination points up the timetable point.  It also points up the content of the information which a creditor is apt to receive about these companies.  The information that the creditor is apt to receive is the information, being the product of fulfilment of the roles being roles which are tied to how they are armed, which is product of information concerning the company and its affairs.

What we seek to advance is that when one moves through the structure there is a constant thread and a strong thread from the beginning to the end that it is to the affairs, business and property of the company one has directed.  That is the object to deal with it.  It is to that which investigation is to be directed, it is to that which information will be supplied to creditors.

In one sense our point may be this.  When one looks at the statutory materials and this legislation it is really a Sherlock Holmes point, in a sense.  If the legislature really contemplated that what was to be dealt with were rights, claims and suits against third parties you would think it would get a mention somewhere, even by way of footnote to some report.

There is of course a danger in construing a statute from an absence, but we say that here, because of the structural aspects of this provision, the absence of any addressing of all the matters such as your Honour Justice Gummow referred to as if one was able to do with business groups, is just so overwhelming that we say it reflects what was the statutory object.

GUMMOW J:   Well, your opponents, in particular Mr Bathurst, said he could get what he needs out of 444D(1).  You say he does not, but what then do you say is got out of 444D(1)?

MR HUTLEY:   I was going to come to it tomorrow morning, but 444D(1) means, we say, this.  I just hate to go to it again, your Honours, you must be…..but your Honour has asked.  It says:

A deed of company arrangement binds all creditors.

Now, that seems to be common ground that is creditors of the company –

so far as concerns –

We say that has the ordinary meaning of to the extent of, so far as concerns claims of that character.  That we say is an ordinary normal meaning of “so far as concerns”.  As we say, one way of describing it is to say the securities market is dangerous for investors so far as concerns sub‑prime mortgages. 

All that is saying is the security market is dangerous to the extent of sub-prime mortgages and we say that is its ordinary meaning without in effect having to talk about relation to, et cetera, and that is what it means.  That was its intent.  It was intent to, in effect, say it binds creditors and then “so far as concerned” directs you in point of fact to the extent of the binding.  We say it is an ordinary meaning of it, and we say that that is available and the clearest and simplest meaning, and we say that that is just made overwhelmingly likely when one examines the structural aspects of this division which point to that outcome and that is what I am seeking to do by going through it.  The third limb of that is we say that that is consonant with the understanding of schemes of arrangement, as at 1992, reflected in Re Buildmat.  I see the time, your Honour.

FRENCH CJ:   Yes.  The Court will adjourn until 10.15 tomorrow.

AT 4.16 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 10 FEBRUARY 2010