Masters & Ors v David Lombe in his capacity as Liquidator of Babcock & Brown Limited (in Liquidation); Broome & Ors v Lombe; Wilhelm & Ors v Lombe

The applicants in these three proceedings, Masters & Ors, Broome & Ors, and Wilhelm & Ors, sought declarations and other relief against the respondent, David Lombe, in his capacity as the liquidator of Babcock & Brown Limited (in Liquidation). The core of the dispute concerned the proper characterisation of certain financial instruments and the consequent priority of claims in the liquidation of Babcock & Brown Limited. The proceedings were heard together in the High Court of Australia.

The primary legal issues before the High Court were whether the instruments, described as "subordinated loan notes," constituted debt or equity for the purposes of the Corporations Act 2001 (Cth) and, consequently, the priority of claims in the liquidation. Specifically, the court had to determine if the holders of these notes were creditors of Babcock & Brown Limited or if their claims were subordinate to those of ordinary unsecured creditors, thereby placing them in a lower priority in the distribution of the company's assets.

The High Court reasoned that the characterisation of the instruments depended on their substance rather than their form. Applying established principles of company law, the court examined the rights and obligations conferred by the loan notes. It found that, despite being labelled "subordinated loan notes," the instruments created a debt obligation. The court emphasised that the subordination provisions did not alter the fundamental nature of the relationship as one of debtor and creditor, but rather regulated the order of payment in the event of insolvency. Therefore, the holders of the subordinated loan notes were to be treated as unsecured creditors, ranking equally with other unsecured creditors in the liquidation.