City of Swan v Lehman Bros Australia Ltd

IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 006 797 760) BETWEEN: CITY OF SWAN

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

LEHMAN BROTHERS ASIA HOLDINGS LIMITED (IN LIQUIDATION)

1. The parties bring in short minutes at 4.15pm on 24 July 2009 to give effect to the reasons of the Court published today and to prepare for the hearing of the questions in the Full Court. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 006 797 760) BETWEEN: CITY OF SWAN

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

LEHMAN BROTHERS ASIA HOLDINGS LIMITED (IN LIQUIDATION)

REASONS FOR JUDGMENT 1 The plaintiffs, City of Swan, Parkes Shire Council and Wingecarribee Shire Council, are local government bodies. Prior to September 2008, through, Lehman Brothers Australia Limited (Lehman Australia), they invested in securities known as collateralised debt obligations, commonly known as "CDOs". These are complex investments that it is not necessary to describe or explain in this judgment. On 28 May 2009 Lehman Australia's creditors passed a resolution that it enter into a deed of company arrangement. On 12 June 2009, Lehman Australia executed the deed of company arrangement (the deed). Neil Singleton and Stephen Parbery are the administrators of the deed. Lehman Brothers Asia Holdings Limited (in liq) (Lehman Asia), the fourth defendant, was the principal proponent of the deed and is a party to it. The parent company of both Lehman Australia and Lehman Asia is Lehman Brothers Holdings Inc (Lehman Bros). Its affairs are being administered under Chapter 11 of the Bankruptcy Code of the United States of America by the United States Bankruptcy Court for the Southern District of New York.

The nature of the proceedings 2 The plaintiffs brought these proceedings to challenge, first, the validity of the deed as being beyond the scope of Pt 5.3A of the Corporations Act 2001 (Cth), secondly, the resolution to enter into the deed under s 600A, and, thirdly and alternatively, to claim that the deed be terminated pursuant to s 445D. Each of Lehman Australia and the administrators, Lehman Asia and Lehman Bros has filed a substantive defence, and the latter two also seek substantive relief. Each of the latter two lines of the plaintiffs' challenges is likely to involve considerable, complex and expensive investigation of: · the value of the rights of the plaintiffs and other dissenting creditors based on their investments in CDOs against, first, Lehman Australia and, secondly, other related Lehman companies including Lehman Bros; · the methods by which the plaintiffs and other dissenting creditors had their claims valued by the administrators in admitting them to vote on the challenged resolution based on the losses they allegedly suffered from investing in CDOs; · whether under s 445D, the provisions of the deed, or an act or omission done or made under it or which is proposed to be done or made would be oppressive or unfairly prejudicial to each of the plaintiffs or dissenting creditors or contrary to the interests of the creditors of Lehman Australia as a whole; · the nature and strength of each relevant dissenting creditor's claims, including those of each plaintiff, against Lehman Australia in relation to the acquisition of the CDOs. This will concern issues of valuation of those securities and the ascertainment of how much worse off, if at all, those dissenting creditors are under the deed. 3 The plaintiffs have proposed that a number of separate questions be answered as to the power of Lehman Australia to enter into the deed containing three impugned clauses (cll 7.1, 9 and 11.5). I will set out the questions shortly. Below is a broad outline and not a precise analysis of these provisions. I have not intended to embark on the task of analysing their proper construction. There will be significant issues as to construction of these provisions which this brief summary may have overlooked. The deed contained the following definitions: · "Claim" was defined as meaning a debt, claim or liability, present or future, certain or contingent, ascertained or sounding in damages against Lehman Australia at the date of the appointment of administrators on 26 September 2008. · "Lehman Entity" was defined as meaning Lehman Brothers and any body corporate not incorporated in Australia that was partly or wholly owned directly or indirectly by Lehman Brothers at or in the six months prior to 15 September 2008. · "Insurance Claim" was defined as any claim for indemnity or other relief in relation to any insurance policy that insures or otherwise provides benefits to Lehman Australia, or any "Lehman Entity", in connection with any "Claim" or any (other) claim, including a claim under statute (such as s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW)) for a statutory charge over insurance moneys payable in respect of insured liabilities of an insolvent debtor) but excluding any claim for indemnity under any insurance policy held by Lehman Asia. · "litigation creditor" was defined as being a current or former client of Lehman Australia that had acquired or purchased CDOs or other financial services from it and who asserts a Claim, as defined in the deed. · "Preserved Contractual Rights" were defined as any contractual right against any issuer and trustee of CDOs (and other financial products) marketed by Lehman Australia to realise their contractual entitlements under the CDOs (but excluding any statutory or contractual claim or claim in tort against a Lehman entity that arose on or before the commencement of the administration whether or not the litigation creditor was aware of the relevant facts at that time). 4 The three impugned provisions of the deed are: 1. cl 7.1: This provides that the deed administrators shall have the sole conduct and control of any insurance claim and an absolute discretion regarding the prosecution and resolution of any such claim and that they will pay any proceeds into the litigation creditors' fund established by cl 6 of the deed. 2. cl 9: This provides for a moratorium in favour of Lehman Australia and the Lehman entities that remains operative until the deed terminates, preventing any creditor (whether or not its claim is admitted or established under the deed) proceeding or taking any steps to proceed to obtain the winding up of, or prosecution of proceedings, enforcement of judgment debts or arbitral awards, set-offs or cross-claims or the participation in any arbitration proceedings against, Lehman Australia or Lehman entities (cl 9.1). The moratorium also prevents litigation creditors seeking leave to proceed against Lehman Australia from proceeding to enforce a charge in respect of an insurance claim for a period of 24 months (cl 9.2(b)). Only after which time, if the deed administrators give written consent or, failing that, a court grants leave, can a litigation creditor commence or prosecute legal or arbitral proceedings against Lehman Australia for the purposes of establishing its entitlement to relief for an insurance claim (cl 9.2(c)). 3. cl 11.5: This provides that on payment in full of the final dividend for litigation creditors, all Claims by them against Lehman Australia or Lehman entities and all insurance claims, except for preserved contractual rights, are released, discharged or extinguished. In addition, cl 11.6 provides that litigation creditors must accept their distribution under the deed in full satisfaction and complete discharge of all Claims and all insurance claims, with the exception of their preserved contractual rights and a litigation creditor must, if called on, execute and deliver to the deed administrators a form of release of any such Claim or insurance claim as they may require.

The separate questions 5 The plaintiffs assert that the scheme of Pt 5.3A of the Act, by providing for administrations of companies and the entry into deeds of company arrangement, does not permit a deed to provide that creditors of the company the subject of the deed release their claims against their fellow creditors or third parties. The Lehman companies and the administrators dispute that view. The Australian Securities and Investments Commission has indicated support for the plaintiffs' contentions of law concerning the scope of Pt 5.3A. 6 The plaintiffs say that, as a matter of law under Pt 5.3A, the deed cannot: · contain legally binding releases by them, and other creditors of Lehman Australia, of rights they have against third parties, being Lehman Asia, Lehman Bros and their related companies; or · impose limitations on the rights of creditors, such as the plaintiffs, from enforcing their statutory and other remedies against third parties, other than the company the subject of the deed. 7 The plaintiffs contend that because the deed contains one or more of cll 7.1, 9 and 11.5 it is not a valid deed and that, if this is correct, the ability of the Court to bring the proceedings to quick final determination will be enhanced. 8 The proposed questions address two principal topics; first, the proper construction of the impugned provisions and, secondly, whether Pt 5.3A authorises the impugned provisions. There is a substantive dispute on the pleadings concerning both. The plaintiffs propose to tender the deed and the material before the creditors for the purposes of voting on the challenged resolution to provide the factual matrix by reference to which the deed was made. The plaintiffs accepted in argument that if it is necessary for the Court to consider any other evidence for the purpose of ascertaining whether Pt 5.3A contained power, in the circumstances, for the impugned provisions to be included in the deed, then the questions relevant to the existence of that power could not be answered outside a full trial on all issues. 9 A major issue of construction will be the meaning of the word "Claims" when used in the impugned provisions. If it is limited to the defined meaning in the deed, of a claim against only Lehman Australia, then some of the plaintiffs' arguments will be attenuated. On the other hand, if the word "Claims" is used in its ordinary meaning (and so ignoring the limitation to Lehman Australia in the definition) then those arguments will gain support. 10 Each of the three Lehman company defendants and the administrators opposes the questions being resolved as separate issues under O 29 r 2. They contend that the questions, if answered, will not shorten the proceedings and are likely to lead to the very kinds of forensic inefficiencies and interruptions that are, unhappily, often associated with separate questions. And the defendants point out that, even on the plaintiffs' arguments, the answers to the questions will not determine the whole of the proceedings, although they may be answered in a way which shortens them. The defendants also have some differences between them as to the consequences of the answers sought by the plaintiffs. 11 In its defence and cross-claim, Lehman Asia claims that the Court retains a discretion to declare certain provisions of the deed void, but then to remove or vary the terms of the impugned provisions or to order amendments so as to give effect to the intention of the persons voting in favour of the deed. Lehman Asia also claims rectification or an order that the impugned provisions be amended or varied so that they confer the benefits of the impugned clauses only on Lehman entities that are creditors of Lehman Australia that have agreed to subordinate their debts pursuant to the deed. 12 Both Lehman Asia and Lehman Bros seek variations of the deed to expand the scope of the impugned provisions to include claims against Lehman entities, in the event that some of the construction arguments made by the plaintiffs are correct. In addition, Lehman Bros seeks orders under ss 445D(1)(g), 445G(3) or 447A(1) of the Act that if the releases in cll 11.5 and 11.6 do not extend to all Lehman entities they should be varied to do so. Alternatively, if the plaintiffs succeed in establishing that the deed is void, Lehman Bros seeks an order validating it and giving cll 11.5 and 11.6 the extended operation for which it contends. Lehman Bros seeks, in the alternative, an amendment to the deed substituting a new cl 11.6 that would require litigation creditors to accept their distribution under the deed in full satisfaction and complete discharge of all Claims and insurance claims except those arising out of preserved contractual rights and irrevocably to appoint and authorise the deed administrators to be their agent to execute such forms of release that may be required by Lehman Australia or any Lehman entity. 13 The plaintiffs separate questions in respect of each of those three provisions were in the following form: "Defined Terms 'Act' means the Corporations Act 2001 (Cth). 'Admissible Claim Date' has the same meaning as contained in clause 1.1 of the DOCA. 'claims' means any debt, claim or liability, present or future, certain or contingent, ascertained or sounding in damages as at the Admissible Claim Date. 'Company' means Lehman Brothers Australia Limited (subject to a Deed of Company Arrangement). 'Deed Administrators' means the second and third defendants. 'DOCA' means the deed of company arrangement dated 12 June 2009 between the first, second, third and fourth defendants. 'General Creditor' has the same meaning as contained in clause 1.1 of the DOCA. 'Insurance Claim' has the same meaning as contained in clause 1.1 of the DOCA. 'Lehman Entity' has the same meaning as contained in clause 1.1 of the DOCA. 'Litigation Creditor' has the same meaning as contained in clause 1.1 of the DOCA. 'Litigation Creditors' Final Dividend' has the same meaning as contained in clause 1.1 of the DOCA. 'Preserved Contractual Rights' has the same meaning as contained in clause 1.1 of the DOCA. Questions for separate determination 1. Whether clause 7.1 of the DOCA, on its proper construction, confers on the Deed Administrators the sole conduct and control of any Insurance Claim and an absolute discretion regarding the prosecution and resolution of any Insurance Claim, which otherwise could have been conducted, prosecuted or resolved by a creditor of the Company against an insurer for indemnity or other relief in respect of any insurance policy which insures or otherwise provides benefits to the Company or a Lehman Entity, excluding any claim for indemnity under any insurance policy held by Lehman Brothers Asia Holdings Limited (in Liquidation)? 2. If the answer to question 1 is 'yes', is clause 7.1 of the DOCA, in so far as it confers on the Deed Administrators the sole conduct and control of any Insurance Claim and an absolute discretion regarding the prosecution and resolution of any Insurance Claim, valid and binding on the creditors of the Company, having regard to sections 435A, 444A, 444D, 444H and Part 5.3A of the Act? 3. Whether clause 9 of the DOCA, on its proper construction, operates so as 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? 4. If the answer to question 3 is 'yes', are the provisions of clause 9 of the DOCA, in so far as they provide for a moratorium in favour of each Lehman Entity in respect of a claim or the Insurance Claims, binding on the creditors of the Company, having regard to sections 435A, 444A, 444D, 444H and Part 5.3[A] of the Act? 5. Whether clause 11 of the DOCA, on its proper construction, operates such that, upon payment in full of the Litigation Creditors' Final Dividend, all claims and Insurance Claims of a General Creditor and/or a Litigation Creditor against a Lehman Entity are forever released, discharged and extinguished, in favour of a Lehman Entity (except the Preserved Contractual Rights)? 6. If the answer to question 5 is 'yes', are the provisions of clause 11 of the DOCA, in so far as they forever release, discharge and extinguish a claim and Insurance Claims of a General Creditor and/or a Litigation Creditor against a Lehman Entity (upon payment in full of the Litigation Creditors' Final Dividend and except the Preserved Contractual Rights), valid and binding on the creditors of the first defendant, having regard to sections 435A, 444A, 444D, 444H and Part 5.3A of the Act? 7. If the answer to any of the questions 2, 4 or 6 is 'no': 7.1 Is the DOCA a 'deed of company arrangement' on the proper construction of sections 435A, 444A, 444D, 444H and Part 5.3A of the Act? 7.2 Is the DOCA void and of no effect?"

Can proofs of claim be filed in Lehman bros bankruptcy? 14 All the defendants stated at the hearing on 21 July 2009 that they did not submit that the plaintiffs would breach the terms of cl 9 of the deed by filing proofs of claim (similar to proofs of debt) in the Lehman Bros' Chapter 11 bankruptcy proceedings. That appears correct to accept the absence of any restriction in the deed (including in cl 9) on a creditor from filing a proof of claim. The Bankruptcy Court has required each person or entity to file a proof of claim based on rights existing prior to the filing of the bankruptcy petition against, among others, Lehman Bros, by 22 September 2009 at 5.00pm. The order provided that a person with a claim based on a derivative contract, including a CDO, was bound by that "bar date". The plaintiffs argued that there was an interest of all the other creditors of Lehman Australia to know what the true position was so that they will be able to take steps to preserve their rights against Lehman Bros by filing their proofs of claims prior to the bar date, without being misled by the provisions of the deed. 15 I do not regard that as a satisfactory or sufficient reason, of itself, to order a separate question. The position of the defendants was made clear in open court that they did not submit that such a filing would be a breach of the deed. But, when the deed is construed, the fate of such proofs of claim may be determined by the construction given later in these proceedings.

The parties' submissions 16 In substance, the plaintiffs claim that an order for the determination of separate questions will contribute to the saving of time and cost by substantially narrowing the issues for trial and may, as a practical matter, then lead to a resolution of the whole matter. 17 Lehman Australia and the administrators argued that questions 1 and 2 were founded on the false assumption that apart from cl 7.1, the plaintiffs had an unqualified right, superior to Lehman Australia itself, to conduct, prosecute or resolve litigation with that company's insurers. It argued that the construction of cl 11.5 was not a matter of controversy and that it related only to claims against Lehman Australia being released. It argued that this construction would defeat the plaintiffs' contention that cl 11.5 was wider than its apparent terms. (As appears above, Lehman Bros disputes this construction.) Lehman Australia also argued that if the impugned provisions could not be supported by Pt 5.3A of the Act, then the deed would still be valid but those clauses would not be an operative part of the deed. Lehman Australia argued that if question 6 were answered "no", it would not follow that the deed would then become ineffective or void. Accordingly it argued that question 6 was of no utility to resolve any issue. Lehman Australia referred to the dangers of separate issues discussed in Tepko Pty Ltd v Water Board (2001) 206 CLR 1 and Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334. 18 Lehman Asia adopted the position of Lehman Australia. Lehman Asia also argued that the plaintiffs, and those they had classed as dissenting creditors, amounted to a little over 20% of the creditors who were bound by the deed. It complained that the plaintiffs had already had over six weeks to formulate its entire case. It also opposed a hearing of separate questions and urged the prompt setting of a timetable for the matter so that the matter could be brought to a speedy final hearing and that this would best serve the objects of Pt 5.3A. It argued that answers to the separate questions could not be determinative in any event because of the discretions reposed in the Court under ss 445G and 447A, to avoid the consequences of any invalid provision in the deed. Lehman Asia argued that s 445G(3) specifically provided that the Court may declare a deed or one of its provisions to be valid despite a contravention of a provision of Pt 5.3A, if the Court were satisfied that the provision was substantially complied with and no injustice would result for anyone bound by the deed if the contravention were disregarded. And, it also noted, if the administrator consents, that under s 445G(4) the Court may order that a deed be varied after it has declared a provision of the deed to be void. 19 Thus, Lehman Asia argued that answers to the separate questions would not necessarily conclude any issue in the litigation because the Court had power to vary or validate the deed in certain circumstances. Lehman Asia argued that a separation of issues will lead to delay and will not remove the need for a substantive hearing on all issues at a later time whatever the answers to the questions. 20 It also asserted that it was unlikely that there would be any claims against the Lehman entities because prior to early 2007 Lehman Australia was not a subsidiary of Lehman Bros and had traded under the name of Grange Securities Limited. I find that argument unpersuasive. The plaintiffs allege that the CDOs, in effect, were financial products devised by one or more Lehman entities and were marketed by Lehman Australia (when known as Grange Securities, including but not limited to the period prior to it having any relationship with Lehman Bros) as well as by Lehman Asia. They also allege that Lehman entities arranged the issue of the CDOs, marketed and sold them to the dissenting creditors. The plaintiffs also allege that Lehman entities engaged in misleading or deceptive conduct to purchasers of CDOs including the dissenting creditors in contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). Lehman Asia did not put forward any basis to suggest that these allegations did not raise genuine triable issues. Indeed, as the plaintiffs' retorted, its propounding of the deed, containing as it did the impugned provisions, suggested that Lehman Asia had a good reason for including them in the deed. 21 Lehman Bros was joined as the fifth defendant at its request on 16 July 2009. It argued that it wished to lead unspecified further evidence as to the surrounding circumstances of the making of the deed, as well as evidence that would support its rectification claim. It did not elaborate how this evidence could go beyond the evidence of the factual matrix on which the parties to the proceedings may rely on issues of construction, in order to establish the relevant common intention of the parties, being the creditors (including Lehman Asia), Lehman Australia and the administrators: cf Pukallus v Cameron (1982) 180 CLR 447 per Wilson J at 452, with whom Gibbs CJ agreed at 448, per Brennan J at 456. 22 Lehman Bros argued that if the questions were answered favourably to the plaintiffs then one of two results followed, either the deed was not a deed of company arrangement and fell outside the scope of Pt 5.3A or, it fell within the scope of the Part but was void. In the latter case remedial options in Pt 5.3A were available and there would be substantial arguments that the Court should exercise a discretion to give effect to the wish of the majority of creditors by value and number voting at the meetings. On the other hand, Lehman Bros accepted that if the plaintiffs were correct and the Court could not make any orders remedying the deed, it would seek termination of the deed, as well as the plaintiffs, since its rights were prejudiced. Lehman Bros argued that it had only agreed to subordinate its debt in the proposed arrangement in order to obtain the releases. 23 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. It referred to the caution expressed about separate questions by Gleeson CJ, Gummow, Hayne and Heydon JJ in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at 524-525 [7], noting that those remarks were made where all the parties had agreed to the use of the separate question, unlike the present case. 24 Lehman Bros argued 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 of issues concerning the ambit of the power in Pt 5.3A for a deed to bind creditors, in the absence of the full context of all of the circumstances. It contended that it wished to advance evidence to show a connection between, and justifying, the exercise of the power to make the impugned clauses and the circumstances of the case. Lehman Bros argued that that would involve a factual investigation into the degree of connection between the impugned provisions and the source of power in Pt 5.3A, not suitable for investigation in a separate question. It also contended that evidence could support the inclusion of the impugned provisions in relation to potential claims for contribution or indemnity that it or other Lehman entities might have against Lehman Australia were they sued by one of the plaintiffs or another dissenting creditor. 25 The plaintiffs emphasised in reply that the only beneficiaries of the wider release in cl 11.5 were Lehman companies. They contended that the separate questions still had utility. They argued that the issue whether there was power under Pt 5.3A to give effect to the impugned clauses in the deed should be determined on the basis that if the Court came to the conclusion that further evidence than the deed itself and the relevant matrix of fact in which the creditors' meeting came to resolve that it be executed could affect the outcome, then those questions should not be answered. Nonetheless, the plaintiffs argued that the issue of power under Pt 5.3A was a stark one and that the questions were capable of receiving an affirmative answer. They argued that if there were no power, the onus to demonstrate that there was no prejudice would then be on any defendants who sought to uphold a validation of the deed or its amendment under the provisions in Pt 5.3A of the Act on which they had relied.

Principles 26 In Tepko (2001) 206 CLR at 55 [168]-[170], Kirby and Callinan JJ observed in their dissenting judgment that the attractions of trials of issues rather than of cases in their totality are often more chimerical than real. They noted that common experience demonstrated that saving in time and expense were often illusory, particularly when they overlapped within parties' preparation for other factual matters. They said that a party might feel aggrieved if their case were knocked out on the trial of a preliminary or single issue, and might suspect that the abbreviated course had been adopted to meet the court's, rather than the parties', interests. And they noted that there was a potential for further appeals, particularly if the separate issue having been decided one way initially were reversed on appeal and the matter sent back for a full trial of the whole of the issues. 27 In AWB Limited v Cole [No 2] (2006) 233 ALR 453 at 460-463 [26]-[40], Young J reviewed the authorities from which (without reciting the authorities to which his Honour referred) I have taken the following principles: (1) As a general rule the starting point is that all issues of fact and law should be determined at the one time. (2) A party seeking the determination of separate questions must satisfy the Court that it is "just and convenient" for the order to be made. The order must be made on concrete facts, either established or agreed, for the purpose of quelling a controversy between the parties so as to produce a conclusive or final judicial decision on the issue, which is of a real, not hypothetical, importance to the determination of the controversy. (3) There are special problems where the separate issue involves a mixed question of fact and law, although it may still be able to be decided as a separate issue. However, care must be taken in precisely formulating the question and specifying the facts upon which it is to be decided. (4) The Court must have all relevant matters before it as a precondition of it being asked to exercise its discretion if the separate question involves the grant or refusal of declaratory relief. (5) It may still be appropriate to determine a separate question even if it will not resolve all the issues, provided that there is a strong prospect that the parties will agree upon the result when the core of the dispute has been decided or if the decision will obviate unnecessary and expensive hearings of other questions. (6) Generally speaking an issue will not be appropriate for separate determination if it is simply one of two or more alternative ways in which an applicant or plaintiff frames its case and its determination would leave other significant issues unresolved. (7) It is relevant to consider whether: · the separate questions will contribute to the saving of time and cost by substantially narrowing the issues for trial or even lead to the disposal of the proceedings; · they will contribute to the settlement of the proceedings; · they will give rise to significant contested factual issues both at the time of the hearing of the preliminary question and at the time of the trial; · there will be any significant overlap between the evidence adduced on the hearing of the separate question and a trial; · the questions will prolong, rather than shorten, the proceedings. 28 In Woolcock Street 216 CLR at 524-525 [7] Gleeson CJ, Gummow, Hayne and Heydon JJ stressed the importance of recognising that there may be difficulties in using procedures for separate issues in cases in which it is necessary to consider developing, as distinct from applying, common law principles and continued: "The dangers of developing common law principle against an artificially constricted body of fact are self-evident. That is why, in some cases, even if the parties join in asking a court to determine a question separate from trial of the facts, it may be prudent for the court to decline to answer the question presented as being one which it is inappropriate to answer (Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at 357-358 [51]-[53]). Indeed, as Bass v Permanent Trustee Co Ltd illustrates (Bass (1999) 198 CLR 334 at 359 [56]. See also Malika Holdings Pty Ltd v Stretton (2001) 204 CLR 290 at 308-309 [61].), in some circumstances to answer a question may be contrary to the judicial process. If the question is answered, it is important to identify any limitations which the procedure adopted may impose on the breadth of any principle that is to be identified as having been established or applied." 29 This is not a case of developing common law principles; rather it involves a question of statutory construction. The task of construing the application of Pt 5.3A and its provisions in this matter must be undertaken in the factual context presented by the evidence.

Factual context for a separate question 30 The plaintiffs argued that the questions of construction of the deed could be decided simply on the evidence of the deed itself and the material put to the creditors before they voted. Some of the defendants argued that that material should include antecedent material circulated by the administrators or others to the creditors so as to provide the relevant background. I am satisfied that evidence of the factual matrix is properly admissible, readily identifiable and discreet. The only relevant evidence will be that bearing on the construction of the deed and it will provide a sufficient, and indeed the only, factual matrix. Thus, the questions of construction can be determined within this narrow factual compass. 31 Essentially, the evidence will be relevant to whether the meaning of the expression "Claims" when used in the impugned clauses extends to any claims that might be made against Lehman companies other than Lehman Australia, notwithstanding the definition of "Claims" in the deed. While, no doubt, substantial arguments will be used to illuminate the rival constructions, little evidence will be relevant to placing the Court into the position that a reasonable person in the position of the parties would have occupied so as to be able to understand the genesis of the transaction, the background, context and circumstances by reference to which the deed was resolved to be made: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 178-180 [36], [41] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 292-293 [9]-[12] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ; Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494 at 510-512 [50]-[53] where I considered the authorities.

Consideration 32 The answers to the questions of construction are bound up in the determination of the separate questions. Once the construction of the deed, so far as it affects the impugned clauses, has been clarified it will be possible to determine whether, as the plaintiffs contend, there is no power at all in Pt 5.3A of the Act, regardless of the circumstances of the creditors and the company, the subject of a proposed deed of company arrangement, to make provisions having the effect of causing those creditors to release or compromise their rights to proceed against third parties, including those who are also existing creditors of that company or may have claims for contribution or indemnity if the third party is sued by a "releasing" creditor. 33 The separate questions will produce a definitive answer to the questions of power in the event that the Court accepts the plaintiffs' argument. However, it may prove not to be possible to answer those questions in the event that it becomes necessary to consider further facts beyond the evidence needed to construe the deed, to decide the issue of statutory construction under Pt 5.3A relating to power to include the impugned provisions. 34 The defendants did not identify any material fact in their pleadings that would make additional evidence, beyond that relating to the factual matrix discussed above, admissible on the issue of power to include the impugned provisions in the deed. Indeed, a claim by a Lehman entity for contribution or indemnity against Lehman Australia in respect of a right which the plaintiffs or other dissenting creditors may have, but has not yet brought against that Lehman entity, can only be hypothetical. And, if they are effective, the impugned provisions would have the practical effect of keeping this possibility hypothetical. That does not necessarily preclude the issue of law being considered. 35 The objects of Pt 5.3A, specified in s 435A, identify that the essential question for creditors is for them to hypothesise on whether a deed of company arrangement "maximises the chances of the company, or as much as possible of its business, continuing in existence" or if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up. Thus, when the creditors vote on whether to proceed with a deed of company arrangement, in general, they will be considering various hypothesised outcomes. In general, at that time, they will not be in a position to consider the issues with the benefit of completed examinations of persons about the company's examinable affairs under Pt 5.9 of the Act to assess, more precisely, the strengths and weaknesses of existing or possible litigation, rights or liabilities that could better inform their evaluation of which hypothesised outcome ought command their vote. Because Pt 5.3A of the Act provides that creditors must vote to decide on a company's fate in this uncertain context, in the usual course of administrations, they necessarily will be examining hypotheses, not facts and voting on this basis whether to resolve that the company execute a deed of company arrangement. 36 It is reasonable to expect that the question of the extent of the power to bind persons to the provisions in a deed of company arrangement under Pt 5.3A may (but need not necessarily) be capable of being answered in the context of the facts necessary to decide the construction of the impugned provisions. Of course, I accept that there may well be facts or scenarios that will be developed in argument which demonstrate that this expectation is not appropriate and the matter will require a full final hearing in order to decide the questions going to the power of a deed under Pt 5.3A to bind creditors to give up rights against third parties. 37 Thus, it is unlikely that evidence would be led at a trial directly on this topic (other than a statement of intention that the Lehman entities may wish to protect their position if the hypothesis is fulfilled). On the other hand, some evidence of the interrelation of business dealings in the Lehman companies' group giving rise to such a possibility is likely to appear in the material used to establish the matrix of fact in which the resolution approving entry into the deed occurred. After all, this is the context in which the present controversy arose and the deed came to be made. The existence of the plaintiffs' and dissenting creditors' legal rights to bring proceedings against one or more Lehman entities (however strong or weak the claim to be asserted may be) is a fact implicit in the impugned provisions themselves, as is the ordinary incidents of litigation once commenced, including, cross-claims. The nature of prophylactic clauses, such as cll 7.1, 9 and 11.5 of the deed, is to foreclose the possibility of a person benefited by the clauses being sued, or further proceeded against, in the circumstances the provisions address. 38 Accordingly, mindful of all of the principles suggesting the constraints on ordering separate issues to be heard before a full trial, I am satisfied that: · the issues of construction can and should be determined now; and · the issue of the power to make the impugned provisions part of the deed under Pt 5.3A, can be addressed now as a real, not hypothetical, question in the proposed separate issues. 39 The deed appears to deal with releases and inhibitions on the exercise of presumed rights of the plaintiffs and dissenting creditors against, at least, Lehman Australia and, depending on the construction of the impugned provisions, other Lehman entities. The clarification of the construction of the deed will focus the preparation of the parties for trial. It may dispose of a raft of alternative cases. 40 In addition, depending on the answer to the questions of construction, the questions relating to the power to provide for creditors to give up or be restrained in their capacity to exercise their legal rights to proceed against third parties may not arise at all. If they do arise, then I am satisfied they will do so in the context of a real controversy that is capable of being resolved by answers to the questions on power. If during the argument, as some of the defendants' submissions assert, it appears that some further evidence could be relevant to the issue of power to include the impugned provisions in the deed that will assist in the construction of the provisions of Pt 5.3A, then the court will need to consider the course to be taken. Evidence would not be relevant to the construction of the Act itself but rather to its application of. But, Lehman Bros argued that in some way it might show a sufficient connection between the use of the power and the purposes of Pt 5.3A. However, I am not satisfied that such a possibility is likely to occur, given that the Court will have before it the factual matrix in which the impugned provisions were made, pursuant to the resolution of the creditors, and will be able to address the exercise, in making the deed, of the powers under Pt 5.3A in that context. 41 In arriving at this conclusion, I have anxiously considered the difficult and somewhat competing demands of justice that confront the parties. It is in all their interests to have a final resolution as quickly as possible with the least expense. A separate question often gives rise to more litigation, appeals, expense and delay than is the intention the moving party, or of the Court, in ordering them. On the other hand, it is a procedure that is a valuable tool in reducing the time and expense of litigation. It is the duty of the parties and the Court to find the most efficient and sensible way of getting to the heart of a controversy as quickly as possible. Modern litigation, has become more and more complex, especially with the plethora of documents and legislative rights and defences that are created constantly in our society. 42 Here, the proposed separate questions could be heard in a day, with the assistance of written submissions, by a single judge or a Full Court in the original jurisdiction. It may be that, in the course of the hearing, some questions will be shown to be unsuitable to be answered separately from a full trial. But, based on the directions hearings I have had with the assistance of experienced counsel, a full trial on all pleaded issues is likely to be highly complex, lengthy and expensive. It will take several months to prepare the evidence, including expert evidence. Indeed, depending on the degree to which the plaintiffs may decide or need to prove their current allegations of prejudice, they may have to prove their underlying cases against Lehman Australia, and possibly one or more Lehman entities. Having managed the separate proceedings brought by Wingecarribee against Lehman Australia before it went into administration last September, I am cognisant of the real complexity of the substantive claims. 43 If some or all of the separate questions can be answered they may prove decisive and, in any event, will clarify the future extent of the controversy so as to facilitate its efficient management. As Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ pointed out in Bass 198 CLR at 356 [48], a crucial difference between an advisory opinion and a declaratory judgment "… is the fact that an advisory opinion is not based on a concrete situation and does not amount to a binding decision raising a res judicata between parties". What the plaintiffs seek will lead to a binding decision on a concrete situation, at least on the issues of construction and, if the questions as to power or any of them are answered in their favour, will be likely further to narrow the controversy considerably. 44 For these reasons, I am satisfied that I should order a hearing under O 29 r 2 that the separate questions be heard before the rest of the proceedings. In my opinion, the questions of construction and (if possible) power should be decided by a Full Court exercising the original jurisdiction so that, the balance of the proceedings can be tried more efficiently and expeditiously. I propose to reserve the separate questions for hearing by a Full Court pursuant to s 25(6) of the Federal Court of Australia Act 1976 (Cth). The power of a single judge sitting in the Court's original jurisdiction to reserve a question for consideration by a Full Court can only be exercised in a matter where an appeal would lie to a Full Court: s 25(6). An appeal, by leave, from an order answering the separate questions, would lie to a Full Court under s 24(1) and (1A) of the Federal Court of Australia Act. Therefore, under s 25(6) of the Act, a single judge has power to reserve for consideration and determination by a Full Court, those questions and the question of whether any amendment or addition to those questions is necessary and, if so ought be made, so as to enable the Full Court to determine the proper construction of cll 7, 9 and 11 of the deed and their validity: Henderson v Pioneer Homes Pty Ltd (1979) 142 CLR 294 at 298-299 per Stephen, Mason and Wilson JJ. 45 There is an important public interest in the prompt determination of these proceedings so that the administrators and the creditors know their positions, particularly if the deed is invalid or the impugned provisions are found to be void or are varied. In addition, the administration of Lehman companies in other jurisdictions and the positions of insurers may be affected by the final decision of this Court. Answers to these questions will provide a suitable means of moving more promptly and efficiently to the final resolution of this complex matter. 46 The parties should prepare an agreed bundle of documents constituting the factual matrix together with the deed and prepare a timetable for submissions. I will direct the parties to bring in short minutes to give effect to these reasons. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Dated: 23 July 2009 Counsel for the First, Second and Third Plaintiffs: N C Hutley SC, A Coleman and D Sulan

Solicitor for the First, Second and Third Plaintiffs: Piper Alderman

Counsel for the First, Second and Third Defendants: B A Coles QC and P Kulveski

Solicitor for the First, Second and Third Defendants: Clayton Utz

Counsel for the Fourth Defendant: D Williams SC and J Castaldi

Solicitor for the Fourth Defendant: Dibbs Barker

Counsel for the Fifth Defendant: T F Bathurst QC and E Hyde

Solicitor for the Fifth Defendant: Jones Day

Counsel for the Amicus Curiae D Barnett

Solicitor for the Amicus Curiae Australian Securities and Investments Commission