Singleton, in the matter of Lehman Brothers Australia Limited (in Liq) [2011] FCA 1068

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 The liquidators of Lehman Brothers Australia Ltd (in Liq) (Lehman Brothers) seek the advice and direction of the Court under s 479 of the Corporations Act 2001 (Cth), concerning the significant difficulties that they are encountering in managing potentially competing priorities between various classes of creditors in the course of the liquidation. There are three relevant classes of contingent creditors whose interests may be affected by the potential resolution of issues in the class action proceedings, NSD 2492 of 2007, that concerns one of those classes in which I have reserved judgment: Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq). 2 There are approximately 74 contingent creditors who are members of the first class of contingent creditors being the group members in the class action. Those proceedings are complex. In the main, they deal with the potential liability of Lehman Brothers in relation to synthetic collateralised debt obligations (SCDOs) that it sold to the representative councils. The applicants in the class action contend that the results of those proceedings will deal with common questions of fact and or law that will impact on the rights of group members. 3 The second group of creditors were persons who wished to participate in the alternative dispute resolution scheme that the liquidators entered into having sought directions from the Court on 22 December 2010: Singleton, in the matter of Lehman Brothers Australia Ltd (in liquidation) [2010] FCA 1491. There are 69 contingent creditors who have expressed interest in engaging in that scheme. However, the insurers of Lehman Brothers have not to this stage been prepared to accept any settlement that might be reached through the use of that scheme, as a means by which the liquidators would be entitled to admit those creditors' proofs as debts in the liquidation, and thereby cause the insurance policies to respond to those admitted claims. 4 The third group of contingent creditors are persons who are neither members of the class in the Wingecarribee proceedings or persons prepared to participate in the alternative dispute resolution scheme. 5 One of the liquidators, Marcus Ayers, swore an affidavit on 1 September 2011 that explains the extent of the problems that the liquidators are currently grappling with in seeking to preserve as far as possible equality between the members of these three groups of creditors. Lehman Brothers has made claims under liability insurance policies that it holds with an Australian based insurer, an insurer in New York and under various excess policies also issued in New York in respect of the claims by these contingent creditors. 6 The potential proceeds of the insurance policies, if any, will apparently fall significantly short of the total amount of the claims by the contingent creditors if they are admitted to prove in the liquidation in the sums they currently claim. 7 One significant issue that confronts the liquidators is the potential operation of s 562 of the Corporations Act in the event that a judgment is given in favour of the Wingecarribee applicants. Another issue that potentially will arise is that some of the contingent creditors may make claims under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) that they are entitled to charges over the insurance moneys that may be payable under the policies. Thus, there may be a potential for inconsistency between the provisions of that section and s 562 of the Corporations Act. The liquidators are concerned that if the insurers decided to make a payment on any particular contingent creditor's claims, for example in the event that one or more of the Wingecarribee applicants were successful, then the application of s 562 of the Act may create a situation in which that creditor obtains an immediate right to payment from the insurance policies. If that occurred, then the amount of that payment would then not be available to meet claims of the remaining general body of contingent creditors who have not had their claims either determined or admitted to proof. The same possibility would occur if, and to the extent that, a charge were operative under s 6 of the Law Reform (Miscellaneous Provisions) Act. 8 Negotiations with the various insurers have not led to any commercial or practical certainty at this stage for the liquidators in ascertaining whether and to what extent any insurance will respond to debts that may be admitted to proof or established by judgment. 9 Moreover, at the moment, the calculation of an appropriate value for any claims relating to the synthetic collateralised debt and similar obligations is not an exact science, and is one of the substantial issues that will need to be resolved in the Wingecarribee proceedings. This uncertainty makes it difficult at present for the liquidators to arrive at a commercial resolution of potential claims in a practical way. And, this difficulty is likely to continue at least until the liquidators have had the opportunity to assess the position after any judgment is given in those proceedings, and subject to any appeals that may then be taken. 10 At this time, the liquidators have not received any insurance moneys, but they apprehend that if an insurer makes a payment, issues as to priorities will arise by reason of s 562 and or s 6 of the Law Reform (Miscellaneous Provisions) Act. The liquidators have drawn attention to a statement made to the Court on 7 February 2011 by senior counsel for the applicants in the Wingecarribee proceedings that they would not seek to obtain or enforce relief which would have the consequence that their claims were preferred over those of any other group member in those proceedings. In other words, the three applicants whose cases were the subject of the hearing accepted that there would need to be some argument as to how, as between the group members, questions of priorities should be resolved. That of course did not deal with the position with respect to the two other classes of contingent creditors, whose interests may be affected by the determination of the Wingecarribee proceedings and the extent to which any insurance policies are required to respond to any provable debts established by any judgment in those proceedings. 11 I am satisfied by Mr Ayers' affidavit that the liquidators are seeking, in a very difficult position, to proceed in what appears to be a practicable and fair manner in order to protect the rights of the whole of the body of creditors whose interests are or may be affected by what may happen to Lehman Brothers' entitlements to recover on their policies of insurance. 12 For these reasons, I consider it appropriate to give a direction that, pending the liquidators having a reasonable opportunity to consider the Court's reasons for judgment in the Wingecarribee proceedings, they are justified in taking the steps that they are currently taking to manage the potentially competing priorities between the general body of creditors, the contingent creditors, and different classes of contingent creditors in respect of any monies that may be received or receivable under the insurance policies of Lehman Brothers as described in Mr Ayers' affidavit. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.