Wingecarribee Shire Council v Lehman Bros Australia Ltd

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 Wingecaribee Shire Council brought proceedings against Lehman Brothers Australia Limited arising out of a number of transactions in which the council invested in collateralised debt obligations. The proceedings commenced in 2007 and at the time that Lehman Brothers went into voluntary administration on 26 September 2008, they had progressed significantly through interlocutory stages, although the pleadings were still being amended. 2 Since that time, the administrators have been performing their duties and have recently reported to creditors for the purposes of the second creditors' meeting. The report to creditors is dated 19 March 2009. Among other topics, it deals with the question of what insurance cover may be available to respond to claims made against Lehman Brothers in respect of their financial advising and other business activities. However, in the section dealing with insurance, the report does not identify whether the claim made by the council in these proceedings is the subject of insurance cover or not. Nonetheless, the report to creditors stated that there were three different insurers and that the relevant policies provided professional indemnity cover to Lehman Bros that may provide a return to its estate where claims of breach of professional duty fall within the terms of the cover. However, the administrators indicated that for the purposes of the report, and because of Lehman Brothers' obligations as an insured under the terms of the policies, they could give only limited advice as to which claims were responded to by which insurance cover. 3 The council's solicitors have attempted to ascertain information about this but in the course of the administration the administrators have refused to provide it. There are clearly substantive commercial reasons that, particularly in an administration of this kind, would suggest that the administrators' attitude was perfectly legitimate. No criticism of it has been advanced. 4 On 15 April 2009, a related company of Lehman Brothers, Lehman Brothers Asia Holdings Pty Ltd, provided to the solicitor for the council an amended deed proposal which contained some, but not all, of the suggested terms of a deed of company arrangement to be voted on by the creditors. The second creditors' meeting took place on 29 April 2009 and the creditors voted for that meeting to be adjourned until 27 May 2009, which is, as I understand it, the final time to which such a meeting could be adjourned in accordance with the provisions of the Corporations Act 2001 (Cth). The proposal from Lehman Brothers Asia suggests that the proceeds of any insurance claim recovered from, or settlement, with the company's professional indemnity insurer will be made available for a particular class of creditors. The proposal also provides that the claims of all creditors to be bound by the proposed deed, including litigation creditors, would be extinguished when they received all their entitlements under it. 5 If there is insurance which responds to the claim made by the council against Lehman Brothers then, at the moment, the council has an enforceable legal right to a charge over any insurance moneys payable by the insurer under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). In addition, s 562(1) of the Corporations Act provides a priority for any insurance recoveries received in the liquidation of Lehman Brothers, were liquidation to be the outcome of the second creditors' meeting. The administration is said to be a complex one. The report to creditors states that there are 33 unsettled claims to which the professional indemnity policies might respond, totalling over $215 million. It is unclear whether, first, the council's claim is one of those and, if so, secondly, what may be the nature or extent of its entitlement to priority or security, either under s 562 of the Corporations Act or s 6 of the Law Reform (Miscellaneous Provisions) Act. 6 On 29 April 2009, a full meeting of the council voted to instruct its solicitors to bring this motion. The motion seeks, first, leave to proceed against Lehman Brothers pursuant to s 440D(1) of the Corporations Act to the extent necessary to determine whether the court should make an order for production of the insurance policies referred to in the report to creditors, together with any other professional indemnity or insurance contracts that might indemnify Lehman Brothers in respect of the claims made by the council in these proceedings and any directors and officers insurance policies other than those which the solicitor for the council has already seen. Secondly, the motion also seeks ancillary correspondence between Lehman Brothers and insurance brokers or insurers relating to claims notifications under the relevant policies or notification of circumstances giving rise to a claim, where relevant. 7 The administrators have opposed the grant of leave to the council to proceed on the motion to seek the production of these documents on the following grounds, as I understand them: (1) the purpose for which the documents are sought is outside the legitimate scope of these proceedings; (2) the documents are sought to enable the council to determine how it ought vote or proceed in relation to any proposed deed of company arrangement or the liquidation of Lehman Brothers, the subject of resolutions to be put to the meeting of creditors on 27 May 2009; and (3) the council has delayed for a considerable period so as to enliven the discretion to refuse leave or negate the exercise of any discretion in its favour. 8 Lehman Brothers also argued that requiring the administrators to deal with the present application, if leave were granted, would cause unnecessary interference with the due administration of the company, particularly in this period immediately before the final opportunity for creditors to vote on the company's future. There is no evidence before me from the administrators to support those assertions. Lehman Brothers argued that there is no urgency in this application and that if it is legitimately within the scope of the proceedings it can be pursued after the second creditors' meeting finally determines the fate of the company. It relies on a decision of the Full Court of the Supreme Court of South Australia in Beneficial Finance Corporation Ltd v Price Waterhouse (1996) 68 SASR 19 which held that discovery of insurance policies would not be ordered under the rules of that court. In those proceedings, however, the appellant's insurers had confirmed that they were dealing with the claim as if it attracted indemnity and their insured was solvent, leaving aside the possible impact of the claim. Those factors are not present here. 9 Subsequently, in Lopez v Star World Enterprises Pty Ltd [1997] FCA 454 (unreported, 18 April 1997) Olney J, albeit in a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) held that after a respondent company had been placed in administration and that there was a jeopardy of it going into liquidation, the question whether or not there was any insurance indemnity available in the event of liability being established was a matter proper to take into account for the purposes of s 440D(1) in determining whether or not leave to proceed should be given against the company, notwithstanding the administration. He found in that case that it was in the interests of justice that the applicant be given leave to proceed against the respondent and that, for the purposes of doing justice and to address the case in an orderly fashion, the respondent company should be required to produce for inspection evidence of any relevant insurance policy it had. His Honour did not appear to have been referred to the distinguishable position in Beneficial Finance 68 SASR 19. 10 In my opinion, the question whether a respondent or defendant has assets that are available to satisfy a judgment and whether there is another party who may be liable, such as an insurer the subject of a charge under s 6 of the Law Reform (Miscellaneous Provisions) Act are matters which are within the power of the Court to require to be disclosed in the proceedings themselves: see Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 622-623 per Deane J, where he discussed the ambit of s 23 of the Federal Court of Australia Act and the power of the court to grant relief in the nature of Mareva orders, including the disclosure of assets by a defendant or respondent. 11 I accept the evidence of the solicitor for the council, Ms Banton, that she obtained instructions from the council on the day before the motion presently before me was filed. I am also satisfied that there is no evidence of prejudice to the administrators were I to permit this limited issue to be heard and determined promptly. In my opinion, it is a legitimate and proper purpose of these proceedings to seek to ascertain whether there is in fact insurance cover held by Lehman Brothers that responds to the council's claim and for the council to be in a position to assess whether or not it ought to take steps to protect its position with respect to any such matter. 12 As Olney J pointed out in Lopez [1997] FCA 454, where the real prospect is that a deed of company arrangement may affect the rights of persons who would otherwise have a charge under insurance policies in accordance with s 6 of the Law Reform (Miscellaneous Provisions) Act or its analogues, or a particular statutory priority were liquidation to occur under s 562 of the Corporations Act, knowledge of the impact of insurance arrangements affecting a particular applicant may be relevant in proceedings such as these. 13 Whether or not in this particular case there is evidence sufficient to satisfy me that I ought make all or any of the orders sought in paragraph 3 of the motion is something I am not presently deciding. Nor do I express any view on that matter. I simply consider that the matter is sufficiently arguable in terms of its urgency and relevance to the proceedings that I should allow the council to litigate it prior to the second creditors' meeting and be told what the outcome of that litigation is. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.