Vol 7 (2010) - Issue 5

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Creditors’ Claims against Third Parties

Recent court decisions in Australia have encouraged Australian insolvency practitioners to revisit a corporate insolvent restructuring tool that has largely been dormant for almost 20 years.
They have also revealed a lack of policy coherence in the legislative approach to restructuring.

Background
Australia has two different statutory regimes to facilitate the restructuring of insolvent companies: schemes of arrangement (s 411 (contained in Pt 5.1) of the Corporations Act 2001) and voluntary administration (Pt 5.3A of the same Act). Voluntary arrangement was legislated for in 1993, specifically to provide an alternative to schemes of arrangement. Since that time, schemes of arrangement have only rarely been used in corporate insolvencies.
Both are designed to allow a financially-troubled company to enter into a statutorily-binding debt arrangement with their creditors: one (scheme of arrangement) is a legislatively 'light-touch' regime with a requirement for Court approval providing the prophylactic element for creditors; voluntary administration eschews court approval in favour of a detailed and prescriptive statutory procedure. At first blush, it may appear that this is an embarrassment of riches, and that there is little point in providing two routes to what should be the same outcome. However, as recent developments have shown, some of the differences between the two regimes are no less substantive than procedural.
In brief, the High Court of Australia has held that, where a voluntary administration results in a deed of company arrangement between a company and its creditors, that deed cannot bind the creditors to a compromise in relation to claims they may have against a party other than the company.
In the same decision, the High Court provided strong obiter support for a line of lower court authorities to the effect that a scheme of arrangement between a company and its creditors can bind the creditors to a compromise in relation to claims they may have against a party other than the company. Whether this outcome was ever intended by the Australian Parliament is open to debate. Nevertheless, it has now received the endorsement of the High Court, Australia's highest court and it is therefore the practical reality with which companies and advisors must deal.

Opes Prime
Until 27 March 2008 the Opes Prime Group provided stockbroking services to institutional and private clients, predominantly in the form of securities lending and equity financing.
Members of the Group borrowed shares from clients and on-lent them to various financiers. Under those securities lending arrangements, the financiers provided members of the Opes Prime Group with cash, collateral and other securities. The financiers included ANZ and Merrill Lynch.
In early May 2008, Opes Prime went into liquidation. Some creditors began legal proceedings against Merrill Lynch, ANZ and Opes Prime Group companies. These and other claims were the subject of a mediation between the liquidators, ANZ, Merrill Lynch and the Australian Securities and Investments Commission (Australia's corporate regulator). The mediation produced an agreement between those parties to propose a scheme of arrangement in order to achieve a global settlement of all Opes-related claims and proceedings against ANZ and Merrill Lynch. In return, ANZ and Merrill Lynch would hand over cash which the liquidators were to distribute to the creditors in accordance with the scheme. Under the scheme, all of the creditors' claims, including those against ANZ and Merrill Lynch, would be released.
The first step in a scheme of arrangement is an application to the Court for an order convening a meeting of creditors to vote upon the proposed scheme. If the creditors vote for the scheme, it then goes back to Court for an order of approval. Once that approval has been obtained, the scheme is binding upon all creditors, regardless of whether they voted in favour of it. This meant that, in the case of the Opes Prime Group, creditors of Opes Prime who also had claims against ANZ and Merrill Lynch would have those claims barred by the scheme, even if they wished to pursue them.