FEDERAL COURT OF AUSTRALIA

 Wingecarribee Shire Council v Lehman Bros Australia Ltd (No 2)
[2009] FCA 532

HIGH COURT AND FEDERAL COURT –– inherent or implied power of Court to order a party to disclose assets and produce documents

PRACTICE AND PROCEDURE –– CORPORATIONS –– protection of integrity of processes –– Mareva orders –– Court’s power to order production of documents –– respondent company placed in administration during proceedings –– respondent’s contracts of insurance may respond to applicant’s claims both existing and potential against other persons  –– proposed deed of company arrangement would extinguish applicant’s claims against third parties and their insurers –– relevance of principles governing scope of discovery –– whether power to order respondent company to produce contracts of insurance and related documents to applicant

PRACTICE AND PROCEDURE –– access to confidential documents –– applicant’s solicitor acts for other entities that may have claims against respondent corporation –– implied undertaking limiting use of documents or information obtained under compulsion in proceedings –– whether documents produced should not be provided to particular person or a particular solicitor for a party

Held: respondent company ordered to produce relevant contracts of insurance and related documents

Corporations Act 2001 (Cth) Pt 5.3A, ss 435A, 439A, 440D, 445D, 562

Federal Court of Australia Act 1976 (Cth) s 23

Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s 6

Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256 applied

Beneficial Finance Corporation Ltd v Price Waterhouse (1996) 68 SASR 19 distinguished

Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 applied

Hearne v Street (2008) 235 CLR 125 discussed

Houghton v Arms (2006) 225 CLR 553 cited

Jackson v Sterling Industries Limited (1987) 162 CLR 612 followed/discussed

Lopez v Star World Enterprises Pty Ltd [1997] FCA 454 followed

WINGECARRIBEE SHIRE COUNCIL v LEHMAN BROTHERS AUSTRALIA LIMITED

NSD 2492 of 2007

RARES J

19 MAY 2009

SYDNEY

THE COURT ORDERS THAT:

1.                  The respondent produce to the applicant’s solicitors by 4 pm on 22 May 2009:

(a)                copies of all insurance contracts referred to in the report to creditors dated 19 March 2009;

(b)               any other professional indemnity or other insurance contracts that may indemnify the respondent, wholly or partly, against the claims by the applicant in these proceedings;

(c)                any directors’ and officers’ insurance policies (other than those policies identified in paragraph 22 of the affidavit of Amanda Kim Banton sworn 4 May 2009) held by, or for the benefit of, the respondent and its directors and officers covering the period 1 December 2006 to 30 September 2008; and

(d)               copies of the letters referred to in paragraphs 3(c) and 3(e) of the affidavit of Brigitte Markovic sworn 18 May 2009.

2.                  The respondent produce to the applicant’s solicitors by 12 noon on 25 May 2009 copies of all correspondence between the respondent and its brokers or insurers recording or relating to the notification of claims or circumstances under the insurance contracts referred to in orders 1(a), (b) and (c) above, arising out of the issue of collateralised debt obligations or other securities to the applicant in the period from January 2007 to September 2008.

3.                  Until further order, or otherwise agreed between the parties, the documents produced by the respondent to the applicant’s solicitors, pursuant to orders 1 and 2 above, will only be viewed by Simon Morris (Mr Morris), a partner of Piper Alderman, solicitors, and the applicant’s counsel (Michael Pembroke SC and Terry Mehigan) and will not be provided to, or the contents of those documents will not be disclosed to or discussed with Amanda Banton or any other solicitor employed by Piper Alderman. Mr Morris and counsel may provide copies of the documents produced by the respondent to the applicant and discuss the contents of the documents with the applicant.

4.                  Until further order or otherwise agreed between the parties the applicant, by itself, its servant and agents, and each of the persons named in order 3 not use any of the documents produced pursuant to orders 1 and 2, or disclose any of their contents to any person, other than an officer of the applicant, for any purpose other than for the purposes of:

(a)                these proceedings (including considering the joinder of other parties as respondents);

(b)               informing the applicant as to how it ought to approach voting on any deed of company arrangement or liquidation of the respondent at the second creditors meeting.

5.                  The respondent pay the applicant’s costs of the motion.

6.                  Leave be granted to the applicant to amend its notice of motion to seek costs against the administrators personally.

7.                  Liberty to either party to apply on 24 hours notice.

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.

REASONS FOR JUDGMENT

(REVISED FROM THE TRANSCRIPT)

1                     This is an application by the applicant, Wingecarribee Shire Council, that Lehman Brothers Australia Limited, the respondent, produce a number of insurance documents.  Lehman Brothers is now in administration, and about to have its adjourned second creditors meeting take place in eight days time, on 27 May 2009.  The proceedings have been brought on with some urgency, because of the imminence of the second creditors meeting, which has already been adjourned to, what I have been informed, is the last possible time at which it can take place, in accordance with Pt 5.3A of the Corporations Act 2001 (Cth).  The circumstances of the present application are described in my decision granting leave to the council to proceed to make it, under s 440D(1) of the Act:  Wingecarribee Shire Council v Lehman Brothers Australia Limited [2009] FCA 503.

The Report to Creditors

2                     Pursuant to s 439A of the Act, the administrators have prepared and put forward a report to creditors, dated 19 March 2009.  Among other things the report discloses that related companies of Lehman Brothers, including Lehman Brothers Asia companies, are creditors with debts owed to them, of around $180 million.  In addition, there are approximately 104 trade creditors, who are owed about $9 million, and 308 contingent creditors, who are potentially owed, according to the report, around $626 million.  One of those contingent creditors is the council.  It has been agreed between the parties that the council has been admitted as a contingent creditor, with a vote valued at the moment at $1, for the purposes of the second creditors meeting.  It is not suggested that such a valuation is, in the circumstances of the contested litigation or of the meeting, inappropriate for the purposes deciding these proceedings.  The report identifies three potential sources of insurance which may be available to respond to claims made against Lehman Brothers.

Disclosures in the report as to Lehman Brothers Insurance

3                     The report states that the company may have the benefit of proceeds of insurance policies which it holds with three separate insurers, both within Australia and overseas.  Those policies provide, among others, professional indemnity cover to the company that may provide a return to the estate where claims for breaches of professional duties fall within the terms of the cover.  The administrators, for bona fide commercial reasons, have provided but limited information as to the nature and extent of the cover and the identity of the insurers with whom the cover was effected.  They said that they would refer to the three respective insurers as insurers A, B and C.  They informed the creditors that they had received advice on the various issues that are relevant to assessing whether or not claims were recoverable under the policies but that that advice was, as one might expect, subject to legal professional privilege.

4                     The administrators informed the creditors that the company had notified insurer A of claims and circumstances that might give rise to claims and had sought indemnity for claims settled by the company prior to their appointment.  They said that seven settled claims totalling over $30 million had been submitted to insurer A and indemnity had been sought, but that insurer A had not yet confirmed indemnity for those claims and was continuing to investigate them as well as other claims notified to it under the policies for the years 2006/2007, and for three months in 2007/2008.  The administrators said that insurer A had indicated that there were a number of issues to be investigated before it would be able to assess whether it had any liability under the insurance policies, and it had raised several potential exclusions under those policies which may operate to exclude the claims in their entirety.  There are 33 unsettled claims totalling over $215 million which the administrators had identified as potentially recoverable under the 2006/2007 policy, and one claim that has been identified as potentially recoverable under the 2007/2008 policy.  The limit of indemnity under the earlier policy is $10 million and the limit under the second policy $5 million with a deductible of $250,000 payable for each and every claim exclusive of legal expenses. 

5                     The evidence before me today from a solicitor for the administrators, Ms Markovic, is that on or about 23 October 2007, the company notified insurer A of the council’s claim and other claims and circumstances which had the potential to give rise to claims.  Insurer A has been provided with copies of the pleadings filed in these proceedings and has sought and been provided with information in relation to the proceedings, as well as other claims or potential claims notified to it.  That information is not contained in the report to creditors.

6                     The report to creditors also identified that the company had notified claims and circumstances to insurer B, a United States company, and cover was provided by that insurer under a global arrangement put in place by a related Lehman Brothers company to cover its worldwide operations.  The report said that the policies with insurer B were subject to the law of the United States and that the company had obtained advice from lawyers in that jurisdiction on aspects of the policy and the application of United States law which, again, was subject to legal professional privilege.  The report said that there were a number of complex legal issues and commercial considerations that must be considered in pursuing any claim for indemnity from insurer B, and that it was not presently known whether or not the limits of indemnity for that cover were exhausted by claims made in the United States and or elsewhere against the policy holder for its global operations.  In her affidavit filed today, Ms Markovic, the solicitor for the company has said that it notified insurer B of the council’s claim and other claims and circumstances on about 5 November 2007, and insurer B had been provided with copies of documentation relevant to the council’s claim.  Again, that information was not given to the general body of creditors.  Ms Markovic also deposed that neither insurer A nor insurer B has denied liability to Lehman Brothers in respect of the council’s claim or any other claim notified by the company.

7                     The report to creditors said that the company had not identified any claims that were recoverable under the policy issued by insurer C, a fact confirmed again by the solicitor for the company today.

8                     In the report the administrators concluded:

“In view of the above, we have for the purposes of preparing this report, based our forecasts on the basis that any return from insurance policies held with insurers A, B and C, will be nil.”

They said that if they did receive proceeds from any insurance policies, they would be distributed in accordance with the proposed deed of company arrangement, if it went ahead or in accordance with s 562 of the Corporations Act, in the event that a liquidation ensued.

Lehman Brothers Asia Holdings’ proposal for a deed of company arrangement

9                     One of the matters the administrators discussed in their report was that the creditors might enter a deed of company arrangement as the alternative to liquidation.  The report described a proposal from Lehman Brothers Asia Holdings which had been developed and identified some of its key terms.  One of those terms was that releases were to be given by creditors to Lehman Brothers (the respondent in these proceedings), the directors, company officers and employees of Lehman Brothers, and its affiliated and associated companies, including subsidiaries and Lehman Brothers Asia Holdings.

10                  In other words, one of the proposals of the deed of company arrangement put forward by a related company of Lehman Brothers was that all claims would be released that might otherwise have been able to be made by creditors, such as the council, against Lehman Brothers, its related companies and the directors and officers of Lehman Brothers themselves.  The evidence contains some outline proposed provisions of an amended draft of the deed put forward by Lehman Brothers Asia Holdings.  But, so far as the evidence before me is concerned, there is no formulated proposal with an actual deed setting out potential legal rights that would flow to any party from accepting a deed to be put to the meeting as a deed of company arrangement under Pt 5.3A of the Act.

The Council’s Motion

11                  In the motion the council seeks the following classes of documents, namely:

“(a)      copies of all insurance contract referred to in the report to creditors dated 19 March 2009;  and

(b)                any other professional indemnity or other insurance contracts that may indemnify the respondent, wholly or partly, against the claims by the applicant in these proceedings;  and

(c)                any directors’ and officers’ insurance policies (other than the policies exhibited at Exhibit AKB-7 and AKB-8 to the affidavit of Amanda Kim Banton sworn in support of this Notice of Motion) held by, or for the benefit of, the respondent and its directors and officers covering the period 1 December 2006 to 30 September 2008;  and

(d)                copies of all correspondence between the respondent and its brokers or insurers, recording or relating to the notification of claims or circumstances under the insurance contacts referred to in (a), (b) and (c) above, arising out of the issue of collateralised debt obligations or other securities to the applicant in the period from January 2007 to September 2008;  and

(e)                copies of all correspondence between the respondent and its brokers or insurers, recording or relating to the notification of claims or circumstances under the insurance contacts referred to in (a), (b) and (c) above, between January 2005 and September 2008.”

12                  The council now seeks to defer calling on par (e) but wishes to press immediately for production of documents under pars (a) to (d).  Ms Markovic, as solicitor for Lehman Brothers, has given evidence on information and belief from one of her partners, Mark Waller, who has been assisting in dealing with insurance issues.  Mr Waller informed her that the documents relevant to the insurance claims are voluminous and the file that he maintains in Brisbane in relation to the insurance issues encompass approximately 77 lever arch folders and 61 A4 files.  He asserted that the breadth of the disclosure sought by the council would involve significant resources being devoted to identifying documents that are subject to legal professional privilege and without prejudice privilege and preparing a list of documents to be produced.  No greater detail is given of those assertions.

13                  The council argued essentially that the issue for decision was properly characterised in my summary in Wingecarribee (No 1) [2009] FCA 503 at [10] where  I said:

 “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.”

14                  Section 23 of the Federal Court of Australia Act 1976 (Cth)provides that:

“The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate.”

The inherent or implied power of the Court as a superior court of record constituted under the Act may also give the court additional powers.

15                  Lehman Brothers argues that essentially there are two substantive reasons why there is either no power, or the circumstances of the proceedings are such as to condition and constrain the exercise of any such power.  First, it points to the general principle that the courts have been unwilling to accept that insurance arrangements entered into between parties to proceedings for indemnity in respect of any liability that might be established against those parties in the proceedings are relevant or discoverable in the ordinary course of litigation or having regard to the principles on which discovery is given.

16                  Secondly, Lehman Brothers argues that the provisions of Pt 5.3A of the Act themselves identify a legislative choice made by the Parliament, in the interests of the efficient and timeous conduct of administrations, about the kind of information that creditors are entitled to receive.  First, it contends that the administrators are obliged, in the limited time they have, to provide the creditors with information relevant to their making a choice when voting at the creditors’ meeting on a decision as to the future of the company – that is, principally, whether it should go into a deed of company arrangement or into liquidation.  Secondly, Lehman Brothers argued that the Parliament has provided a creditor, whose position may have been prejudiced by a vote to enter into a deed of company arrangement, with a right of action under s 445D to have the Court terminate that deed.

Consideration – Do the principles as to discovery operate to defeat the Council’s claim?

17                  In Lopez v Star World Enterprises Pty Ltd [1997] FCA 454 (unreported, 18 April 1997) Olney J held that a respondent company that had been placed in administration could be ordered by the Court to make available its insurance policies to the applicant.  He held that after the respondent company had been placed in administration, and was in jeopardy of going into liquidation, the question whether or not there was any insurance indemnity available in the event of liability being established was a matter appropriate to take into account for the purpose of determining whether or not leave to proceed against the company should be given under s 440D(1) of the Corporations Act.  For the purposes of doing justice and to progress the matter in an orderly fashion, Olney J ordered that the respondent company produce for inspection evidence of any relevant insurance policy that it had. 

18                  Lehman Brothers does not suggest that his Honour erred in principle.  But it seeks to distinguish his decision on the ground that those proceedings were brought under Pt IVA of the Federal Court of Australia Act, as representative proceedings. Lehman Brothers argues that the discretionary considerations attaching to the conduct of such proceedings and the fact that there is a large body of potential group members who may be affected, are grounds for confining the exercise of a similar discretion in favour of production of the insurance documents in a case such as the present.

19                  Significantly, however, his Honour held that the Court, as a matter of jurisdiction had power to grant the relief sought.  Lehman Brothers argues, however, that in formulating the limits of this power the Court should be guided by the decision of the Full Court of the Supreme Court of South Australia in Beneficial Finance Corporation Ltd v Price Waterhouse (1996) 68 SASR 19.  In that case, there were solvent defendants.  The evidence established that they would be unlikely to be able to meet more than the costs of a lengthy and highly complicated piece of litigation, in circumstances, were the plaintiff successful, which might result in an award of very substantial damages.  The Full Court held that the defendants could not be required to discover documents relating to their insurance position or otherwise to produce them in accordance with particular rules of the Supreme Court of South Australia.  The Full Court was unanimous in that view, although Cox J dissented on the basis that he felt constrained to follow an earlier decision to the contrary of the Full Court of the Supreme Court of South Australia.  Importantly, in that case, as on the evidence now before me, the insurer had not declined liability under the professional indemnity policy.  There the insurer treated itself as having had a claim made on it, but had not at that stage either admitted or denied liability.  Rather, the insurer was treating the claim as one which might attract liability under the relevant policy.

20                  Perry J accepted that an earlier decision of the Full Court, J N Taylor Holdings Limited (In liq) v Bond (1993) 59 SASR 432, illustrated that an insurer may be properly joined as a defendant, where, first, it had denied liability and, secondly, there was a need to ensure that if the proceedings went ahead, the insurer would be bound by the findings of fact and law that may enliven liability in its insured:  see Beneficial Finance 68 SASR at 28.  However, his Honour concluded that because the insurer was not denying liability under the policy, any attempt to have access to the insurance documents must, in those circumstances, have amounted to nothing more than a fishing exercise designed to reveal whether the documents indicated a basis for the plaintiff seeking a declaration.  He held that the necessity or desirability of a declaration that the insurance responded to the claim could not be demonstrated at that stage.  In that way, he distinguished the earlier decision in J N Taylor 59 SASR 432:  see Beneficial Finance 69 SASR at 36 and at 52-53, Lander J was of a similar view. 

21                  In my opinion, Beneficial Finance 68 SASR 19 is distinguishable.  The current application is not an application for discovery but for production of documents.  I accept that considerations relevant to the issue of discovery may also govern or assist in the formulation of discretionary judgments as to whether documents ought be produced in particular circumstances.

22                  But the present circumstances are that the council is involved in the current litigation and an event has occurred in its course that has given rise to this application being made.  That event is the administration of Lehman Brothers.  No longer is Lehman Brothers the same entity as that with which the council dealt unlike in Beneficial Finance 68 SASR 19, where the plaintiff had to take the solvent defendants as it found them.  The same circumstances that enlivened Olney J’s exercise of discretion to order production in Lopez [1997] FCA 454 have been introduced here by the intervening event of the administration and the consequent, inferred admission that Lehman Brothers is insolvent.

Nature of the jurisdiction and powers of the Court

23                  The power of the Court to require a party to proceedings in which relief is sought against it to disclose its assets has been established authoritatively in Jackson v Sterling Industries Limited (1987) 162 CLR 612.  In the leading judgment, Deane J (Jackson162 CLR at 622-623) discussed the power to make what are now known as Mareva orders (Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 401 [42]) saying that (omitting citations):

“That general power has been held to encompass an order requiring the disclosure by a defendant of his assets  … As a general proposition, it should now be accepted in this country that "a Mareva injunction can be granted ... if the circumstances are such that there is a danger of [the defendant's] absconding, or a danger of the assets being removed out of the jurisdiction or disposed of within the jurisdiction, or otherwise dealt with so that there is a danger that the plaintiff, if he gets judgment, will not be able to get it satisfied".”

24                  The other members of the High Court agreed with that approach:  Jackson 162 CLR at 616 per Mason CJ, at 617 and 619 per Wilson and Dawson JJ.  Indeed, Wilson and Dawson JJ said that the purpose of the grant of a Mareva order is to prevent the abuse of the process of the Court by frustration of its remedies.  The power could be exercised for purposes including to prevent a defendant from removing assets in order to defeat a judgment:  (Jackson162 CLR at 617).  They explained that the power (Jackson 162 CLR at 619):

“... exists not to create additional rights but to enable a court to protect its process from abuse in relation to the enforcement of its orders. It is neither a species of anticipatory execution nor does it give a form of security for any judgment which may ultimately be awarded.”

25                  Likewise, Brennan J, in agreeing, explained that the remedy was incidental to the exercise by the court of its jurisdiction to enter judgment for a debt or damages and was designed to prevent the defendant from divesting himself of his assets whereby enforcement of such a judgment might be frustrated (Jackson 162 CLR at 621).

The statutory scheme in Part 5.3A of the Corporations Act

26                  There is no suggestion here that the administrators have the purpose of interfering with or frustrating the ordinary execution of the Court’s orders.  But, the effect of implementation of a deed of company arrangement, as opposed to a liquidation, can radically affect the ordinary rights of creditors.  In a liquidation their rights would be converted into a right to prove in the liquidation which may be different to their rights under a deed of company arrangement.  Indeed, some of the proposed terms of Lehman Brothers Asia Holdings’ deed to which I have referred, such as the release of rights against third parties including directors and officers, could have a significant and adverse affect on a creditor being able to enforce its ordinary remedies.  In addition, the suggested deed of company arrangement will make provision for the distribution of whatever entitlements may be available to creditors that would otherwise have had rights in respect of insurance policies, such as those written by insurers A, B or C that might respond to the various claims.  Those proposals include ones affecting the creditors rights to proceed directly against insurers under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) or against the directors and officers of Lehman Brothers or their insurers.

27                  I am of opinion that the Court’s power to require Lehman Brothers to produce the insurance documents is found in s 23 and the inherent or implied power of the Court to do justice in a matter before it.  It is an important part of the Court’s ordinary processes to permit litigants before it to have effective remedies and the means, if appropriate, of enforcing them when orders are made.

28                  In a case where administration under Pt 5.3A or liquidation intervenes and so affects the rights of an applicant or plaintiff against a party sued by it for relief, the court must be careful to ensure that it both maintains the statutory scheme for administration of insolvent companies and preserves such rights that the plaintiff or applicant may otherwise possess that might exist outside that scheme or that might be arguably said to exist outside that scheme.  One such right is, of course, the independent right given by s 6 of the Law Reform (Miscellaneous Provisions) Act.  That provision creates a charge in circumstances where a person in Lehman Brothers’ position has entered into a contract of insurance by which they are indemnified against liability to pay damages or compensation.  That Act provides that the amount of that liability, will be a charge on all insurance moneys that have become payable in respect of the liability on the happening of the event (that is at a time before action is brought in the ordinary course) giving rise to the claim for compensation or damages, and notwithstanding that that claim may not have been quantified or determined.  And, s 6(4) provides that every such charge is enforceable by an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured.

29                  Accordingly, the council argues that it has a current, potential right to bring proceedings against insurers A, B or C, provided that they have policies to which the claims made by the council in these proceedings respond, and that they may do so in this proceeding.

30                  The basis on which Lehman Brothers argues, however, that the council should not be permitted access to the insurance documents, is that such access would cut across the policy of Pt 5.3A of the Corporations Act.

31                  The objects of Pt 5.3A are to provide for the business, property and affairs of an insolvent company to be administered in a way that first, maximises its chances, or those of as much as possible of its business, to continue in existence, or, secondly, 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 of the company (s 435A).  So under ss 439A(3) and (4), the administrator must convene meetings of creditors and provide documents to the creditors with a report to enable them to vote on the company’s future.  Among other things, the report by the administrator must deal with the company’s business, property, affairs and financial circumstances.  The administrator must also provide a statement setting out his or her opinion about whether it would be in the creditors’ interests for the company to execute a deed of company arrangement, for the administration to end, or for the company to go into liquidation.  In addition, the report must set out the administrator’s reasons for those opinions, and “… such other information known to the administrator as will enable the creditors to make an informed decision about” each of the options covered above (s 439A(4)(b)).

32                  In addition, a creditor who seeks to challenge the appropriateness of a deed of company arrangement may apply to the court to have it terminated on the grounds set out in s 445D.  Those grounds include, first, a power for the Court to terminate the deed if it is satisfied that information given to the administrator or to the creditors concerned about the company’s business, property, affairs or financial circumstances was false or misleading and could reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution for the company to execute the deed (s 445D(1)(a)).  Secondly, the deed can be terminated if misleading information was contained in a report or statement under s 439A(4), leading to the resolution being passed (s 445D(1)(a)), or, thirdly, that there was an omission from such a report or statement that could reasonably be expected to have been material to the creditors in their decision-making (s 445D(1)(b) and (c)).  Further bases for termination of a deed under s 445D(1) is that effect could not be given to the deed without injustice or undue delay, or that, in substance, the deed or one of its provisions or an act or omission done or made under it, or proposed to be done or made, was oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more creditors, or contrary to the interests of the creditors of the company as a whole, or for some other reason (see s 445D(1), (d), (e), (f) and (g)). 

33                  Thus, there is a wide basis for a creditor who is disappointed with the decision to enter into a deed of company arrangement, to seek to have it set aside if, in some way, there has been incomplete information provided to creditors for the purposes of them voting on the proposed deed, or, relevant prejudice or unfairness could be demonstrated.

34                  Lehman Brothers argues that when one considers the objects and comprehensive nature of the provisions in Pt 5.3A, it is clear that the Parliament intended that creditors, including persons in the council’s position, would be given recourse to the information and remedies provided in Pt 5.3A itself rather than that they be permitted to pursue to their conclusion, other rights and remedies before having to vote on the company’s future at the second meeting of creditors.  Indeed, Lehman Brothers argues that the stay of, then, current proceedings provided in s 440D reinforces such a construction.  It argued that this is because s 440D contemplates that the ordinary course of an administration will require all proceedings against the company in a court to be stayed unless one of the exceptions in the section is satisfied.  Lehman Brothers argued that this stay enables the creditors and the administrators to concentrate on propounding a course for the future of the company within the confines and ambit of Pt 5.3A.

35                  Consequently, Lehman Brothers argues that it would be important to have regard to the objects of Pt 5.3A in construing the ambit of the power, and in exercising any discretion to order documents to be produced of the kind sought by the council here.  It says that the adventitious existence of current litigation in the ordinary course could not be a sufficient reason to allow a party to that litigation to seek remedies in those very proceedings against the company for the purposes of advancing itself in relation to the conduct of the future of the administration.  It contends that the rights of creditors are to be seen as restricted because of the stay in s 440D, and the recognition in s 439A(4) of limitations in the material and information which may be available to all creditors when they come to vote on any proposal put forward by the administrators at a meeting in accordance with their report and statements under s 439A(4).

36                  Lehman Brothers argues that this puts all persons affected by the administration on equal footing, and that in principle it would not be appropriate to make an order favouring one particular creditor merely because that creditor is involved in current, but stayed, litigation.  Lehman Brothers contends that, to the extent that that creditor’s interests may be adversely effected by any vote that takes place on the administrator’s recommendations or at the meeting, that creditor may have a remedy under s 455D.

Consideration – The relevance of Part 5.3A of the Corporations Act 

37                  I am of opinion that the purposes of Pt 5.3A are relevant and do inform the exercise of the Court’s discretion in this application to order production of documents of the kind sought.  However, those purposes do not deny to the Court power properly to control and determine what orders it ought make in each particular case in the interests of the administration of justice, pursuant to its powers under s 23 of the Federal Court of Australia Act, or in its inherent or implied jurisdiction to ensure the protection of its process from any abuse:  cf:  Cardile 198 CLR at 396 [33].  The power of the Court to prevent abuse of its process comprehends a power to protect the integrity of its processes once set in motion.  That includes the power to preserve the efficacy of the execution that would lie against a prospective judgment debtor.

38                  The protection of the processes of the Court and the administration of justice which this involves may, in a proper case, extend to asset preservation orders against third parties to the principal litigation:  Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256  at 265 per Gleeson CJ, Gummow, Hayne and Crennan JJ (citing from the joint judgments of Gaudron, McHugh, Gummow and Callinan JJ in Cardile 198 CLR at 395 [25] and in CSR Ltd v Signa Insurance Australia Limited (1997) 189 CLR 345 at 391).

39                  In my opinion, the question whether there is insurance that, in fact, responds or there may be a charge that the council is entitled to under s 6 of the Law Reform (Miscellaneous Provisions) Act are matters which it is entitled, as a litigant in this Court, to know in the interests of justice before it has to determine what it will do in Lehman Brothers’ second creditors meeting.  It is not the council’s fault that the accident of insolvency and administration has overtaken Lehman Brothers in the course of this litigation.  Rather, it is a circumstance which must be taken into account.  I am also conscious that very substantial debts are owed to related companies of Lehman Brothers.  Those companies are aware of, at least, some of the insurance arrangements the subject of the council’s present application, because they are parties to those policies.

40                  Part of the relief claimed by the council in the principal proceedings is in relation to allegedly misleading statements by Lehman Brothers.  In those circumstances, one Lehman Brothers’ related company is proposing a deed of company arrangement that would have the effect, on the evidence before me, of seeking to destroy the creditors’ right to sue directors and officers of the company for breaches of their obligations.  Such a right may be capable of being enforced directly against the directors and officers in an action under the Trade Practices Act 1974 (Cth) or its analogues in State Fair Trading Acts:  Houghton v Arms (2006) 225 CLR 553 at 566-567 [40]-[42] per Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ.

41                  The council is also in the position where its vote at the proposed meeting of creditors is, because of the administrators’ current view, likely to be admitted at merely nominal value, whereas, the other parties who may benefit in that meeting, such as the related Lehman Brothers companies, have debts that will be available to vote for their full value of about $180 million, on a proposal they are seeking to put forward and commend to the other creditors.  That may all have a dramatic impact on the rights and recourse of the council, were it successful in this litigation, in the event that the proceedings were permitted to continue having regard to the terms of the deed or any subsequent orders made by the Court granting the council leave to proceed to final hearing against Lehman Brothers.  The grant of any such orders may, in themselves, be affected by the existence of insurance that, prima facie, does respond.

42                  Lehman Brothers has made claims on insurers A and B with respect to these proceedings.  The information available to the council, as an ordinary incident of an administration under Pt 5.3A, is less than other creditors involved in this very administration, such as the related Lehman Brothers companies.  While that is a result contemplated by the Parliament as potentially possible, the questions arise whether there will be potential or actual prejudice to the council in these proceedings of rights that may be valuable in the event that the council were able to succeed in obtaining a judgment in its favour.

43                  These factors suggest to me that the council should not be deprived of the opportunity of informing itself whether it can, and should, bring proceedings now under s 6 of the Law Reform (Miscellaneous Provisions) Act to preserve its entitlement against any insurance that does in fact respond, at least arguably, to its claims and to protect its position for the purposes of avoiding or minimising any adverse effect of the administration on its remedies in these proceedings.

44                  The effect of the administration, as Pt 5.3A contemplates, will be to bind all creditors, including the council, in the event that a deed of company arrangement is entered into and is not terminated.  Because that may produce outcomes that possibly may impact on the conduct of the current proceedings in a way that is not necessarily the same as in the ordinary course of every other piece of litigation, I am of opinion that it is appropriate to require production of the insurance information sought having regard to considerations to which I have referred:  Jackson 162 CLR 612;  Batistatos 226 CLR 256;  Lopez [1997] FCA 454.

What should be produced?

45                  The width of what the council seeks, beyond the existence of the policies and the notification of claims made both by it and others, at the moment, on the material before me, seems excessive.  Provision of all correspondence covered in par (e) of the motion, appears to me to be capable of involving oppression of the administrators.  In the current circumstances on the (not particularly satisfactory) evidence before me, there is a very large amount of documentation, which must be considered, including for the purposes of claims for legal professional privilege and without prejudice privilege, before it can be released.  These materials may also involve documents that have other aspects perhaps requiring redacting for confidentiality purposes.  As a matter of commonsense, I do not think I should impose the burden of compliance with a requirement such as in par (e), in the few days currently available.

46                  However, I am of opinion that the copies of the insurance policies, referred to in the report to creditors, can and ought be produced.  There is no oppression in identifying what they are.  That has been put forward in the evidence.  It is clear that they are available and their locations must be known.  There is no evidence from Lehman Brothers about any other professional indemnity or other insurance contracts that may indemnify Lehman Brothers as referred to in par (b).  There is no evidence that there will be any difficulty in producing those policies if any exist.  I think that such policies are unlikely to exist having regard to the administrators’ report to creditors not identifying any such policies. They have no doubt diligently sought to perform their duties.  However, I will order that any such documents as exist be produced.

47                  The directors and officers insurance policy is directly at threat by the proposal in Lehman Brothers Asia Holdings’ draft deed of company arrangement, referred to in the administrators’ report.  Prima facie, for the protection of the integrity of the process of this Court and the possible actions which the council may have, I am of opinion that ought to be produced.  In addition, it may or may not provide a source for a settlement that may be able to be applied, among other things, in an administration.  Again, I am satisfied that there is no difficulty in the Lehman Brothers being required to produce the notifications, to insurers A and B, that were made in late 2007, referred to in its solicitor’s affidavit.

48                  Lehman Brothers argues that it is oppressive to require it to produce all correspondence between it and its brokers or insurers, relating to the notification of claims or circumstances under insurance contracts A, B, and C, arising out of collateralised debt obligations or securities, to the applicant in the period.  I am not able to see that that is so.  As I understand par (d), it relates to issues connected to the applicant council.  However, I am of opinion that I should allow more time for a relevant search and consideration of issues, such as privilege and redaction for confidential commercial material, to be taken for the production of those documents, than the others.

Should the solicitor for the Council have access?

49                  Last, there is an issue as to whether the solicitor for the council should be allowed to have access to these documents.  She gave evidence that she acts for over 30 other councils, which are considering bringing similar or related claims against Lehman Brothers.  The implied obligation or undertaking, as to confidentiality, is an important adjunct to the administration of justice in proceedings.  The implied undertaking is a formula by which the law ensures that no harsher or more oppressive burden is placed on litigants or persons who produced documents than is necessary to do justice in the proceedings, at the stage they have reached.  Persons who give discovery or produce documents under compulsion can suffer a very serious invasion of the privacy and confidentiality of their affairs:  Hearne v Street (2008) 235 CLR 125, at 158-159 [107] per Hayne, Heydon and Crennan JJ.

50                  There is a public interest in preserving the ordinary confidentiality that attaches to production of documents under compulsion by the Court.  It is the circumstance that Lehman Brothers is, in fact, a party to this litigation, which attracts the jurisdiction and, ultimately, the exercise of my discretion, to order production of the documents the council has sought.  I do not see, at the moment, any reason why the council should be relieved of the constraint, imposed in the implied undertaking to keep confidential and to use the documents only for the purposes of these proceedings and to assist it in determining its position for the adjourned second creditors’ meeting.  The council’s ability to use the information in the documents to be produced extends to include, in my view, informing itself as to how it ought approach voting on any proposals for a deed of company arrangement, or liquidation, of Lehman Brothers, since those matters affect its entitlement to enforce, or may affect its entitlement to enforce, any judgment and the quantification of that judgment. 

51                  I am of opinion that there is good reason to suppose that if Ms Banton is given access to the documents that I have ordered be produced, she will be placed in an impossible position as a fiduciary with the knowledge that she will gain of their contents in advising or dealing with persons who are her other clients.  I think that I should afford the parties an opportunity to discuss and formulate an appropriate order that enables a person who would be bound by the implied undertaking, or may give express undertakings, who can advise the council, but will not be able to be involved in giving advice to or communicate with the other clients of Ms Banton’s.  Whether that person is independent entirely of the solicitors for the council or a person who, through the use of Chinese walls, can discharge that function, I think I should leave for the parties to discuss in the first instance.

52                  Finally, Lehman Brothers has asked that any order I make be stayed for 24 hours to enable it to consider its position as to whether it would wish to seek leave to appeal from my decision.  I think that is a reasonable request.  The reason I have given my judgment now is because of the urgency and the need, if any party wishes to challenge my decision, that they have some opportunity to do so and I would not wish to frustrate that.

Associate:

Dated:         21 May 2009