Adjusting Creditor Rights Against Third Parties During Debt Restructuring

Debt restructuring procedures aim to achieve a compromise between the needs of the debtor and its creditors. It is common for business to be conducted using group structures with related parties potentially exposing themselves to broad claims upon the debtor’s insolvency, usually in a false hope of reparations. Enterprise groups may seek a global resolution to their disputes by proposing settlement arrangements that will address claims against the primary debtor as well as potential claims against related third parties. Recent decisions concerning the collapse of Lehman Brothers Australia and other complex financial firm insolvencies offer contrasting approaches to the question of whether a formal restructuring procedure (such as a scheme of arrangement or a deed of company arrangement) can include rights that creditors have against third parties. This article considers the potential scope and effect of these decisions and suggests that other mechanisms may also be available, particularly the long-standing but little used section 510 arrangement under voluntary liquidation. A review of decisions in the US, Canada, New Zealand and England on the issue is also included to provide guidance as how the Australian law may develop in the future