Lehman Brothers Australia Ltd v MacNamara & Ors

Factual and Procedural Background

This appeal was brought by Company A against the dismissal of its application for directions in the administration of Company B. Company A, incorporated in The State, was part of a global group and entered liquidation in October 2009. Company A sought a direction requiring the administrators of Company B to increase its agreed proof of debt by approximately 1.67 million to a total of just over 25 million. The agreed proof of debt had been established under a claims determination deed (CDD) dated 12 March 2014, entered into between Company B’s administrators and Company A’s liquidators. It was common ground that the agreed proof amount was understated due to a mutual clerical error by both parties acting on behalf of the administrators and liquidators. Company A did not seek rectification of the CDD as a remedy, acknowledging it was unavailable.

Company A’s application for directions was dismissed by Judge Hildyard. The appeal challenges this dismissal.

Company B entered administration by a High Court order on 15 September 2008. Subsequent court orders permitted the administrators to notify unsecured creditors of proposed distributions and to make such distributions, activating the statutory insolvency rules governing claims and distributions. Due to the scale and complexity of Company B’s business and claims, the administrators developed an optional claims determination process using standardised legal agreements (CDDs) to agree claims more efficiently, reducing costs and accelerating distributions.

Company A’s CDD was one such standard form agreement, setting out a final and mutual release of claims in exchange for an agreed claim amount, which was admitted as proof of debt and paid in full. However, a clerical error in a spreadsheet caused Company A’s claim relating to a bond denominated in euros to be incorrectly recorded as Australian dollars, undervaluing the claim by approximately 1.67 million. This error was not detected until 2016, after which Company A requested the administrators to amend the proof of debt to reflect the correct amount. The administrators declined, relying on the mutual release and finality provisions in the CDD.

Company A then applied to the court for directions to correct the agreed proof of debt. The application was dismissed by Judge Hildyard, who held that the court could not interfere with contractual rights freely entered into absent rectification or invalidation of the contract.

Legal Issues Presented

1. Whether the court may, under its inherent jurisdiction or paragraph 74 of schedule B1 to the Insolvency Act 1986, direct administrators to vary an agreed proof of debt where a mutual clerical error has caused an understatement, despite the existence of a binding claims determination deed.
2. The proper test for intervention under the principle in Ex parte James: whether it is "unconscionability" or a broader standard of "unfairness".
3. Whether the principle in Ex parte James and paragraph 74 can be applied to override contractual rights freely entered into by both parties.
4. The application of the above principles to the facts of the present case.

Arguments of the Parties

Appellant's Arguments

• The agreed proof of debt was understated due to a common clerical error made by both administrators and liquidators, and thus the agreed amount did not reflect the true entitlement.
• The court should exercise its jurisdiction under the principle in Ex parte James or paragraph 74 of schedule B1 to correct the error and require the administrators to admit the correct amount.
• The CDDs were not ordinary commercial contracts but instruments to facilitate statutory functions of administrators in distributing the estate, and thus strict legal rights under the CDD should be assessed in that context.
• Correcting the mistake would not undermine the purpose or finality of the CDDs, nor open the floodgates to reopening settled claims, as the error was a shared clerical mistake.
• The administrators, as officers of the court, are held to higher standards of conduct and should not enforce strict legal rights that perpetuate a shared mistake.

Respondent's Arguments

• The CDDs were entered into to achieve certainty and finality in claims, enabling cost-effective and timely distributions, and included mutual releases of all other claims.
• Allowing the appeal would undermine the purpose and value of the CDDs and potentially allow other counterparties to reopen their entitlements.
• The administrators’ refusal to amend the agreed proof of debt was consistent with contractual rights freely entered into by sophisticated parties who had legal advice.
• The principle in Ex parte James and paragraph 74 should not be applied to override clear contractual rights in a full and final settlement.
• Applying the court’s jurisdiction to restrain administrators but not creditors would create an unfair one-sided application.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed review of the principle in Ex parte James and its development over time, concluding that the appropriate test for intervention is one of objective unfairness rather than the stricter standard of unconscionability. The court rejected the lower court’s view that contractual rights freely entered into by parties are immune from interference under the principle or paragraph 74 of schedule B1 to the Insolvency Act 1986.

The court emphasised that administrators, as officers of the court, are held to higher standards of conduct and may be restrained from insisting on strict legal rights if doing so would be unfair. Paragraph 74 provides a statutory basis for relief where an administrator’s conduct unfairly harms a creditor.

Applying these principles to the facts, the court noted the mutual clerical error that understated Company A’s claim by approximately 1.67 million. This error was admitted by both parties and related to the incorrect currency denomination of a bond. The court found no legitimate reason why the administrators should not correct this mistake, as doing so would not undermine the purpose of the CDDs, which was to facilitate efficient and final distributions, nor would it open the floodgates to reopening settled claims.

The court rejected the administrators’ arguments that enforcing the strict contractual amount was appropriate to preserve certainty and finality, or that intervention would unfairly restrain administrators but not creditors. It held that correcting the mistake would not cause unfair harm to other creditors or the estate, as Company A would receive no windfall but only its true entitlement.

Accordingly, the court concluded that Company A was entitled to relief under both paragraph 74 and the principle in Ex parte James, and allowed the appeal.

Holding and Implications

The court’s final decision was to ALLOW THE APPEAL, overturning the dismissal of Company A's application and directing that the administrators amend the agreed proof of debt to reflect the correct amount inclusive of the clerical error.

This decision directly impacts the parties by requiring the administrators to acknowledge and admit the increased claim amount. No broader precedent was established beyond clarifying that the principle in Ex parte James and paragraph 74 of schedule B1 can apply to restrain administrators from enforcing strict contractual rights where a mutual mistake causes unfairness. The ruling affirms that administrators, as officers of the court, must act in accordance with standards of fairness and may be required to correct shared errors even in the context of final settlement agreements.