The Liquidators for Lehman Brothers Australia (LBA) are still seeking a tax ruling from the ATO and this remains the impediment to paying out any further dividends from the LBA estate. The tax problem arises from actions taken by LBHI (the US parent entity within the Lehman Group of companies) that caused a technical re-organisation of LBA in 2015. Under Australian tax law, this technical re-organisation has resulted in LBA’s tax loss carry-forwards as a result of its 2008 bankruptcy being threatened.
LBA has contested this ruling as the purpose of the tax laws was to prevent offshore companies re-organising themselves to prevent (or minimise) the payment of corporate tax on profits generated in Australia. LBA appears to have unwittingly been captured under the legislation having breached “the same business test” even though it was in bankruptcy and not trying to avoid tax. The issue for the ATO appears to be providing a ruling that allows LBA to recover its tax losses but without setting a precedent that can be used by other companies trying to circumvent the legislation and avoid paying tax in Australia.
It is unclear as to when this issue will be resolved. Without any particular insights, Amicus suspects the ATO is currently distracted at a corporate level by the more pressing issues associated with COVID-19 such as JobSeeker and JobKeeper payments and cash boost tax refunds for small businesses as well as financial year end matters.
In other positive news, LBA has won its court case against LBIE over a documentation error in the settlement agreement resolving a previous claims dispute. PWC (the liquidators for LBIE) have lodged an appeal, but this appeal has been denied by the lower courts and PWC are currently looking to lodge an appeal at the higher court. This dispute if successfully resolved should free up AUD 7 million for distribution to creditors when the next dividend is paid.
Our understanding is the Federation issue is also still unresolved, although LBHI continues to make statements indicating it will agree to drop the case against LBA. However, this has been an ongoing pattern and Amicus is not confident LBHI will drop the dispute. Although the dispute has no real meritocratic basis, it ties up AUD 20 million of cash in the estate until it is resolved.
We believe LBA has or will receive shortly a tax refund from HMRC (Her Majesty’s Revenue and Customs – the UK equivalent of the ATO), but this is a relatively small amount.
Disappointingly, when we review this progress against our last update to clients in April 2019, progress has been less than we hoped. Issues we believe have been resolved since last year include recovery of the Dante monies from BNY, sale of some minor claims to LBHI and an in principle resolution of the waterfall of claims with LBHI regarding LBAH and LBAF (two small companies withing the Lehman group where both LBA and LBHI had an interest) pending resolution of the tax issues. However, the major issues of the dispute with LBIE, the Federation claims made by LBHI and the tax ruling are all still outstanding as they were a year ago.
Positively, the commitment made to pay a dividend to creditors once the tax issue with the ATO is resolved remains in place, so unless there is a change of heart by the Liquidator this is the major issue creditors should be focusing on.
Lastly, we understand the Liquidator will be issuing an update to creditors in the near future. Obviously if anything in that update differs from Amicus’ understanding due to recent progress, investors should assume the Liquidator’s report is the most current.
