Local councils which invested millions of dollars with Lehman Brothers stand to get up to half their money back under a proposal that would return almost $210 million to the failed investment bank's clients.
Lehman's creditors have been embroiled in a long-running legal stoush about complex debt securities sold by the bank in Australia before its collapse in 2008.
Last year the Federal Court found Lehman had breached its fiduciary duty to investors by selling the products, and now liquidators and litigation-funder IMF (Australia) have agreed on a proposal to divide up what is left of Lehman's assets in this country.
Clients including councils, charities and churches will share an estimated settlement of about $210 million, equal to between 39.9¢ and 49.2¢ in the dollar, IMF said. The proposal still has to be approved by creditors, including some related parties to Lehman, and by the Federal Court.
IMF (Australia) executive director John Walker said the deal was "pretty close" to the best that councils could expect from Lehman Australia, and he expected them to back the deal.
However, he suggested related-party creditors within the Lehman group might raise concerns about the proposal after previously offering councils a much smaller amount.
"My guess is that it won't be client creditors that will be an issue; it may be related-party creditors," Mr Walker said.
Councils involved in the case against Lehman have included Wingecarribee and Parkes shire councils in NSW, and Western Australia's City of Swan.
The toxic assets at the heart of the dispute were synthetic collateralised debt obligations, which Federal Court judge Steven Rares said were "highly complex financial instruments, underpinned by equally complex, and at points arcane, legal documentation to give them effect".
For the latest proposal to become effective it must be approved by 75 per cent of each class of creditor, by value.
Mr Walker said Lehman Brothers Asia still had the capacity to repay 100¢ in the dollar to councils, and he argued that Lehman Asia was knowingly involved in selling the assets to councils. IMF had taken early steps towards taking an action against Lehman Asia in Hong Kong, but it had not yet filed a claim, he said.