Local councils have won the right to pursue insurance payouts from policies belonging to failed US investment bank Lehman Brothers.

The Federal Court this month ruled against the validity of a deed of company arrangement that had blocked the councils from chasing claims against Lehman.

Many councils, including WA’s Swan Council and NSW shires Parkes and Wingecarribee, lost millions after investing in collateralised debt obligations arranged by the firm.

Local councils launched legal action after they were deemed “contingent creditors” under the deed, with an offer of between 2-13 cents in the dollar. Related-party creditors were offered between 47.8-100 cents in the dollar.

Litigation funder IMF Australia last week welcomed the court’s decision.

“IMF will now fund those councils and other parties in litigation to recover monies lost when they invested in collateralised debt obligations arranged, issued and promoted by those Lehman entities,” the company said.

IMF had earlier criticised the deed for creating unfair prejudice against contingent creditors, who include charities, churches and universities.

The company says liquidation is likely to provide better returns to those investors.