On 8 February 2023, the High Court of Australia delivered its judgment in the case of Bryant & Ors v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, concerning the long-standing “peak indebtedness rule”, specifically the application of a running account on unfair preference claims brought by liquidators. Her Honour Jagot J identified three key questions in the delivery of the Court’s judgment, being:
- Is the peak indebtedness rule included or excluded by section 588FA(3) of the Corporations Act 2001 (Cth) (“the Act”) (per [9])?
- What is the proper approach to determining whether a transaction is “an integral part of a continuing business relationship”, as referred to in section 588FA(3)(a) of the Act (per [10])?
- Were certain payments from Gunns to Badenoch an integral part of a “continuing business relationship” between the two entities (per [11])?
The case involved the liquidators of a company, Gunns, who sought to have a series of payments made by Gunns to the respondent, Badenoch, declared voidable on the basis that they were unfair preferences. The liquidators sought orders in accordance with section 588FF(1) of the Act for repayment of the preferences. The liquidators submitted that, on the basis of a “continuing business relationship” between Gunns and Badenoch, they were entitled to choose the starting date under the peak indebtedness rule within the relation-back period to prove the existence of an unfair preference payment given by Gunns to Badenoch.
In response to her Honour’s first question above, the High Court dismissed the appeal and held that Part 5.7B of the Act, dealing with voidable transactions, does not incorporate use of the “peak indebtedness rule.” Her Honour determined that the construction of section 588FA specifically does not provide for, or give effect to, the peak indebtedness rule (per [69]).
In response to her Honour’s second question, the Court held that the determination of whether a transaction is an integral part of a continuing business relationship under section 588FA(3)(a) involves an objective factual inquiry into the “business character” of the relevant transaction, the relationship between, and intention of, the parties to those transactions.
Applying those principles to the facts, and in answering her Honour’s third question, the Court confirmed that only two of the payments (payments 3 and 4 made by Gunns) were made as an integral part of a continuing business relationship involving a running account, while the remaining payments (payments 1 and 2 and 5 to 11) were not.
The Court also held that to be an unfair preference, the deemed single transaction under section 588FA(3) – treated as all transactions forming part of the relationship during the relevant period – must reduce the indebtedness of Gunns to Badenoch over that period. Given the net indebtedness of Gunns to Badenoch increased over the relevant period, there could be no unfair preference. This ruling clarifies that the running account principle does not itself create the instance of an unfair preference, but instead, requires an examination of the overall financial position and transactions between the parties to determine whether a transaction is an unfair preference.
This decision provides important guidance for practitioners in the field of insolvency, as it clarifies the operation of s 588FA(3) of the Corporations Act and the application of the running account principle in the context of insolvency. It is also significant for creditors and debtors, as it provides clarity on the circumstances in which transactions may be declared voidable on the basis of being an unfair preference.
Her Honour noted that any previous case, concluding that the peak indebtedness rule ought to be read within section 588FA(3) of the Act, has:
- incorrectly applied the peak indebtedness rule as a part of the running account principle; and
- did not consider a full argument or reasoning of that issue, or must now be considered wrong on that issue (per [76]).
The High Court’s decision in these proceedings highlights the need for a nuanced, fact-specific approach in determining, on a case-by-case basis, whether transactions are “integral parts of a continuing business relationship” and whether such transactions may be considered unfair preferences in the context of insolvency.
A copy of the judgment can be found here.
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