Federal Court abolishes the Peak Indebtedness Rule

Federal Court abolishes the Peak Indebtedness Rule

In the recent decision of Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in Liquidation) (Receivers and managers appointed) [2021] FCAFC 64 (“Gunns”), the full Federal Court determined that liquidators should no longer apply the peak indebtedness rule to unfair preference claims.

Under section 588FA(3) of the Corporations Act 2001 (Cth) (“the Act”), where a transaction is, for commercial purposes, an integral part of a continuing business relationship, such as a running account between the company and creditor, then all transactions forming part of the relationship are taken to constitute a single transaction. Previously, a liquidator could select the highest point of indebtedness during the relation back period and deduct the amount of the debt at the time of the company’s liquidation to determine the amount recoverable as an unfair preference – also known as the peak indebtedness rule. By applying the peak indebtedness rule, liquidators could maximise the amount recoverable where there was a continuing business relationship between the company and creditor.

The peak indebtedness rule originated in Rees v Bank of New South Wales (1964) 111 CLR 210, where Barwick CJ stated at [220-221]:

In my opinion the liquidator can choose any point during the statutory period in his endeavour to show from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of peak indebtedness of the account during the six months period”.

In the Gunns case, the Federal Court unanimously found that the peak indebtedness rule no longer had any application to section 588FA of the Act. In reaching this decision, the Federal Court determined that:

  1. the plain language of the statute and the legislative material both support the contention that the peak indebtedness rule was not intended to apply in the context of section 588FA(3) of the Act;[1]
  2. the peak indebtedness rule is not consistent with the doctrine of ‘ultimate effect’ which recognises that the general body of creditors are not disadvantaged by payments made to induce trade creditors to supply goods of equal or greater value;[2] and
  3. the abolition of the peak indebtedness rule is consistent with the stated purposes of Part 5.7B of the Act which is, in essence, to do with fairness between unsecured creditors.[3]

The decision in the Gunns case means that liquidators will now have to asset the net result of all dealings between the creditor and the company. This will have a significant impact on quantum of claims made by liquidators.

If you have been contacted by a liquidator seeking to enforce an unfair preference claim against you, you should seek immediate independent legal advice. Our RCR Lawyers are skilled in the area of insolvency law and can help you to determine the best approach to dealing with such claims. Speak with one of our dedicated insolvency lawyers today:

NSW: 02 9307 8900 – [email protected]

QLD: 07 3009 8900 – [email protected]

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[1] Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in Liquidation) (Receivers and managers appointed) [2021] FCAFC 64, [112].

[2] Ibid [114].

[3] Ibid [119].
The blog published by Rostron Carlyle Rojas is intended as general information only and is no legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

 

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June 24, 2022 |

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