On 10 May 2021 in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq)(receivers and managers apptd)[i] the Full Court of the Federal Court of Australia abolished the application of the Peak Indebtedness Rule to a running account ‘single transaction’ under section 588FA(3) of the Corporations Act 2001 (Cth) (the Act) in unfair preference claims.
The effect is that Liquidators can no longer maximise the return on such an unfair preference claim by valuing the section 588FA(3) ‘single transaction’ by reference to the highest point of indebtedness.
The Liquidators of Gunns Limited (Gunns), a major forestry public company founded in 1875, commenced proceedings against Badenoch Integrated Logging Pty Ltd (Badenoch), a family-owned regional logging and haulage business, alleging eleven payments totalling approximately $3.6 million received from Gunns in the ‘relation-back period’ were unfair preference payments under section 588FA(1) of the Act.
Badenoch relied on the running account (section 588FA(3)), good faith (section 588FG) and set off (section 553(c)) defences under the Act. Further, Badenoch disputed the Liquidators’ application of the Peak Indebtedness Rule to the valuing of the running account ‘single transaction’ as an unfair preference payment.
The primary judge, Justice Davies, found in favour of the Liquidators, save that two of the eleven payments were held to be part of the ‘continuing business relationship’ between Gunns and Badenoch and, accordingly, were subject to the valuation of the ‘single transaction’ under section 588FA(3) of the Act.
On appeal, the Full Court re-considered:
The Continuous Business Relationship Principles
The running account defence under section 588FA(3) provides that where:
then all transactions forming part of the relationship are taken as one ‘single transaction’ for the purposes of valuing the amount of the unfair preference.
The Full Court provided clear guidance on eight factors to consider when determining whether a payment was part of a continuous business relationship:
In its consideration of these eight principles, the Full Court determined the first four of the eleven payments made by Gunns were part of a continuing business relationship. Thereafter, following a letter of demand containing a proposal and subsequent variation to the agreement between the parties (which fundamentally changed the nature of the relationship), the mutual assumption of a continuous business relationship between the parties had ceased.
Peak Indebtedness Rule
The Court then considered how the value of the single transaction should be calculated.
Both parties agreed that the relevant end date for the single transaction was either (a) the cessation of the continuing business relationship or (b) date of liquidation, whichever was earlier.
The issue was when the single transaction was said to begin:
The Full Court: a) overturned the decision of the primary judge; b) rejected the decision of Olifent[ii]; c) determined previous authorities were wrongly decided; and d) agreed with the New Zealand Court of Appeal in Timberworld[iii] and abolished the application of the Peak Indebtedness Rule to section 588FA(3) for three reasons:
The Full Court noted that the arbitrary timing of a single transaction in the absence of the Peak Indebtedness Rule may also result in unfairness, as liquidators may be less inclined to pursue preferences as the amount to be recovered may not justify the time and expense involved, resulting in a lower return to creditors.
Nonetheless, the Full Court concluded that there was a degree of arbitrariness or unfairness inherent in either approach but that the balance weighed in favour of not applying the Peak Indebtedness Rule.
Good Faith and Set Off Defences
The Full Court upheld the primary judge’s decisions that these defences were not made out on the facts and in doing so did not need to consider the issue of whether the right of set-off is available in unfair preference claims as a matter of law.
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Scott Couper, Partner
Claudia Dennison, Senior Associate
[i]  FCAFC 64.
[ii] Olifent v Australian Wine Industries Pty Ltd (1996) 130 FLR 195.
[iii] Timberworld Ltd v Levin (2015) 3 NZLR 365.