By Michael Baltins and Georgina Overend -
Snapshot
- A recent judgment of the Full Court has rung the death knell on 50 years of case law applying the peak indebtedness rule.
- The Full Court formed the view that the abolition of the peak indebtedness rule reflected the objective of part 5.7B of the Corporations Act, being fairness among unsecured creditors.
- Subject to any grant of special leave to appeal to the High Court, the decision is expected to have far reaching ramifications and may result in liquidators being less inclined to pursue unfair preference claims.
In the landmark decision of Badenoch Integrated Logging P/L v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64, the Full Court of the Federal Court of Australia has rung the death knell on the peak indebtedness rule for unfair preference claims.
At law, where a payment by an insolvent company to a creditor forms part of a broader series of transactions, determining whether it is an unfair preference involves consideration of the whole transaction and whether the payment is integral to the continuation of a business relationship. On the basis that the transaction is integral to the continuation of a business relationship, the peak indebtedness rule previously provided that the amount of any recovery can be ascertained by the difference between the highest point of indebtedness during the relation back period and the level of the debt on the last day of that period.
Background
In 2015, Bryant, Carson, and Crosbie (‘Liquidators’) in their capacity as joint and several liquidators of Gunns Limited (in liq) (‘Gunns’) and its wholly owned subsidiary, Auspine Ltd (in liq) commenced proceedings against Badenoch Integrated Logging Pty Ltd (‘Badenoch’). The Liquidators alleged a number of payments made by Gunns to Badenoch were unfair preferences pursuant to s 588FA of the Corporations Act 2001 (Cth) (‘Act’), and were therefore voidable pursuant to s 588FE(2).
In May 2020, Justice Davies delivered judgment in favour of the Liquidators, finding the payments were unfair preferences (Bryant, in the matter of Gunns Ltd (in liq) (receivers and managers appointed) v Badenoch Integrated Logging P/L [2020] FCA 713). In determining the claim, Davies J was asked to consider whether s 588FA(3) codified the peak indebtedness rule having regard to the New Zealand Court of Appeal’s decision in Timberworld Ltd v Levin [2015] 3 NZLR 365 (‘Timberworld’).
