Peak indebtedness rule abolished
Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64 (which judgment was delivered on 10 May 2021), abolished what is known as the “peak indebtedness rule”.
The case is significant for the following reasons:
The “running account” principle provides that where a creditor has a running account with a debtor company, all transactions forming part of the business relationship between the parties in the six-month relation back period preceding the debtor company’s liquidation must be viewed as if they were a single transaction.
That transaction will be a preference if the payments made by the debtor company exceeded the value of the goods or services it received from the creditor.
The peak indebtedness rule previously limited the running account principle. Pursuant to the peak indebtedness rule, at the liquidators’ election, the “running account” commences not at the start of the six-month relation back period but from the point during that period at which the debtor company’s indebtedness to its creditor was at its peak (i.e. from the point of its greatest indebtedness).
The effect of the peak indebtedness rule was to shorten the duration of any running account from six months to some lesser point and in turn, to increase the quantum of preference received applying the running account principle.
The recent case of Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) abolishing the peak indebtedness rule will likely be the subject of a special leave application to the High Court of Australia.
If you have received a demand from a liquidator claiming your entity has received a preference payment, get in touch with us to discuss the claim and any available defences.
Ali Erskine
Principal
T: 03 5225 5208
M: 0419 884 992
E: aerskine@ha.legal
