Case notes on unfair preferences: Peak indebtedness rule
Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 (Badenoch) regarding the peak indebtedness rule.
Under s 588FA(3) of the Corporations Act 2001 (Cth), if a payment to a creditor forms “an integral part of a continuing business relationship” (for example, a “running account”), then all payments forming part of the relationship may be taken as a “single transaction”. That “single transaction” falls to be assessed under s 588FA(1) – that is, whether it prefers the creditor because that creditor receives more than it would have, had it proved in the winding up along with other creditors.
Historically, the Court’s applied the “peak indebtedness rule” to the provisions above meaning that Liquidators could choose the date within the statutory “relation back” period – usually 6 months – at which the amount owed by the company to the creditor was at its peak. This would be the “start date” of the “single transaction”. They could then calculate the difference between the company’s indebtedness on the “start date”, and at the end of the “running account” to determine the amount of the preference. This would always maximise the recoverable preference amount.
In May 2020, the Full Court of the Federal Court of Australia held that liquidators could no longer apply the peak indebtedness rule.
The High Court affirmed the Court of Appeal’s decision, finding:
There was no basis to “read” the peak indebtedness rule into the statutory provision for running accounts.[1]
The first transaction to be considered in the relationship is the first transaction after the 6 months preceding the relation-back day (or some later date if the relationship first started thereafter).[2]
The Court gave positive treatment to the Court of Appeal’s dicta that if the purpose of a payment is to induce the creditor to provide further goods or services as well as to discharge existing indebtedness, it will not be a preference unless it exceeds the value of the goods or services acquired.[3]
While this decision provides certainty for insolvency practitioners, it will likely reduce possible recoveries in unfair preference claims.
