Introduction
On 27 May 2020, the Federal Court of Australia handed down its judgments in three separate unfair preference proceedings instituted by the liquidators of Gunns Limited (in liq)(receivers and managers appointed)(“Gunns”).[1] The liquidators were successful in each proceeding.
The Gunns proceedings represent the first time an Australian court has been asked to consider the “peak indebtedness rule” post the decision of the New Zealand Court of Appeal in Timberworld Ltd v Levin [2015] 3 NZLR 365 (“Timberworld”). The Court confirmed the continued operation of the rule in Australia.
While the Court also usefully considered the circumstances in which a running account may be terminated, and confirmed its discretion to reduce an amount otherwise payable as an unfair preference, it did not clarify the vexed question of whether set-off under s.553C of the Corporations Act 2000 (Cth)(“Act”) applies in the context of unfair preference claims.
Peak indebtedness rule
The “peak indebtedness rule” allows a liquidator to choose the highest point of indebtedness in a running account during the relation back period as the starting point to calculate the amount of any unfair preference:
Peak indebtedness – Debt due on relation back day = Value of preference claim
All three defendants argued that previous Australian cases which applied the “peak indebtedness rule” were wrongly decided and should not be followed. The defendants relied on the reasoning of the New Zealand Court of Appeal in Timberworld, which held that the equivalent New Zealand provisions do not give a liquidator the right to disregard transactions which form part of a continuing business relationship.
The Court disagreed with the reasoning in Timberworld, and confirmed the continued operation of the “peak indebtedness rule” in Australia.
Running account
In two of the proceedings,[2] the Court found that payments made during a period when services were suspended did not form part of the running account. This was despite the fact that, in respect of one of the defendants, the suspension was initiated by Gunns (pursuant to a force majeure clause).[3]
The Court found each defendant required Gunns’ outstanding debt to be reduced significantly before recommencing supply, and that the parties were “looking backwards rather than forwards” and “to the partial payment of old debt rather than the provision of continuing services.” This undermined the essential feature of the continuing business relationship, namely, that payments are made in the mutual expectation of future supply.
Discretion
One of the defendants argued that the Court should not order repayment of any of the preferences, in the exercise of its discretion under s.588FF of the Act.[4] The defendant argued the payments were substantially for Gunns’ benefit, and allowed the defendant to continue providing valuable services to Gunns.
While accepting that its powers under s.588FF are discretionary, the Court maintained that discretion must be exercised in light of the objectives of Part 5.7 of the Act. In the circumstances, the defendant was unable to convince the Court to exercise its discretion in the defendant’s favour.
Set-off
In two of the proceedings, the defendants argued an entitlement to set-off amounts owing to them by Gunns against any amount found to be owing by them as an unfair preference, pursuant to s.553(C) of the Act.[5]
The Court found it ultimately did not have to decide the issue of whether or not set-off is available in the context of unfair preference claims. This was because of the Court’s finding that the defendants had notice that Gunns was insolvent at the time of the payments within the meaning of s.553C(2) of the Act.
While the Court did not provide clarity around the issue of set-off, it cited numerous authorities which support the proposition that set-off is not available in unfair preference claims (while acknowledging some cases which suggest the contrary).
Binti Prasad
Principal
Melbourne
Helen Hodgins
Lawyer
Melbourne
[1] Bryant, in the matter of Gunns Limited (in liq)(receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713 (“Badenoch”); Bryant, in the matter of Gunns Limited (in liq)(receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715 (“Edeborn”); Bryant, in the matter of Gunns Limited (in liq)(receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714 (“Bluewood”).
[2] Edenborn and Bryant.
[3] Edenborn.
[4] Edenborn.
[5] Bluewood and Badenoch.
