Introduction
The Full Court of the Federal Court of Australia has missed an opportunity to provide real clarity for unfair preference claims following its earlier decision abolishing the “peak indebtedness” rule.
On 10 May 2021, the Court held in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) [2021] FCAFC 64 that liquidators are not entitled to apply the “peak indebtedness rule” when calculating the quantum of an unfair preference claim in the context of a continuing business relationship. The Court also held that out of the eleven payments made by Gunns to Badenoch, only four could be considered to have been made as part of a continuing business relationship. See our analysis of the first decision in the Gunns Appeal here.
The Gunns Appeal left two main questions unanswered:-
- What was the commencement date of the single transaction forming part of the continuing business relationship (“commencement date”)?
- What was the end date of the continuing business relationship and single transaction (“end date”)?
The parties were allowed to make further submissions on these points.
The parties’ submissions
The liquidators submitted that the commencement date was 26 March 2012 (being the start of the six month statutory period prior to Gunns’ winding up), and that the end date was 30 June 2012. The starting balance at 26 March 2012 was $1,466,916.82 and the end balance at 30 June 2012 was $1,365,321.02, resulting in a net reduction in Gunns’ indebtedness to Badenoch (and therefore an unfair preference).
Badenoch submitted that the commencement date was 30 March 2012 (being the date of Gunns’ insolvency), and that the end date was 31 July 2012. The starting balance at 30 March 2012 was $820,965.07 and the end balance as at 31 July 2012 was $1,559,594.08, resulting in an increase in Gunns’ indebtedness (and therefore no unfair preference).
Neither party provided any reasons to support their submissions, other than references to various paragraphs in the Gunns’ Appeal judgment.
The second decision
On 24 June 2021 the Court handed down a second decision in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (No 2) [2021] FCAFC 111.
The Court accepted Badenoch’s submissions that the end date was 31 July 2012. Significantly, the Court found that on 12 July 2012, when Badenoch ceased providing services to Gunns, the continuing business relationship ended. However, the Court determined that an invoice rendered on 31 July 2012 was referrable to the single transaction and so the sum invoiced must therefore form part of the single transaction within the meaning of s 588FA(3)(c) of the Act.
The dispute between the parties as to the commencement date was expressed as a choice between the commencement of the statutory period and the date of insolvency. The Court held that, because of its conclusion as to the end date (which meant that on either scenario there was no unfair preference due to an increase in Gunns’ indebtedness to Badenoch), it was unnecessary to resolve this issue. Further, as the parties proceeded at trial on an agreed position that the single transaction must begin within the statutory period, and Justice Davies did not decide the correctness of that position, the issue was not one arising for determination on appeal.
To compound the uncertainty, the Court noted that the commencement date could be as early as the “beginning of the running account” which could be “years prior” to the statutory period or the date of insolvency. The Court opined that the intended operation of the Act is now a question to be deferred to a case where the outcome depends on it.
In the result, the Court determined that there was no net reduction in the running account, and therefore no unfair preference comprised by the single transaction. However, Badenoch was ordered to pay Gunns $1,200,633.68, representing the total amount of the unfair preference payments received by it after 31 July 2012 (i.e. the end date of the single transaction).
Take Aways
It is disappointing that the Court could not give an authoritative pronouncement on how the commencement date should be determined. Rather, the Court’s decision leaves open three alternative scenarios (i.e. the start of the statutory period, the date of insolvency and the commencement of the continuing business relationship).
If it is later decided that the relevant commencement date is the beginning of the running account (when the balance is possibly $0), then unfair preference claims may become increasingly difficult to pursue where there is a continuing business relationship. Liquidators would also have the additional burden of having to examine years of transactions between the company and creditors, as opposed to being confined to the six month statutory period.
Despite the Court failing to clarify this question, in our view, a court determining the issue is likely to be guided by the reasoning of the New Zealand Court of Appeal in Timberworld Ltd v Levin [2015] NZCA 111, which signalled the end of the “peak indebtedness” rule in New Zealand having regard to comparable statutory provisions (and was cited with approval in the Gunns Appeal). In that jurisdiction, it was determined that the single transaction commences at the start of the statutory period.
~ with Helen Hodgins, Lawyer
