In a surprise ruling, the Full Court of the Federal Court has in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64 (Badenoch v Bryant) stated that the “peak indebtedness” rule was abolished with the introduction of section 588FA of the Act.

Under section 588FA(3) of the Corporations Act 2001 (the Act), where preference payments are claimed against a creditor that had a running account with a company, any supply by the creditor to the debtor company is required to be taken into account and the whole of the transactions (both debits and credits) such that the net result at the conclusion of the running account is the amount of the preference.

A long line of cases have approved the peak indebtedness rule, which says that a liquidator is entitled to nominate the date from which a claim by the liquidator with the result that the liquidator nominates when the “running account” starts for the purposes of 588FA(3). The rule has its genesis in comments made in Rees v Bank of New South Wales (1964) 111 CLR 210 and the effect of the rule is that liquidators have been able to choose the date during the relation back period when the debt owing to the creditor is at its peak, allowing the liquidator to claim the difference between this peak debt amount and when the continuing business relationship ended (typically the closing balance of the account).

At first instance in the Federal Court Badenoch argued that the liquidator should not be entitled to nominate the date from which the running account starts, and instead the whole of the business relationship referred to in section 588FA(3) of the Act should be factored into the calculation for the purposes of section 588FA(3). The liquidators argued that they should be entitled to nominate the point of peak indebtedness.

However, on appeal Full Court of the Federal Court held that there was nothing in the statute that indicated that a liquidator was permitted to nominate the peak indebtedness, and instead the whole of the continuing business relationship was required to be taken into account for the purposes of section 588FA(3). The Full Court agreed with the New Zealand Court of Appeal’s decision in Timberworld Ltd v Levin (2015) 3 NZLR 365 concerning the equivalent New Zealand statutory provision, that the words in the Act require the whole of the continuing business relationship.

This decision is a significant win for those creditors who receive unfair preference as part of a continuing business relationship. Claims made by liquidators against those creditors will now often be significantly reduced or unavailable to a liquidator.