Insolvency
Full Federal Court smokes the peak indebtedness rule in Gunns decision! How the latest Gunns decision creates a fundamental shift in the calculation of unfair preferences claims and what this means in practical terms for trade creditors. By James Devonish FICM CCE and Alida Chan MICM*
James Devonish FICM CCE
On 10 May 2021, the Full Court of the Federal Court handed down its decision in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64 (Gunns). The decision is significant to future and current unfair preference claims, particularly for its implication that liquidators are unable to utilise the peak indebtedness rule when examining a continuing business relationship embodied in a single transaction under section 588FA(3) of the Corporations Act 2001 (Cth) (Act).
What this means…
Alida Chan MICM
Pursuant to the Act, a liquidator of a company may claw back payments it made to a creditor in the period beginning six months prior to the relation-back day (“relation-back period”).1 There are a number of elements that the liquidator must prove to succeed with the claim, including: that the payments were
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made when the company was insolvent; that they were made in respect of an unsecured debt; and, that the creditor was preferred by the payments over other unsecured creditors. However, for the purpose of determining the unfair preference amount, when the payments form part of a series of transactions made in the course of a continuing business relationship and the company’s net indebtedness to the creditor is increased and reduced from time to time as a result of these transactions, then section 588FA(3) of the Act requires the various transactions to be considered as one single transaction. Prior to Gunns, where a continuing business relationship was evident and so as to maximise the amount of the single transaction, liquidators could apply the peak indebtedness rule and choose the starting point of the single transaction in the relation-back period as being the company’s
