High Court delivers a win to credit managers on unfair preference claims

A man in a business suit, white shirt and glasses is seated at a desk in a corporate office. He is sitting in front of an open laptop computer and inspecting a document.

The High Court's decision in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 provides important guidance for your credit management team.

The ability of corporate liquidators to recover unfair preferences from creditors is the bane of the existence of credit managers in Australia.

It must be frustrating to work so hard to recover debt from recalcitrant debtors, only to have a liquidator seek to claw back your hard-earned gains.

Fortunately, the High Court of Australia has provided some useful guidance that will assist credit managers in navigating their roles and in dealing with liquidators demanding repayment of alleged unfair preferences.

Calculating "peak indebtedness"

Initially, liquidators used to look at the running account between the debtor and creditor and choose the point of "peak indebtedness" in the six months prior to their appointment, and then compare that against the balance of the account at the time of their appointment. If the debtor's indebtedness to the creditor had decreased during that time (a sign of a credit manager hard at work), the liquidators could seek to recover the difference from the creditor as a voidable unfair preference.

The Court's finding in Bryant v Badenoch

The High Court looked at the Explanatory Memorandum to the relevant part of the Corporations Act and the cases that developed and applied the "peak indebtedness rule". It held that the rule has no place in a liquidator's analysis of a running account. Instead, a liquidator must look at all the transactions in the running account during the relevant period to decide whether the ultimate effect is an increase or decrease in the indebtedness of the debtor during the period. Only a decrease in indebtedness could then be pursued by the liquidator as an unfair preference.

The decision will limit liquidators when pursuing unfair preference recoveries.

Assessing the continuing business relationship

In seeking to defend a liquidator's unfair preference claim, a creditor will often say that there was a continuing business relationship with the debtor, such that the debtor's payments to the creditor induced further supply that came to be of benefit to the debtor. In response, the liquidator will point to events in the relationship that they say amount to an end to that relationship (such as stopping supply), and will say that all payments after that point reduced the debtor's indebtedness to the creditor and were preferential.

The High Court has now emphasised that it is necessary to consider the whole of the evidence of the "actual business" relationship between the parties in assessing whether the continuing business relationship is at an end. The creditor in Badenoch ceased supply to the debtor at one point and renegotiated additional credit terms but then recommenced supply. The High Court found that to have maintained the continuing business relationship. Later though, the creditor proposed termination of the supply and received payments mostly in reduction of the debtor's indebtedness to the creditor. The relationship was found to be at an end and those payments were found to be unfair preferences.

The message for credit managers is that they can confidently continue their normal, measured debt recovery steps within a relationship of continued supply with a debtor. Such steps are not likely to later abrogate your business' ability to rely on the defences available to a liquidator's unfair preference claim.

Our team

Our team of Insolvency & Restructuring experts is available to guide your credit team through this judgment and to assist with steps being taken in particular recovery matters to ensure your business does not fall foul of the unfair preference provisions. We can also assist you to defend any unfair preference actions brought by liquidators against your business. In recent matters assisting creditors defending liquidator's claims, we have significantly reduced or eliminated the amount payable.

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