Unfair Preferences and the High Court

It was a strangely busy day for the High Court today when it comes to considering cases related to unfair preferences, with movement on both the ‘Peak Indebtedness’ rule and 553C Set-off.

Peak Indebtedness

Submissions were published in the matter of Bryant & Ors v. Badenoch Integrated Logging Pty Ltd

As many of you will recall, on 10 May last year, the Full Court of the Federal Court of Australia (“FCFCA”) handed down a decision that the ‘peak indebtedness rule’ which has been a long-standing precedent in preference claims, was abolished with the introduction of section 588FA of the Corporations Act (“Act”). You can read about that decision at https://www.linkedin.com/pulse/peak-indebtedness-rule-preference-claims-abolished-brendan-giles/

The decision has been appealed to the High Court and we finally get a look at the submissions by the appellant.

The submissions are focused on two grounds:

(a) In enacting section 588FA of the Act, did Parliament intend to abrogate a liquidator’s right to choose any point during the statutory relation back period, including the point of peak indebtedness, in an endeavour to show that from that point there was an unfair preference (the peak indebtedness rule)?

(b) Will a continuing business relationship, within the meaning of section 588FA(3) of the Act, cease if the operative and mutual purpose of inducing further supply of goods or services is subordinated to a predominant purpose of recovering past indebtedness?

Clarity on both these points will go a long way to clearing up the lingering uncertainty in this space following the FCFCA decision.

As I’ve said previously, I found the decision by the FCFCA is a more equitable approach. I have never seen an equitable justification for allowing the Liquidator to choose a date that maximised the preference claim and nothing in the submissions in compelling enough to make me change my mind.

553C Set-off

The High Court also granted an application for special leave to appeal in the decision of the FCFCA in the matter of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228.

In that case the FCFCA clarified the, until then, quite confused law around the availability of set-off as a defence to an unfair preference claim, confirming that set-off was not available as a complete or partial defence for a creditor facing an unfair preference claim.

While we won’t see submission on this one for a while, it will be interesting to see the basis upon which the appeal in being made. I personally think that the FCFCA got this one right as well and expect that the High Court will be more likely to remove any doubt around the issue, rather than to overturn the FCFCA’s decision.