The case of Bryant v Badenoch Integrated Logging Pty Ltd  HCA 2 (‘Bryant’) is an appeal from a decision of the Full Court of the Federal Court of Australia. The case concerned the operation of voidable transactions in insolvency.
Badenoch, a timber logistics business, entered into an agreement with Gunns, a timber felling business, to supply services for harvesting and hauling timber. In 2010, Gunns began to suffer significant declines in revenue. Badenoch however, continued to supply services to Gunns, despite Gunns frequently making late or partial payments. In 2012, Gunns appointed liquidators who applied under section 588FF(1) of the Corporations Act 2001 (Cth) to have a series of payments made by Gunns to Badenoch in the six month period prior declared as voidable transactions on the basis that they were unfair preferences.
The liquidators argued that if there was a ‘continuing business relationship’, so as to engage section 588FA(3), they were entitled by the ‘peak indebtedness rule’ to choose the starting date within that six month period to prove the existence of an unfair preference by Gunns to Badenoch. T
The peak indebtedness rule granted liquidators the authority to designate any date within the defined timeframe as the initial reference point for the ongoing business association when assessing the individual transaction.
Section 588FA exists to mitigate against creditors who are paid money that they would not be entitled to according to their order of priority of creditors when the company liquidates:
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
The primary judge held that the ‘peak indebtedness rule’ applied and that only two of the eleven payments were an integral part of the continuing business relationship involving a running account.
On appeal, the Full Court held that the ‘peak indebtedness rule’ did not apply and that an additional two of the payments were part of the relationship.
The appeal raised three main question regarding the operation of section 588FA(3):
- Whether the ‘peak indebtedness rule’ is part of or is excluded by this section;
- The proper approach to determining whether a ‘transaction is, for commercial purposes, an integral part of a continuing business relationship’; and
- Whether certain payments in this case from Gunns to Badenoch were, for commercial purposes, ‘an integral part of a continuing business relationship’.
Justice Jagot, with the assent of the bench, upheld the judgement of the lower court and dismissed the appeal. The Court reasoned that section 588FA(3) is a ‘statutory embodiment of the “running account principle” which has long been a part of insolvency law in Australia’. Additionally, the Court reasoned that if a transaction is, for commercial purposes, an integral part of a continuing business relationship (e.g., a running account) between a company as debtor and a creditor, then all transactions forming part of that relationship are to be treated as if they together constituted one, single transaction in determining if the transaction is an unfair preference given by the company to the creditor, voidable on application by a liquidator.
Ultimately, the decision in Bryant can be of benefit to creditors who receive payments in the six-month period prior to a company’s administration who are able to demonstrate that they received the payments as an integral part of a continuing business relationship with the company. Liquidators, however, may be limited when pursuing unfair