Unfair preference update

We have previously written about issues relevant to unfair preference actions by liquidators.

On 8 February 2023 the High Court has recently handed down two decisions which significantly impact two important legal issues to such actions.

Badenoch’s case - the peak indebtedness rule no longer exists

Previously, in calculating the unfair preference amount where a creditor and insolvent company had a running account, liquidators would select the highest level of indebtedness during the relation-back period (i.e. the ‘peak indebtedness’) and deduct from that the indebtedness at the date of the company’s liquidation. This resulted in a notional single unfair preference amount.

This method of calculation was overruled by the High Court in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2. As a result, to determine the amount of the notional unfair preference in a running account scenario, the starting point to be used by liquidators will be the later of (a) the first transaction in the relation-back period when the company was insolvent, or (b) the first transaction after the beginning of the continuing business relationship.

Practically speaking, moving forward the decision will likely advantage running account creditors. Liquidators will no longer be able to simply select the highest point of indebtedness during the relation-back period to maximise the amount of their claim.

Metal Manufactures’ case – set off is no longer available to creditors as a defence

There has been a long line of cases holding that set off under s553C of the Corporations Act 2001 can be used by creditors to defend / reduce liquidators’ unfair preference claims. In short, where the company in liquidation still owed a creditor a debt, a creditor could set off that debt against the liquidator’s claim.

This authority persisted despite some academic and judicial criticism to the effect that:

1. Section 553 appeared in the part of the Act dealing with proving debts, not in the part dealing with unfair preferences and similar actions.

2. To operate, s553C required mutuality of debts or dealings. In the context of unfair preference actions which are personal to a liquidator and not the company in liquidation, there was no mutuality.

The High Court in Metal Manufactures Pty Ltd v Morton [2023] HCA 1 overturned this previous case authority. A creditor can no longer rely on continuing debt owed to it by a company liquidation to reduce a liquidator’s unfair preference claim.

In light of this, creditors will need to strongly consider their other rights and defences to unfair preference actions by liquidators.

As a firm, we have significant experience in dealing with liquidators. Please feel free to contact Tony Scoglio or David Tooth on (07) 3833 2100 or info@scogliolaw.com.au if you have any questions.