Abolition of peak indebtedness: The ground rules for unfair preference payments have changed

The High Court of Australia recently handed down its decision in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, which deals with the concepts of unfair preference payments and peak indebtedness in insolvency law. This case is significant as it clarifies the application of the peak indebtedness rule and provides guidance on the calculation of preference payments.

In this article, we will explore the key points of the judgment and its implications for the treatment of unfair preference payments and peak indebtedness in insolvency law.

In 2016, the Liquidators of Gunns Limited (in liq) (Gunns) commenced proceedings against Badenoch Integrated Logging Pty Ltd (Badenoch) seeking to recover $4.4 million in unfair preference payments made to Badenoch in the lead up to Gunns’ insolvency. Badenoch argued that it was not a creditor of Gunns at the time of the payments as it had reached its peak indebtedness to Gunns prior to the payments being made.

The trial judge rejected Badenoch’s argument, finding that it was a creditor of Gunns at the time of the payments and that the payments were unfair preferences. The Full Federal Court later overturned this decision, finding that Badenoch had reached its peak indebtedness to Gunns prior to the payments and therefore was not a creditor of Gunns at the time of the payments.

The High Court’s Decision

The High Court unanimously overturned the Full Federal Court’s decision, finding that Badenoch was a creditor of Gunns at the time of the payments and that the payments were unfair preferences. The court held that the peak indebtedness rule did not apply in this case as Badenoch’s indebtedness to Gunns had decreased after reaching its peak, and then increased again prior to the payments being made.

The court also provided guidance on the calculation of preference payments, finding that the calculation should be made based on the actual amount of the debt owed by the company at the time of the payment, rather than the amount of the debt that was due and payable at that time. This means that if a company has agreed to extend the payment terms of a debt, the calculation of preference payments should take into account the extended payment terms.

Implications for Insolvency Law

The High Court’s decision in Bryant v Badenoch provides important guidance on the application of the peak indebtedness rule and the calculation of preference payments in insolvency law. It clarifies that the peak indebtedness rule does not apply where a creditor’s indebtedness to the company has decreased and then increased again prior to the payment being made.

The decision also highlights the importance of accurately calculating preference payments based on the actual amount of the debt owed by the company at the time of the payment, rather than the amount of the debt that was due and payable at that time. This ensures that preference payments are calculated in a way that is fair and reflects the actual debt owed by the company.

The High Court’s decision in Bryant v Badenoch provides important guidance on the concepts of unfair preference payments and peak indebtedness in insolvency law. It clarifies that the peak indebtedness rule does not apply where a creditor’s indebtedness to the company has decreased and then increased again prior to the payment being made.

The decision also highlights the importance of accurately calculating preference payments based on the actual amount of the debt owed by the company at the time of the payment, rather than the amount of the debt that was due and payable at that time. This ensures that preference payments are calculated in a way that is equitable and consistent for the parties involved.