Abolition of the Peak Indebtedness Doctrine for Preference Claims?
Abolition of the Peak Indebtedness Doctrine for Preference Claims?

The Full Court of the Federal Court recently delivered its judgment in the matter of Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64.

The decision will undoubtedly have significant implications for the ongoing application of the peak indebtedness rule by creditors and liquidators.  

The appeal considered whether the primary judge had erred in finding that the peak indebtedness rule applied to claims made in respect of s 588FA of the Corporations Act 2001 ('the Act').

In summary, the Court considered the history of the rule and competing decisions, and ultimately found that the language in s 588FA(3)(c) points against the application of the peak indebtedness rule.

The Full Court disagreed with the primary judge's conclusion that the Liquidators had been entitled to apply the peak indebtedness rule for the purpose of determining whether there was an unfair preference under s 588FA(1) of the Act, and upheld the creditor's appeal on this ground. 

Holman Webb believes this decision will have significant implications for creditors in dealing with a running account defence and/or an ultimate effect defence.  The decision will also impact on a liquidator seeking to arbitrarily choose any point during the statutory period (which would typically be the point of peak indebtedness) to establish a preferential payment.

If you have a query relating to any of this information, or would like to reach out to Holman Webb's Commercial Recovery and Insolvency Group, please don't hesitate to get in touch with Partner Christopher Hadley today.

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