Case Note – High Court Confirms That “Peak Indebtedness Rule” Is Not Part Of Australian Law

13 February 2023

The High Court of Australia has dismissed an appeal and cross-appeal from the decision of the Full Court of the Federal Court of Australia in Bryant & Ors v Badenoch Integrated Logging Pty Ltd [2023] HCA 3.

The key findings of the Court were:

  1. Pt 5.7B of the Corporations Act 2001 (Cth) does not incorporate the “peak indebtedness rule”.
  2. The relevant test under s 588FA(3)(a) (i.e. whether a transaction is, for commercial purposes, an integral part of a continuing business relationship”) involves an objective factual inquiry as to the “business character” of the relevant transaction, and it is necessary to consider the whole of the evidence of the “actual business” relationship between the parties (applying Richardson v The Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110).
  3. The first transaction that can form part of the continuing business relationship contemplated by s 588FA(3) is the first transaction after the later of the beginning of the prescribed period or the date of insolvency (or, if the relationship started after the beginning of the prescribed period or date of insolvency, the first transaction after the later of the beginning of the continuing business relationship or the date of insolvency).
  4. To be an unfair preference, the indebtedness of the company to the creditor must reduce over the relevant period.  Since the net indebtedness of Gunns to Badenoch increased over the relevant period, there was no unfair preference.

Please contact a member of HWL Ebsworth’s Insolvency and Restructuring team for further information and assistance.

This article was written by Carmen Boothman, Partner.

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