Full Court of the Federal Court fires shots in Badenoch No 2

Following our previous publication ‘Gunns at 10 paces, Full Court of the Federal Court blows away peak indebtedness rule’, the Full Court of the Federal Court of Australia has delivered a follow up decision in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) (No 2) [2021] FCAFC 111 (Badenoch No 2) which further delves into the operation of the running account provisions in section 588FA(3) of the Corporations Act 2001 (Cth) (Act).

The further issues in dispute

Following the judgment in Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64 (Badenoch No 1), the parties were ordered to confer in relation to the final orders to be made in the proceedings.

Unfortunately, no agreement could be reached and the parties returned before the Court to address a number of key issues in dispute including:

  • the date on which the Court found the ‘single transaction’ within the meaning of section 588A(3)(c) of the Act to have commenced; and
  • the date on which the Court found there to have been a break in the continuing business relationship and thus the single transaction to have ended.

Accepting that the Court had found that there had been a continuing business relationship for at least part of the relevant period (but that the peak indebtedness rule was not to be applied in this case), the parties were concerned to ascertain the precise start and end dates for the period of the continuing business relationship which could therefore impact on the calculation of the net preference received by Badenoch over that period.

Decision

The Court dealt with the two issues in reverse order.

When did the continuing business relationship end?

This issue arose because of the range of dates dealt with in the decision at first instance.

In particular, it had been found that:

  • Badenoch ceased providing services to Gunns on 10 July 2012;
  • Badenoch then proposed the arrangement to wind down the relationship to Gunns on 31 July 2012;
  • Badenoch issued an invoice to Gunns for work up to 10 July 2012 on 31 July 2012; and
  • Gunns accepted the Badenoch proposal to wind down the relationship on 2 August 2012. 

The Court confirmed that the key date was 10 July 2012, which was the date when Badenoch ceased providing services to Gunns and which was therefore the date on which the continuing business relationship ended. 

However, the Court also said that the invoice issued on 31 July 2012 “reflected the provision of services as an integral part of the continuing business relationship relating to the provision of services during and pursuant to the relationship up to 10 July 2012”.  As a result, the invoice was referable to the deemed ‘single transaction’ and the sum invoiced on 31 July 2012 had to be included in assessing the level of indebtedness as at the end of the single transaction.

When did the continuing business relationship begin?

The Court noted the following in relation to this aspect of the dispute between the parties:

  • the parties expressed their dispute as to the starting date for the deemed ‘single transaction’ as being a choice between either 26 March 2012 (being the start of the 6 month statutory period) or 30 March 2012 (being the date of insolvency as assessed by the liquidators); 
  • however, on the facts found by the primary judge at first instance, the continuing business relationship between Badenoch and Gunns had in fact commenced long before 26 March 2012.

The Court found that it was unnecessary to determine the start date as between 26 March 2012 or 30 March 2012, noting that the net debt increased between those dates and the end date of 31 July 2012, such that no preference arose.

However, the Court then went on to make certain observations at paragraph 22 of Badenoch No 2.  It is worth setting these observations out in full, which were as follows:

It may also be observed that if the continuing business relationship commenced at the beginning of the running account (some years prior to 2012) questions may arise as to whether Badenoch “received” anything in relation to an unsecured debt at all.  Expressed another way, if the single transaction is that evidenced by the whole of the running account, Badenoch appears to have supplied more than it has received, such that there could be no unfair preference.  Whether that is the intended operation of the Act is a question that may be deferred to a case where the outcome depends upon it.

Lavan comment

Leaving aside the question of how the Badenoch decisions are to be treated by courts at first instance (noting that there is High Court and other intermediate appellate authority in existence that deal with running accounts and peak indebtedness), the decision in Badenoch No 2 appears to further increase the level of uncertainty in relation to how running accounts/continuing business relationships are to be assessed in unfair preference claims.

Given that the decision was not handed down until 24 June 2021, it will be interesting to see whether the matter is further appealed to the High Court.

However, liquidators and creditors alike should ensure that they are aware of the decisions in Badenoch No1 and No 2, and the potential impact of these decisions on any contemplated or actual unfair preference claims.

These decisions raise highly complex issues and the Lavan team would be happy to discuss any inquiries that parties may have about the implications and potential impact of these judgments.