Federal Court of Australia

Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64

ORDERS

THE COURT ORDERS THAT:

1.    The parties confer and within 14 days file an agreed minute of orders (including as to costs) reflecting the reasons of the Court or, in default of agreement, written submissions (no longer than 5 pages) and proposed minutes of orders.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

1    These reasons concern an appeal and cross-appeal from orders of a judge of this Court delivered on 30 July 2020, giving effect to reasons published on 27 May 2020: Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713 (‘J’).

2    The appellant, Badenoch Integrated Logging Pty Ltd (‘Badenoch’), is a family-owned business that provides logging and transport services. The respondents are the liquidators of Gunns Limited (in liquidation) (receivers and managers appointed) (‘Gunns’) and its wholly owned subsidiary Auspine Limited (in liquidation) (receivers and managers appointed) (‘Auspine’) (together, ‘Gunns’) (‘Liquidators’).

3    The Liquidators were appointed as joint and several administrators of Gunns on 25 September 2012, being the applicable ‘relation-back day’ within the meaning of s 91 of the Corporations Act 2001 (Cth) (‘Act’).

4    The Liquidators alleged that 11 payments (‘impugned payments’) made by Gunns to Badenoch in the period from 26 March 2012 to 25 September 2012 (‘relation-back period’) are insolvent transactions and voidable under s 588FE of the Act. The impugned payments were made after the date of Gunns’ insolvency on 30 March 2012 (‘insolvency date’).

5    Throughout the relation-back period, the following invoices were issued by Badenoch and Gunns made the following payments (including the 11 impugned payments that were made on and after the insolvency date):

6    This table is informed by the account summary reproduced in the expert report of Mr Mark Lipson of Hall Chadwick Forensics dated 31 July 2018. See also [2], [15] J.

7    As the primary judge observed ([16] J), there is some uncertainty on the facts as to the actual dates of the impugned payments, which is reflected in the first column of the above table. However, it does not appear that anything material turns on whether one date is accepted over another.

8    The appeal and cross-appeal concern the availability and scope of the Liquidators’ unfair preference claims, which are to be determined by the following questions:

(a)    whether any of the impugned payments were an integral part of a “continuing business relationship” within the meaning of s 588FA(3) of the Act such that the series of transactions forming part of the relationship, including the payments, would be taken to constitute a single transaction for the purpose of determining whether there has been an unfair preference (‘continuing business relationship issue’);

(b)    if so, whether the Liquidators were entitled to apply the peak indebtedness rule and choose any point in the relationship as the starting point of the single transaction for the purpose of s 588FA(3) of the Act (‘peak indebtedness issue’);

(c)    whether Badenoch had established a good faith defence pursuant to 588FG(2) of the Act in respect of any of the impugned payments (‘good faith defence’); and

(d)    the availability of set-off under s 553C of the Act (‘set-off issue’).

RELEVANT LEGISLATION

9    Division 2 of Pt 5.7B of the Act creates statutory rights for company liquidators to seek court orders in relation to certain transactions that are deemed to be voidable. This includes a regime for unfair preference claims.

10    Section 588FF of the Act provides that the court may make certain orders, including that monies be paid to the company, if satisfied that a transaction of the company is a voidable transaction.

11    Section 588FE prescribes when a transaction is a voidable transaction. It relevantly provides:

(2)    The transaction is voidable if:

(a)    it is an insolvent transaction of the company; and

(b)    it was entered into, or an act was done for the purpose of giving effect to it:

(i)    during the 6 months ending on the relation-back day; or

(ii)    after that day but on or before the day when the winding up began.

12    The six-month period prescribed in s 588FE(2)(b)(i) is what is referred to as the statutory period (or relation-back period) for unfair preference claims. In sub-ss (3)-(6B), there are longer statutory periods prescribed for other types of voidable transactions.

13    Section 588FC prescribes when a transaction is an insolvent transaction. It relevantly provides that a transaction will be an insolvent transaction if it is an unfair preference given by the company and the transaction is entered into, or given effect to, at a time when the company is insolvent.

14    Section 588FA prescribes when a transaction is an unfair preference and includes, in sub-s (3), what is commonly referred to as the ‘running account’ defence. This is not strictly a defence but an essential element of the cause of action in an unfair preference claim. The section relevantly provides:

(1)    A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)     the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)     the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

[…]

(3)    Where:

(a)    a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b)    in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c)    subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d)    the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.

15    Section 588FG sets out when certain good faith defences are available to creditors. Relevantly, s 588FG(2) provides:

A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

(a)    the person became a party to the transaction in good faith; and

(b)    at the time when the person became such a party:

(i)    the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii)    a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and

(c)    the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

16    Separately, in Pt 5.6 of the Act, s 553C provides for a creditor’s right to set-off against an insolvent company in certain circumstances. It provides:

(1)    Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a)    an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b)    the sum due from the one party is to be set off against any sum due from the other party; and

(c)    only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

(2)    A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.

THE PRIMARY JUDGE’S REASONS

17    We summarise the reasons of the primary judge in the following paragraphs insofar as they are relevant to the appeal and cross-appeal. The applicable legal principles are addressed below with our conclusions.

18    The primary judge was asked to consider whether the impugned payments were unfair preferences within the meaning of s 588FA(1) and voidable transactions within the meaning of s 588FE(2) of the Act. It was not in dispute that the payments were made in the relation-back period and at a time when Gunns was insolvent.

Continuing business relationship issue

19    The primary judge determined that only two of the impugned payments, being payments 3 and 4, were an integral part of a continuing business relationship between Gunns and Badenoch for the purpose of s 588FA(3) of the Act.

20    The primary judge based this finding on the following facts and circumstances ([99] J):

(a)    the relation back period commenced 26 March 2012. On 20 March 2012, Badenoch’s solicitors had sent a letter of demand to Gunns, demanding payments of outstanding debts owed by Gunns and threatening legal action unless the January 2012 and February 2012 invoices were paid within seven days and by 31 March 2012 respectively. Payments 1 and 2, namely the payments made by Gunns on 30 March and 13 (or 16) April 2012 were made in discharge of Gunns’ past indebtedness to Badenoch in respect of the January 2012 and February 2012 invoices pursuant to a payment plan negotiated in circumstances where Badenoch had ceased providing services to Gunns pending receipt of payment for the prior services, albeit for only 10 days;

(b)    during the months of March through to June, work continued and invoices for the work performed were raised for that work at the end of each of those months. The payments made on 1 (or 2) May and 7 (or 8) June 2012 related to the March 2012 and April 2012 invoices. Although those payments were slightly outside the terms of payment, there was no evidence to show that those payments were other than referrable to a mutual assumption of a continuing business relationship, following the payment of the overdue amounts for January and February 2012;

(c)    the remaining payments 5 to 11, namely the payments on 6 (or 8), 17, and 24 (or 27) August 2012, 31 August (or 3 September) 2012, and 3 (or 7), 14 (or 17) and 21 (or 24) September 2012, were all made pursuant to the payment plan negotiated in early August 2012 relating to the unpaid amounts on the May 2012 and subsequent invoices following Badenoch’s threat in July 2012 to issue a statutory demand unless prior debts were paid in full. Albeit that Badenoch continued to provide limited services during August and September 2012, the predominant purpose of those payments was to reduce past indebtedness rather than to secure the ongoing provision of services.

21    Later in her reasons, when considering the application of the peak indebtedness rule, the primary judge said she had already found there was a continuing business relationship “between April and the end of June 2012 (inclusive)”: [109] J. It is implicit that the primary judge considered any continuing business relationship between Gunns and Badenoch to have been limited to the period in which payments made were referable to a mutual assumption of a continuing business relationship.

22    The primary judge found that payments 1, 2 and 5 to 11 did not form part of a continuing business relationship for the purpose of s 588FA(3) of the Act, as these payments were made in circumstances where Gunns and Badenoch were “looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services”: [99] J.

23    We therefore consider the primary judge to have found a continuing business relationship existed in the relation-back period from 17 April 2012 (being the day after payment 2), and not some earlier date in the month, up to and including 30 June 2012.

24    Subject to the application of the peak indebtedness rule, all dealings between Gunns and Badenoch from 17 April 2012 to 30 June 2012 were thus deemed to be a “single transaction” under s 588FA(3)(c) for the purpose of determining whether there was an unfair preference.

Peak indebtedness issue

25    After determining that there was a continuing business relationship between Gunns and Badenoch for part of the relation-back period — and thus that the procedure in s 588FA(3)(c)-(d) of the Act was engaged in respect of the dealings between Gunns and Badenoch from 17 April 2012 to 30 June 2012 — the primary judge next found the Liquidators were entitled to apply the peak indebtedness rule to claim that the single transaction was an unfair preference.

26    In reaching the conclusion that the peak indebtedness rule, which had its genesis in the decision of Barwick CJ in Rees v Bank of New South Wales (1964) 111 CLR 210 (‘Rees’), applied in the context of s 588FA(3) of the Act, the primary judge had regard to Olifent v Australian Wine Industries Pty Ltd (1996) 130 FLR 195 (‘Olifent’).

27    In Olifent, Master Burley held that the nature and ambit of the running account defence was essentially the same under s 588FA(3) — which had been introduced into the Corporations Act 1989 (Cth) (‘1989 Act’) by the Corporate Law Reform Act 1992 (Cth) — as it had been under the old provisions, and this indicated there was no legislative intention to alter the law that the liquidator was free to choose any point during the statutory period, including the point of peak indebtedness, to establish a preferential payment: at 202-203.

28    The primary judge observed (at [102] J) that the peak indebtedness rule has been applied in a number of single and appellate cases and the correctness of the decision in Olifent has not been called into question. The primary judge ultimately found that this approach was correct, and did not accept Badenoch’s contention that the cases were wrongly decided and should not be followed,

29    In arriving at this conclusion, the primary judge was not persuaded by the reasons of the New Zealand Court of Appeal in Timberworld Ltd v Levin (2015) 3 NZLR 365 (‘Timberworld’’), where the Court examined a number of Australian authorities and determined that the peak indebtedness rule did not apply in the context of an equivalent New Zealand statutory provision.

30    The primary judge’s conclusion meant that the Liquidators were entitled to nominate any point in the continuing business relationship within the relation-back period as the beginning of the “single transaction” for the purpose of s 588FA of the Act.

31    The Liquidators nominated the peak of Gunns’ indebtedness to Badenoch (being after 31 May 2012, when Badenoch issued the May invoice of $737,733.68 due for payment at the end of June 2012 and Gunns’ indebtedness reached $1,416,563.31). Applying the peak indebtedness rule, and the procedure set out in s 588FA(3)(c)-(d) of the Act, it would appear that the outcome of the “single transaction” was the difference between the peak ($1,416,563.31) and the level of indebtedness at the conclusion of the continuing business relationship on 30 June 2012 ($1,365,321.02), being a net reduction in indebtedness of $51,242.29.

Good faith defence

32    The primary judge then considered whether Badenoch had established a good faith defence pursuant to s 588FG(2) in respect of any of the payments.

33    There are four limbs that must be satisfied in respect of each impugned transaction in order to rely on the good faith defence. These are:

(1)    the creditor became a party to the transaction in good faith: s 588FG(2)(a);

(2)    the creditor had no reasonable grounds for suspecting that the company was insolvent, or would become insolvent, at the relevant time: s 588FG(2)(b)(i);

(3)    a reasonable person in the creditor’s circumstances would have had no such grounds for suspecting insolvency: s 588FG(2)(b)(ii); and

(4)    the creditor provided valuable consideration under the transaction or changed its position in reliance on the transaction: s 588FG(2)(c).

34    The primary judge accepted that Badenoch acted in good faith and provided valuable consideration under each transaction by providing logging and transport services up until the relation-back day. However, the primary judge did not consider that Badenoch established the second and third limb of the defence. This was notwithstanding her finding that, based on assurances given by Gunns’ representatives that Gunns was solvent and its cash flow problems were only temporary, the directors of the company, Messrs Kenneth and Peter Badenoch, genuinely believed that Gunns would ultimately be in a position to pay all of Badenoch’s outstanding invoices.

35    In making this finding, the primary judge had regard to the following facts and matters in the period up to March 2012 (at [117] J):

The evidence showed that by at least March 2012, Gunns had been late in paying Badenoch’s invoices for about 18 months, and Badenoch regularly had to chase up payment. Badenoch also

(a)    was aware that Gunns was facing cash flow constraints and difficulties;

(b)    knew that other contractors in the region were also consistently facing issues in being paid on time;

(c)    knew that Gunns was selling assets;

(d)    knew that the timing and amount of payments it received from Gunns were directly dependant on the sale of assets;

(e)    knew that the late and irregular payments were not due to any dispute or complaint about Badenoch’s services;

(f)    was concerned that Gunns could not pay its accounts in full or on time;

(g)    knew that Gunns was prioritising payments to its contractors;

(h)    was plainly concerned about Gunns’ financial position because on 1 March 2012 it took the step of asking Gunns by email to advise whether it was solvent, what the timelines were for payments of amounts outstanding, and whether the proposed assets sales would improve cash flow to the extent that Gunns would return to normal trading terms. That email is probative evidence of Peter [Badenoch]’s state of mind at the time, namely that he did suspect that Gunns was then insolvent or would become insolvent. If he did not have that state of mind, there were reasonable grounds to hold that view;

(i)    knew that Gunns’ future was in part dependant on the pulp mill and if the pulp mill was unable to proceed, that would have been a significant event for Gunns;

(j)    was aware that Richard Chandler Corporation was not proceeding with its proposed equity investment and that Gunns shares were in a trading halt;

(k)    was unable to secure Gunns’ agreement to pay its outstanding invoices within the timeframes prescribed by the letter of demand dated 20 March 2012 that Badenoch instructed its solicitors to send to Gunns, notwithstanding that it took the drastic step of ceasing to provide services to Gunns for non-payment of invoices, as threatened; and

(l)    wanted, but could not secure, a bank guarantee from Gunns for payment of its accounts.

36    The primary judge also had regard to the following additional facts and matters from March 2012 onwards (at [119]-[120] J):

The position did not thereafter improve:

(a)    apart from the payments referrable to the March and April invoices, payments continued to be outside terms, irregular and not for the full amount of Badenoch’s invoices;

(b)    Gunns would not meet the payment schedule demanded by Badenoch’s solicitors in the further letter of demand dated 3 July 2012, even with the threat of legal action if payment was not received; and

(c)    despite the further letter of demand and threat of legal action, the debt owed to Badenoch increased to $1.56 million at the end of July 2012.

[…]

Further, the publicly available material such as the newspaper articles which Peter and Kenneth read should have caused them to have serious concerns about the solvency of Gunns.

37    The primary judge considered the fact that Messrs Peter and Kenneth Badenoch knew Gunns had the support of its bankers and knew that Gunns was generating money from asset sales. However, in circumstances where the extension of finance facilities did not alleviate either Gunns’ liquidity problems or its reliance on asset sales to pay contractors, and where there was a chronic history of late and irregular payment, these matters did not disturb the primary judge’s conclusion that there were reasonable grounds to suspect insolvency.

38    The primary judge thus found that the facts and matters of which Badenoch was aware as at the end of March 2012 provided reasonable grounds for Badenoch to suspect that Gunns was insolvent or would become insolvent, and that a reasonable person in Badenoch’s circumstances would have had grounds for suspecting insolvency from March 2012 at the latest.

39    The primary judge concluded that the good faith defence was not made out.

Availability of set-off

40    The primary judge then considered whether Badenoch had a right of set-off under s 553C of the Act. The primary judge observed that there were mixed authorities as to whether the right of set-off under s 553C of the Act (and cognate provisions) is available in unfair preference claims. However, the primary judge considered it was unnecessary for her to deal with this issue, as she found Badenoch had actual notice of the fact that Gunns was insolvent on each of the relevant dates and was thereby prevented from making a set-off claim by operation of s 553C(2) of the Act.

41    The primary judge summarised the relevant facts in relation to notice as follows:

[127] As at 31 March 2012, Badenoch had notice that:

(a)    Gunns had not been paying Badenoch’s invoices on time or for the full amount for at least 15 months;

(b)    Gunns had not been paying other contractors on time or for the full amount;

(c)    Gunns was facing cash flow constraints and was making payments to contractors based on priorities;

(d)    the timing and amount of payments it received from Gunns were directly dependant on the sale of assets; and

(e)    Gunns was not prepared to agree to pay its outstanding invoices to Badenoch within the timeframes prescribed by the letter of demand dated 20 March 2012 that Badenoch instructed its solicitors to send to Gunns, notwithstanding that Badenoch took the drastic step of ceasing to provide services to Gunns for non-payment of invoices, as threatened;

(f)    Gunns had “max’d out” its bank guarantees; and

(g)    Badenoch had openly questioned whether Gunns was solvent and knew that Gunns was not able to pay Badenoch on time.

[128]    In addition to those matters, as at 30 June 2012, Badenoch also had notice that:

(a)     Gunns shares continued to remain in a trading halt pending its efforts to raise further capital of approximately $400 million; and

(b)     Gunns was still reliant on asset sale proceeds to pay contractors.

[129]     By 31 July 2012, Badenoch also had notice that:

(a)    Gunns was “unable” to pay the $737,533.68 owing on the May 2012 invoice due and payable at the end of June 2012, despite Badenoch ceasing to provide services and threats by Badenoch to commence legal proceedings immediately in the event of non-payment;

(b)    Gunns was prepared only to offer a payment schedule of $150,000 per week commencing 20 July 2012;

(c)    Gunns had failed to make any payment in reduction of the outstanding debt, despite its offer; and

(d)    despite Badenoch’s request, Gunns did not provide any security for payment of the outstanding debts.

[130]     By early September 2012, Badenoch also had notice that:

(a)    the debt outstanding on the May invoice had only just been discharged;

(b)    Gunns’ indebtedness for services performed in the month of June 2012 remained undischarged (save as to around $13,000); and

(c)    Gunns was willing to terminate, and had in fact agreed to terminate, the contract with Badenoch.

[131]     As at 25 September 2012, Gunns had announced to the ASX that a Voluntary Administrator had been appointed.

42    The primary judge concluded that at the time of each of the impugned payments, Badenoch had notice of facts that “were more than sufficient” to disclose that Gunns and Auspine were not able to pay their debts as and when they fell due: [132] J. The primary judge thus found Badenoch was not entitled to claim the benefit of a set-off under s 553C of the Act.

THE APPEAL, CONTENTION AND CROSS-APPEAL

43    It is convenient to address the grounds of appeal, contention and cross-appeal in the order that the primary judge dealt with these issues, rather than the order that they appear in the respective notices.

CONTINUING BUSINESS RELATIONSHIP ISSUE

44    Ground 2 of the notice of appeal and Ground 1 of the cross-appeal relate to the primary judge’s findings that payments 3 and 4 were an integral part of a continuing business relationship between Badenoch and Gunns within the meaning of s 588FA(3) of the Act.

45    Badenoch contends the primary judge erred in not finding that all of the payments were part of such a relationship, whereas the Liquidators contend that the primary judge erred in so finding in respect of payments 3 and 4.

Relevant legal principles

46    As observed by the primary judge, s 588FA(3) of the Act embodies and gives statutory effect to the principle expressed in Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 (‘Richardson’) that where a payment “forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction”: at 129 (Dixon, Williams and Fullagar JJ).

47    In Airservices Australia v Ferrier (1996) 185 CLR 483 (‘Airservices’) the majority of the High Court (Dawson, Gaudron and McHugh JJ) set out the rationale and intended operation of this principle (albeit in the context of s 122 of the Bankruptcy Act 1966 (Cth)), which they referred to as the “doctrine of ultimate effect”. The majority held (at 501-503, 509):

If a payment is part of a wider transaction or a “running account” between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be “decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact.”

[…]

If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt.

[…]

If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction – they may even be better off. The supplying creditor, therefore, has received no preference…

[…]

Once the doctrine of ultimate effect is applied, it follows that the payments to Airservices gave it no preference, priority or advantage over the general body of creditors. On the contrary, the general body of creditors benefited from the revenues that were generated as the result of the services provided by and at the expense of Airservices. The value of the services provided exceeded the amount of the payments during the relevant period by several million dollars.

To ignore the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings between the parties would not advance the purpose for which s 122 was enacted.

(Footnotes omitted.)

48    From our review of the authorities, the applicable principles for the purpose of determining whether a payment was part of a continuous business relationship are, in summary, as follows:

(a)    the payment must be made in circumstances where there is a mutual assumption of a continuing relationship of debtor and creditor, with an expectation that further debits and credits will be recorded: Queensland Bacon v Rees (1967) 115 CLR 266 (‘Queensland Bacon’) at 285-286 (Barwick CJ); Airservices at 504-505 (Dawson, Gaudron and McHugh JJ);

(b)    it will usually be relevant to consider a statement of account in determining whether, from a business point of view, each particular payment was connected with the subsequent provision of goods or services: Sutherland t/as Southern Livestock Nutrition v Lofthouse (2007) 213 FLR 157 (‘Sutherland v Lofthouse’) at [35]-[36] (Nettle JA, Neave and Redlich JJA agreeing); see Airservices at 507 (Dawson, Gaudron and McHugh JJ);

(c)    if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired: Airservices at 501-502 (Dawson, Gaudron and McHugh JJ);

(d)    where the relationship contemplates further debits and credits, the appropriation of a payment to a past debt is not unusual and has no significance unless the parties expressly agree that one of the purposes of the payment is to permanently reduce the level of indebtedness below the level existing at the time of the agreement: Airservices at 508 (Dawson, Gaudron and McHugh JJ);

(e)    knowledge of insolvency, suspicion of insolvency, or reasonable grounds to suspect insolvency will not necessarily destroy a continuing business relationship: Hussain v CSR Building Products Ltd [2016] FCA 392 (‘Hussain’) at [222] (Edelman J); Clifton v CSR Building Products Pty Ltd [2011] SASC 103 (‘Clifton v CSR’) at [69]-[70] (Peek J); Carrello v Perrine Architecture Pty Ltd (2016) 112 ACSR 448 at [253]-[254]; cf Olifent at 199;

(f)    a stop on an account will not necessarily destroy a continuing business relationship: Clifton v CSR at [71] (Peek J). See also Hussain at [223] (Edelman J);

(g)    the continuing business relationship does not need to exist for the entirety of the relation-back period: Clifton v CSR at [86] (Peek J); and

(h)    the existence of a continuing business relationship is a question of substance, not form: Airservices at 505 (Dawson, Gaudron and McHugh JJ).

49    In applying s 588FA(3) of the Act, a number of single judges, including some of this Court, have referred to or relied upon the principle that there will be no mutual assumption of a continuing business relationship where the purpose of inducing further supply is “subordinated to a predominant purpose of recovering past indebtedness”: Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd (2001) 37 ACSR 477 (‘Sutherland v Eurolinx’) at [148] (Santow J). See Clifton v CSR at [73] (Peek J); Re Employ (No 96) Pty Ltd (in liq) (2013) 93 ACSR 48 at [43] (Black J); Stone v Melrose Cranes & Rigging Pty Ltd (No 2) (2018) ACSR 406 at [259] (Markovic J); Hussain at [221] (Edelman J); Wily & Anor v Eastern Elevators Pty Ltd (2003) 175 FLR 344 at [25] (Dunford J). This principle was also referred to by the primary judge at [96] J.

50    It is useful to say something about the origins of this principle. It arises from the decision of Santow J in the Equity Division of the Supreme Court of New South Wales in Sutherland v Eurolinx. After referring at length to the majority judgment in Airservices, his Honour observed:

[147]    …the basis of a running account is a continuing relationship between the debtor and creditor with an expectation that further debits and credits will be so incurred.

[148]    For that defence to be maintained, there are some essential prerequisites. First, there must be no cessation of that mutual assumption of payment and reciprocal supply throughout the relevant period. Second, those payments must continue to have as at least one operative, mutual purpose, namely inducing further supply. I would add that such purpose must not come to be subordinated to a predominant purpose of recovering past indebtedness.

(Emphasis added).

51    In the subsequent paragraphs of the judgment, it is clear that Santow J arrived at this conclusion by way of extrapolating from the majority judgment in Airservices, where the High Court found that all but the final payment in a series of 10 payments were part of a continuing business relationship. The final payment was made on the eve of the company’s liquidation under an agreement for the payment of all outstanding debt by instalments, although the company only paid $1,700,703.16 out of the $3,081,102.63 that was due to be paid as the first instalment. The creditor continued to provide some limited services. The majority of the High Court held (at 510):

After the payment on 18 December, Airservices provided further services to the value of $351,122.55 to Compass. Moreover, it seems certain that on 18 December Airservices believed that it would continue to provide services to Compass after that date. But notwithstanding the running account and the provision of these services after 17 December, the better view on the evidence is that in making its demand Airservices was looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services. Accordingly, we think that the whole of this payment should be regarded as a preference…

52    In Sutherland v Eurolinx, Santow J sought to ascertain the basis on which the final payment in Airservices had been distinguished from the other payments. To that end, his Honour observed:

[149]    What was it about the last payment as compared to the earlier ones that precluded the running account defence, when the previous nine payments were held to be covered by the defence? No alternative defence of good faith, valuable consideration or ordinary course of business was ultimately relied upon in relation to the previous nine payments, though originally part of Airservices grounds of defence. So it can be taken that it was not in contest that the previous payments were all received in circumstances where that defence of good faith could not have been maintained. But one cannot infer, one way or the other whether the earlier payments were received with actual knowledge of insolvency, as distinct from imputed knowledge based on the objective test of “reason to suspect”.

[150]    Perhaps the best explanation for this part of the decision is this. The circumstances of the demand for payment was made by the payee when it clearly knew at that time of the payer’s parlous circumstances. That demand in those circumstances must have led the court to conclude that the payee’s predominant concern was no longer continued supply but to get the previous accounts paid. By then continued supply, though it did not cease, appears to have receded in significance as a mutual purpose to the point where it was no longer to be treated as governing the parties’ relationship or at any rate was subordinated to getting paid. In Airservices supply did continue, it appears by then to have merely reflected the public obligation on Airservices to continue to provide civil aviation services for public safety reasons.

[151]    Thus the Airservices decision regarding the last payment should not be understood as negating the starting proposition. That proposition is that knowledge, even actual suspicion of insolvency, though coupled with a purpose of getting a previous account paid, does not of itself preclude the running account or continuing business relationship defence. But this is provided there still remains at least a substantive mutual purpose of continued supply which does not come to be subordinated to a predominant purpose of getting paid. It may well be so subordinated where the payer is known to be about to go under and the payee by its actions, such as demands for payment, signals that this has now become its predominant purpose. Further supply after that point is reached will not then suffice to negate that predominant purpose. This is more especially where continued supply is explicable for reasons such as public safety, though that reason by itself will not suffice to negate a running account.

    (Emphasis added.)

53    There is some ambiguity in the majority’s reasoning in respect of the final payment in Airservices. On the one hand, it is possible to say (as Santow J does) that their Honours recognised an operative mutual purpose of inducing further supply, albeit one that became subordinated to the purpose of recovering past indebtedness. On the other hand, it also seems possible to conclude that the majority did not accept that there was any mutual purpose of inducing further supply in respect of the final payment — notwithstanding the payee’s expectation that supply would continue and the fact that some services were in fact provided at a later date — and that this is the basis for the distinction drawn between the final payment and the others. The latter interpretation has some support in the use of the words “rather than” in the third sentence of the above passage at 510 of Airservices: “looking backwards rather than forwards” and “looking to the partial payment of the old debt rather than the provision of continuing services” (emphasis added).

54    With this in mind, the principle arising from the decision of Santow J in Sutherland v Eurolinx should be treated with some caution. It would not be consistent with the rationale behind s 588FA(3) of the Act — which recognises that a series of payments made by an insolvent company to induce creditors to provide further supply do not cause any disadvantage to the general body of creditors unless the total payments made exceed the total value of goods or services acquired — to take an unduly restrictive approach to the existence of a mutual assumption of a continuing business relationship in this context. Indeed, it is surely a reality of continuing to do business with a company in financial distress (as is contemplated by s 588FA(3)) that an unsecured creditor will often be concerned to ensure that payment is received for goods or services supplied. In such circumstances, it would be wrong to say that a mutual assumption of a continuing business relationship ceases whenever the balance tips ever so slightly in favour of recovering past indebtedness, such as where a creditor insists on payment of an ordinary invoice before continuing supply on terms.

55    At the other end of the scale, a creditor will not be permitted to hide behind the façade of a continuing business relationship when the true nature of what he or she is doing is seeking to recover past indebtedness in priority to other unsecured creditors. A mutual assumption of a continuing business relationship will cease in circumstances where the real purpose is the recovery of past indebtedness, so if it becomes clear on the evidence that the reality is there is a looking backwards to the payment of an old debt (and not to the provision of continuing services or goods) then there will be a preference.

56    Looking at the majority’s comments in Airservices (at 501-502), where their Honours were considering the purpose for which payments were “made and received”, there is no doubt that if the sole purpose is to discharge an existing debt, then there is a preference. Where the purpose of the payment is to induce the creditor to provide further goods or services, but also to discharge an existing indebtedness, then, as the majority said, the Court looks to the “ultimate effect of the transaction”. The purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference over other creditors but, ultimately, to determine whether there is an unfair preference, the Court must look at the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings.

57    Having made this observation, it is important then to keep in mind the operation of s 588FA(1) which concerns when a transaction is an unfair preference and s 588FA(3) which concerns when a transaction is part of a continuing business relationship. There are two questions to be considered: whether the transaction is part of a continuing business relationship; and whether a transaction will be a preference. Whether there is a preference by reference to the requirements of s 588FA(1) will involve looking at the effect of the transaction (and in the case of a running account or a continuing business relationship, the ultimate effect of the transaction). Section 588FA(3) is not itself concerned with this conclusion, but is directed to the treatment of a running account. There is nothing in the wording of the provisions as to purpose other than the reference in s 588FA(3) to whether a transaction is “for commercial purposes, an integral part of a continuing business relationship”. In answering this question, we consider that a court will need to view the evidence as a whole to ascertain whether the relevant transaction was undertaken to effectively pay an old debt (in whole or in part) rather than being undertaken for the provision of continuing services or supply of goods.

Consideration

58    It is necessary to start by considering the context of the commercial relationship between Badenoch and Gunns. Badenoch and Auspine entered into an agreement in August 2003 (‘Agreement’), which was renewed in 2008 for a further period up to June 2013 although was subsequently varied (and terminated) in August 2012. Under the Agreement, Badenoch was contracted to provide harvesting and hauling services in a specified quantity per annum, Badenoch was to provide an invoice at the end of each calendar month and payment was due on the last working day of the following month. From 2010 onwards, as the primary judge found, Gunns was regularly late in making payments and often made payments that were only in partial satisfaction of invoiced amounts such that, by the end of February 2012, Gunns owed Badenoch approximately $1.64 million.

59    It is clear that Gunns had not adhered strictly to the terms of the Agreement for some time. Yet Badenoch continued to provide services, issue invoices and regularly chase up Auspine for payment. Badenoch’s conduct is explicable for two key reasons. Firstly, as stated by Mr Peter Badenoch, Gunns was Badenoch’s only customer and so there were serious ramifications arising from a “stop supply” decision. Secondly, as found by the primary judge, Messrs Kenneth and Peter Badenoch genuinely believed that Gunns would ultimately be in a position to pay all of Badenoch’s outstanding invoices. That is, Badenoch continued to have faith that it would eventually be repaid for the services provided.

60    Notwithstanding these matters, in March 2012, and again in July 2012, Badenoch sought to apply additional pressure to obtain repayment of outstanding debt. In March 2012, Badenoch issued a letter of demand, implemented a 10 day “stop supply”, and negotiated a plan for repayment of its January and February invoices in exchange for the continued supply of services up to a $1 million credit limit. Later, in July 2012, Badenoch issued a second letter of demand, ceased providing services to Gunns, and then negotiated a plan for repayment of all outstanding debt in exchange for the provision of some limited services with a view to “gradual tapering off” of services.

61    It is convenient to consider each series of payments in turn.

Payments 1 and 2

62    Prior to the beginning of the relation-back period, there were clear signs to indicate the existence of a continuing business relationship between Badenoch and Gunns. There was ongoing activity on the business account. There was a system for invoicing and payment of services rendered (albeit one that was not always adhered to) and a clear mutual assumption of continued supply by reference to the Agreement. The question is whether Badenoch’s conduct in March 2012 amounted to a cessation of the continuing business relationship such that payments 1 and 2 fall outside of it.

63    Badenoch contends that its conduct ought to be understood in the context of it continuing to supply and intending to supply services, and Gunns continuing to accept and intending to accept those services. The essence of Badenoch’s submission is that it was obviously the intention to continue to supply services, just so long as payment was received for those services.

64    The Liquidators say Badenoch’s predominant focus from March 2012 onwards was on the recovery of past debt such that the nexus between the payments and the subsequent provision of services had been broken.

65    In the present case, we are not persuaded that any so-called tactics employed by Badenoch in March 2012 resulted in the loss of a mutual assumption of continued supply. The amounts sought by Badenoch in the letter of demand correlated precisely with the invoices issued for services rendered in January and February 2012. The subsequent correspondence between the parties focused on the dates for future supply and the desire to “get deliveries back on track”. Badenoch then resumed supplying services of substantial value and issuing monthly invoices for amounts that seemed no smaller (or larger) than usual.

66    The Liquidators rely on the decision of Peek J in Clifton v CSR, where his Honour described a supply stoppage as a “tactic employed… to obtain payment of at least part of the larger outstanding debt” (at [74]) and ultimately found that the continuing business relationship between the parties ceased on the day that a letter of demand was issued. However, in that case there was a stoppage for almost four weeks’ prior to the cessation date and the creditor had demanded payment of $20,000 and a further $36,361.12 in two days’ time in exchange for delivery of only $7,000 worth of product. In that instance, it is clear that the creditor was looking to repayment of the entirety of its debt and to gain priority over other creditors.

67    Viewed in the context of the entire business relationship, the measures adopted by Badenoch were unprecedented but the intended outcome remained the same: Badenoch wanted Gunns to continue to pay for past services so that Badenoch could continue to supply services in future. In this regard, there is some similarity to the understanding between the insolvent company and one of the creditors in Queensland Bacon, where Barwick CJ observed (at 281):

But clearly the course of business between the company and each creditor was such that the company could reasonably expect that so long as it paid the creditor’s accounts according to the current credit arrangements between them, the creditor would continue to supply upon the company’s order and upon the agreed terms of credit, goods in which they were mutually dealing. On the other hand, that course of business was such that the company could expect a rejection of its further orders for goods to be supplied on credit if it failed so to pay the creditor’s account.

68    The fact that Badenoch applied additional pressure in order to have two invoices paid does not mean that there ceased to be a mutual assumption of a continuing relationship of debtor and creditor. Rather, there was a clear expectation that further debts and credits would be recorded and the parties would return to trading on terms (albeit with a $1 million credit limit). It follows that, even though there was a temporary cessation of supply, there was no cessation of a mutual assumption of payment and reciprocal supply at least from 30 March 2012 onwards.

69    We should say something more about Badenoch’s state of mind. The Liquidators submit that, from at least March 2012, Badenoch had serious reservations about Gunns’ willingness and ability to pay, and so the primary judge ought to have found that Badenoch could not have sustained an expectation that it would be paid for future services.

70    The primary judge found that Messrs Kenneth and Peter Badenoch had a genuine belief that Gunns ultimately would be in a position to pay all of Badenoch’s outstanding invoices. The primary judge had the advantage of hearing the oral evidence of both of these witnesses and forming a view as to their state of mind and we do not see any error in her conclusions. Of course (and contrary to Badenoch’s submissions), a genuine belief as to eventual payment of all outstanding debt is not the same as an expectation of future payment in the sense of there being a mutual assumption of a continuing relationship of debtor and creditor.

71    However, to the extent Badenoch did have serious initial reservations about Gunns’ willingness and ability to pay (at least in the short term), we consider these reservations would have been addressed in the course of the negotiations in March 2012. In implementing the supply stoppage, issuing the demand and proposing a credit limit, Badenoch was effectively seeking assurance from Gunns that it would be paid for its services. The response from Gunns, which included a payment schedule for the January and February invoices, and the fact that two payments (prior to payments 1 and 2) were actually made within the week ought to have gone some way to allay Badenoch’s concerns. It is in this context that Badenoch resumed supply, and that payments 1 and 2 were made.

72    For these reasons, we respectfully disagree with the primary judge’s conclusion that payments 1 and 2 were not a part of a continuing business relationship for the purposes of s 588FA(3) of the Act.

Payments 3 and 4

73    The grounds for determining that there was a continuing business relationship from April to the end of June 2012 are even stronger. In April and June 2012, the parties seemed to be adhering (at least in principle) to the terms of the Agreement. Badenoch issued invoices at the beginning of the month in each of March and April 2012, and Gunns paid the invoices in full one month or so later. Badenoch did not need to apply any additional pressure to secure payment and did not make any further threats to discontinue supplying services to Gunns. Throughout this period, Badenoch continued to supply logging services to Gunns expecting to be paid, and Gunns continued to pay amounts to Badenoch in order to secure the continued provision of services.

74     As the primary judge observed ([54] J):

Badenoch continued providing services to Gunns throughout April, May and June. Despite Badenoch’s threat to cease services immediately if the debt rose above $1 million, at the end of April 2012, Badenoch was owed approximately $1.34 million (although that included the two invoices for April of $674,368.12 and $4,561.41 not due for payment until the end of May 2012), as at the end of May 2012, Badenoch was owed approximately $1.42 million (although that included the invoice for May of $737,733.68 not due for payment until the end of June 2012), and at the end of June 2012, Badenoch was owed approximately $1.37 million (although that included the invoice for June of $627,687.34 not due for payment until the end of July 2012).

75    It is clear that the continuing business relationship continued throughout this period up to the end of June 2012, and that payments 3 and 4 (which were referable to the March and April invoices) formed an integral part of that relationship. We do not consider that the primary judge erred in finding that payments 3 and 4 were a part of a continuing business relationship for the purpose of s 588FA(3) of the Act.

Payments 5 to 11

76    From July 2012, the nature of the relationship between the parties began to change. Badenoch insisted that Gunns enter into a payment plan for the repayment of all past debts (totalling approximately $1.36 million) as a precondition to supply of any further services.

77    Badenoch submits that the payment plan was at least in part designed to ensure that Badenoch continued to supply future services to Gunns and shows that it expected to be paid for those services. We do not accept this submission. Consistently with the primary judge’s findings, we consider that the plan was agreed to with a view towards cessation (not continuation) of future supply.

78    On 31 July 2012, Mr Peter Badenoch proposed by letter that Gunns and Badenoch “transition to a mutually acceptable termination of the agreement at the end of three or four months” and that there be “a gradual tapering off [of services] while another contractor gets up to speed”: see [77] J. This proposal and the subsequent variation of the Agreement on 20 August 2012 fundamentally changed the nature of the relationship between Gunns and Badenoch. Even though Badenoch provided some “limited final work” to Gunns in August and September 2012 ([89] J), Mr Peter Badenoch said in cross-examination that provision of further limited services was “absolutely” about getting Badenoch’s debt paid down, and that the “reality” was that “if [Badenoch] were no longer supplying that mill, we would have had to wait longer for our money”. By this point, it was clear that any mutual assumption of a continuous business relationship had ceased.

79    For these reasons, we do not consider that the primary judge erred in finding payments 5 to 11, being payments made after 31 July 2012, were not a part of a continuing business relationship for the purpose of s 588FA(3) of the Act.

Conclusion

80    Ground 2 of the notice of appeal should be upheld in part.

PEAK INDEBTEDNESS ISSUE

81    Ground 1 of the notice of appeal contends that the primary judge erred in finding that the peak indebtedness rule applies to claims made in respect of s 588FA of the Act.

82    In construing s 588FA(3)(c) of the Act, it is convenient to start with the language of the provision: “all the transactions forming part of the relationship”. In this regard, we agree with the following statement of the New Zealand Court of Appeal in Timberworld at [68] in relation to an equivalent New Zealand provision (s 295 of the Companies Act 1993 (NZ)):

The effect of the section, taken on its face, is to require all payments and transactions within the continuing business relationship to be netted off against one another. This includes both payments to the creditor and the supply of goods to the debtor….The statutory wording does not permit a liquidator to disregard some of those transactions. There is also no basis on which the liquidator can commence with only the first payment, and disregard the first supply of goods. The plain meaning of “all transactions” is just that.

83    As observed by the New Zealand Court of Appeal, the plain language of s 588FA(3) does not seem to contemplate the liquidator looking only at part of the transactions in the continuing business relationship. On its face, s 588FA(3) is intended to give the creditor the benefit of all (not part) of the dealings between the parties. However, the literal meaning of the provision presents some practical difficulty. As Master Burley observed in Olifent (at 200):

… in the case of a running account, the opening balance would, if it were not a nil balance, be no more than the opening entry on the account and it is almost inevitable that, in circumstances where the debtor company eventually goes into liquidation, the closing balance would exceed the opening balance. In that case, a preferential payment would rarely occur.

84    It is clear that a wholly literal interpretation of s 588FA(3) would lead to an absurd result in that trade creditors would effectively be made immune from the voidable preference regime. The question is thus: if “all transactions forming part of the relationship” does not mean exactly what it says, then what does it mean?

85    It is common ground between the parties that the relevant end date for the single transaction within the meaning of s 588FA(3)(c) is either the date of the cessation of the continuing business relationship or the date of liquidation, whichever is earlier. The issue in dispute is when the single transaction is said to begin.

86    Badenoch says that the relevant date must be either the relation-back day or the commencement of the continuing business relationship, whichever is latest. The Liquidators say that, applying the peak indebtedness rule, they should be free to choose any point in the continuing business relationship within the relation-back period. It is accepted that in almost all instances a company liquidator would choose the point of the company’s peak indebtedness as, when compared with the closing balance in claiming a preference, this will lead to the maximum net result.

87    In this regard, the parties agree that s 588FA(3) is to be construed by reference to s 588FE of the Act which prescribes time periods prior to the winding up in which transactions may be voidable. It is common ground that the single transaction must begin within the relation-back period, which is six months in the present case.

88    The Liquidators further contend that s 588FA(3) is to be construed by reference to s 588FF of the Act which provides for a mechanism under which a company liquidator can elect which voidable transactions to avoid. It is said that the peak indebtedness rule reflects the liquidator’s right of election and there is no principled reason why the position should be different where the relevant transactions form part of a continuing business relationship.

89    It is convenient here to provide an overview of the circumstances in which s 588FA(3) was introduced.

90    Section 588FA(3) was inserted into the 1989 Act by the Corporate Law Reform Act 1992 (Cth). The Explanatory Memorandum to the Corporate Law Reform Bill 1992 (‘Explanatory Memorandum’) stated (at [1042]):

…where a transaction is, for a commercial purpose, an integral part of a continuing business relationship such as a running account between a creditor and a company (including such a relationship to which other persons are parties), it should not be attacked as a preference, but rather the effect of all the transactions which form the relationship between that creditor and the company should be taken into account as though they constituted a single transaction. This provision is aimed at embodying in legislation the principles reflected in the cases of [Queensland Bacon] and Petagna Nominees Pty Ltd & Anor v AE Ledger (1989) 1 ACSR 547. The effect of these principles is that it is implicit in the circumstances in which payments are made to reduce the outstanding balance in a running account between the purchaser and supplier that there is a mutual assumption that the relationship of the purchaser and supplier would continue as would the relationship of debtor and creditor. The net effect, therefore, is such that payments ‘in’ are so integrally connected with payments ‘out’ that the ultimate effect of the course of the dealings should be considered to determine whether the payments are preferences…

91    The Explanatory Memorandum does not otherwise refer to the peak indebtedness rule. It also does not refer to the decision of Barwick CJ in Rees, which is the genesis for the rule.

92    In Rees, in the context of a preference claim under s 95 of the Bankruptcy Act 1924 (Cth), the High Court considered whether a series of transactions on a bank overdraft facility had the effect of giving the bank a preference over other unsecured creditors. It was not in dispute that there was a continuing business relationship between the parties such that this question was to be determined by the ultimate effect of the transactions. However, the bank submitted, among other things, that the whole transaction over the entire statutory period must be considered in order to determine whether there was a preference.

93    The Chief Justice held (at 220-221):

In this case the challenge is not to individual payments…at the time of the receipt of each deposit during the relevant period, the bank was able to retain at least some portion of it in permanent reduction of its account. What part it did retain can be determined by taking the total intake into the account during the period and deducting the outgo...It is sufficient in the circumstances of this case to take the overall effect of the deposits and the withdrawals in the period.

It was also said in argument for the bank that it was not permissible for the liquidator to choose a date within the period of six months and to make a comparison of the state of the overdrawn account at that date and its state at the date of the commencement of the winding up. It was submitted that the proper comparison was between the debit in the account at the commencement of the statutory period of six months and the debit at the commencement of the liquidation—a comparison which in this case would result in a materially lesser figure than that reached by taking the liquidator’s comparison. In my opinion the liquidator can choose any point during the statutory period in his endeavour to show from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of peak indebtedness of the account during the six months period.

I am therefore of opinion that, accepting all the findings of the primary judge except his finding as to the bona fides of the bank, the deposits to the company’s account during the period 1st December 1960 to 8th February 1961, to the extent that they were applied in permanent reduction of the bank’s debt, were not received bona fide by the bank within the meaning of the statute because at the time of their receipt the bank had at least reason to suspect that the company was unable to pay its debts as they became due, and that the effect of the receipt of that money applied as the bank proposed to apply it would be to give the bank a preference, priority or advantage over other creditors.

(Emphasis added.)

94    In a separate judgment, Kitto J agreed with Barwick CJ and did not make any further comment on the relevant start date for the calculation of the transaction. Justice Taylor delivered a separate judgment that did not address this question. The High Court made orders in the form sought by the liquidators declaring that the bank was liable to pay the sum of the total reduction in indebtedness in the period from 1 December 1960 to 8 February 1961 (inclusive) (ie only part of the six month statutory period).

95    Badenoch says that Barwick CJ’s statement about the liquidator’s right to choose the point of peak indebtedness was obiter dictum. This was also the view of the New Zealand Court of Appeal: see Timberworld at [35]. It is unnecessary for us to reach a view on this point. The statement by Barwick CJ was made in the context of a different statutory provision, whilst we are concerned with the interpretation and application of the Act.

96    We will now turn to the cases that are expressly referred to in the Explanatory Memorandum: Queensland Bacon and Petagna Nominees Pty Ltd & Anor v AE Ledger (1989) 1 ACSR 547 (‘Petagna’).

97    In Queensland Bacon, which involved the liquidators of the same insolvent company as Rees but different creditors, Barwick CJ (at 282) expanded on his previous statements in relation to the running account defence:

There is… considerable importance for the appellants in the resolution of the question whether these payments should each be regarded in isolation, the immediate effect of the payment to one creditor and not to others being taken as the relevant effect or whether these payments should be regarded as part of the overall series of not unrelated transactions recorded in the running account so that the net effect of the operations from the date of the first impugned payment to the date of liquidation becomes the determinant both of the fact and of the extent of preference….

I have been able to express the question in this fashion without taking any distinction between one of the voided payments and another because, as his Honour dealt with the matter, no fact or event existed or occurred between such limiting dates to warrant any different conclusion being drawn between one such payment and another. But there will be occasions when there will be such facts or events intervening between the first payment which is impugned and the commencement of the liquidation as will require the limiting dates to be different, the terminal date for consideration of the state of the running account being for that reason earlier than the date of the commencement of the liquidation.

(Emphasis added.)

98    The Chief Justice also discussed Richardson and said (at 286):

…it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relationship of debtor and creditor in the running account so that, to use the expressions employed in [Richardson] “it is impossible” – I interpolate, in a business sense— “to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed.”

99    Aside from two references to the date of the first impugned payment, there was no other express reference to the potential application of the peak indebtedness rule by Barwick CJ, Kitto J or Menzies J.

100    We will now turn to consider Petagna. In that case, Franklyn J of the Full Court of the Supreme Court of Western Australia (with whom Malcolm CJ agreed) distilled the law in relation to the running account defence into the following six principles (at 564):

1.    For the purpose of deciding whether a payment is void within s 95 of the Bankruptcy Act 1966 it is the effect in fact of the making of the payment that is decisive.

2.    Where the payment forms part of a wider transaction or where it is sufficiently connected with other items in a running account, it is the effect of the whole transaction, of all the connected items, that has to be regarded.

3.    The mere fact that a payment is in discharge of an existing or past indebtedness does not necessarily mean that its effect has to be considered in isolation.

4.    In deciding whether payments are so integrally connected with counter-payments that the ultimate effect of the course of dealings has to be considered to determine whether the payments are preferences, it is necessary to look at their business purpose or business character.

5.    It is not necessary that a payment should have been made under express arrangements for the continuation of the relationship reflected in the running account, for example, continuance of supply. It is enough if implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relation of debtor and creditor in the running account.

6.    The mere fact that a payment is made on a running account does not protect it from scrutiny and if a point comes where payments are made with a view to terminating the running account, or greatly reducing the level of credit granted on the account, the effect of these payments may be a preference. It follows that the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment. However, this does not mean that the connection between such a payment and dealings prior to the chosen date is to be ignored.

(Emphasis added.)

101    The Liquidators say that the first sentence in the emphasised text supports their contention that the date of the first impugned payment is the starting point from which all transactions (including supplies of goods and corresponding payments) are to be combined and considered as a single transaction. The primary judge expressed a similar view: see [108] J. However, if Franklyn J’s sixth principle is read as a whole, it appears that his Honour was not referring to the peak indebtedness rule at all. Read in the context of the preceding sentence, the liquidator’s freedom to “choose any point during the statutory period” is a freedom to choose the point from which to seek to show that the transactions have ceased to be part of a continuing business relationship. That is different to the peak indebtedness rule, which permits the liquidator, in effect, to choose when the continuing business relationship relevantly starts.

102    In any event, the Liquidators’ reading overlooks the important qualification in the second sentence — that dealings prior to the chosen date should not be ignored. This is a significant qualification that is also reflected in the outcome of the case. Even though the first impugned payment was on 4 November 1982, the Court looked at the period from 10 October 1982 (being the date that the running account was said to have begun) up to the date of winding up in determining whether there was a preference. This was fatal to the liquidator’s claim, as the extent of supply prior to the chosen date was such that there was no preference.

103    We interpolate that the Liquidators also submit that the Court in Petagna had cited with approval the decision of Gibbs J in Re Weiss; Ex parte White v John Vicars & Co Ltd (1970) ALR 654 (‘Re Weiss’) where it was found (at 661) that the applicant trustee could choose any later starting point within the relevant period to examine the net effect of a bankrupt’s payments to the defendant creditor. It is true that this was the outcome of that case. However, in referring to Re Weiss (at 564), Franklyn J in Petagna was only quoting from another decision (M & R Jones Shopfitting Co Pty Ltd (in liq) v The National Bank of Australiasia Ltd (1983) 7 ACLR 445) that in turn cited Re Weiss in relation to the running account doctrine generally and not the peak indebtedness rule. A mere reference of this nature does not seem to us to amount to a citation with approval.

104    We do not consider Petagna or Queensland Bacon to provide any support for the continued application of the peak indebtedness rule, nor can it be said that Parliament was intending to adopt the peak indebtedness rule in the context of s 588FA(3) of the Act when referring to those cases in the Explanatory Memorandum. In fact, notwithstanding that the peak indebtedness rule may have formed part of the common law at this time, the reference in the Explanatory Memorandum to Petagna lends support to the opposite conclusion: that it was Parliament’s intention to allow creditors to have the benefit of earlier dealings within a continuing business relationship when determining whether there has been an unfair preference.

105    Since the introduction of s 588FA(3) (formerly s 588FA(2)), there are a number of decisions where the peak indebtedness rule has been applied. However, Olifent is the only instance where the application of the rule has been expressly considered.

106    In Olifent, the creditor submitted that the provision should be construed so as to preclude the liquidator from picking the point of peak indebtedness as the starting point for the impugned transaction in the context of a continuing business relationship. Master Burley of the Supreme Court of South Australia rejected this submission and held (at 202-203):

If the continuing business relationship commenced prior to the commencement of the six-month period, it does not necessarily follow that the opening balance for the purposes referred to should be taken as the balance as at the date of the commencement of the six-month period. This seems to me to be just as arbitrary a starting point as picking the point of peak indebtedness. In my opinion, the nature and ambit of the running account defence under the former provisions is essentially the same as the defence provided for under the current provisions. The absence of any provision in s 588FA(2) to alter or vary the situation which pertained under the former provisions indicates that the legislature did not intend to alter that position. I therefore consider that what was said by Barwick CJ in Rees v Bank of New South Wales applies with equal force to the current provisions of the Law…

107    The peak indebtedness rule was subsequently applied by Australian courts without further discussion. For example, in Sutherland v Lofthouse, without the benefit of full argument in relation to the application of the rule, Nettle JA of the Court of Appeal of the Supreme Court of Victoria (as his Honour then was) held at [50] (Neave and Redlich JJA agreeing):

Where the balance of a continuing account fluctuates over the relation back period, a liquidator faced with the prospect of having to treat the account as a notional single transaction is entitled to pick the peak indebtedness during the relation back period as the beginning of the arrangement, in order to maximise recovery: Rees v Bank of New South Wales (1964) 111 CLR 210 at 221; Austin and Ramsay, Ford’s Principles of Corporations Law, 13th ed, Butterworths, Sydney, 2007 at [28.370]…

108    In Timberworld, the New Zealand Court of Appeal observed (at [41]):

…The Australian courts seem to have assumed the rule had the weight of authority and sufficient pedigree to warrant its direct application. We have located no Australian authorities offering a considered analysis of the rule.

109    To this line of cases, we would add that the construction of s 588FA(3) of the Act was considered by the Court of Appeal of the Supreme Court of Victoria in VR Dye & Co v Peninsula Hotels Pty Ltd (1999) 3 VR 201 (‘Dye v Peninsula Hotels’). In that case, Ormiston JA held at [33]-[34] (Winneke P and Tadgell JA agreeing):

The qualification applying to running account payments must be considered as being accepted by Parliament inasmuch as subs. (3) of s. 588FA explicitly recognises it. I would therefore conclude also that the other, formerly existing, apparent exceptions were intended still to apply and, to that extent, the legislative definition must be treated as purposive. In other words the section is still directed against unfair preferences. If that be so, then I would conclude that the new provision should be construed in the same way as the former provision, except to the extent that the language of s. 588FA clearly points to a contrary conclusion.

Consequently, although a number of judges at first instance have expressed different views as to the extent to which the earlier cases may bear upon the proper interpretation of s. 588FA, it is not necessary to examine those in detail for in my opinion it is clear that no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law.

(Emphasis added.)

110    In our view, as a result of the emphasised text, Dye v Peninsula Hotels adds little to the discussion. The language in s 588FA(3)(c) points clearly against the application of the peak indebtedness rule, and so, even if that rule formed part of the common law prior to the introduction of s 588FA, the emphasised text means that the matter of its continued application is left open. There was also no specific consideration of the peak indebtedness rule.

111    For the following reasons, we have determined that Olifent, and the decisions that followed it, were wrongly decided insofar as they applied the peak indebtedness rule to s 588FA(3) of the Act.

112    Firstly, as outlined above, we do not accept that there was any legislative intention to adopt the peak indebtedness rule when introducing the provision into the 1989 Act. The plain language of the statute and the legislative material both support Badenoch’s contention that the peak indebtedness rule was not intended to apply in the context of s 588FA(3). The words of s 588FA dictate that where the test in s 588FA(3)(a) and (b) is satisfied, there is taken to be a single transaction encompassing within it all payments and all supplies forming a part of the continuing business relationship. It is that single transaction that is to be the subject of the Court’s consideration under s 588FA(1) and s 588FA(3)(d) so as to determine whether or not the single transaction constitutes a preference. To apply a peak indebtedness rule is to impermissibly sever the single transaction into two parts and to ignore the commands in both sub-ss 588FA(3)(c) and (d). There can be no room for the implication of a rule that is inconsistent with the express language of the statute.

113    The Liquidators’ reliance on s 588FF of the Act as authorising a company liquidator to elect which payments to avoid is no answer to this. While a liquidator may choose not to impugn particular payments, if they are an integral part of a continuing business relationship then s 588FA plainly requires their effect to be considered by reference to the effect of all the transactions that form part of that relationship.

114    Secondly, s 588FA(3) of the Act embodies the doctrine of ‘ultimate effect’ which recognises that the general body of creditors are not disadvantaged by payments made to induce trade creditors to supply goods of equal or greater value: see Explanatory Memorandum at [1042]. This is consistent with the purpose behind Pt 5.7B of the Act which aims to balance the interests of unsecured creditors and persons who have engaged in fair transactions with the insolvent company: see Explanatory Memorandum at [1034]. The effect is to set apart certain trade creditors from the general pool of unsecured creditors and provide an incentive to continue providing value to companies in financial distress: Timberworld at [95] citing Allied Concrete Ltd v Meltzer (2015) NZBLC 99-717.

115    This principle was embraced by the High Court in Airservices, where the majority of the High Court held (at 509):

Once the doctrine of ultimate effect is applied, it follows that the payments to Airservices gave it no preference, priority or advantage over the general body of creditors. On the contrary, the general body of creditors benefited from the revenues that were generated as the result of the services provided by and at the expense of Airservices. The value of the services provided exceeded the amount of the payments during the relevant period by several million dollars.

To ignore the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings between the parties would not advance the purpose for which s 122 was enacted. That purpose is to strike down those payments by a debtor during the six-month period prior to bankruptcy that have the effect of depleting the assets available to the general body of creditors. But it is no purpose of s 122 to prevent a debtor from making payments - even payments to existing creditors - if the purpose of the payments is to acquire goods or services equal to or of greater value than the payment.

116    It is true that in the above passage, and elsewhere in Airservices, the High Court referred to the effect of a payment on the subsequent supply of services, and did not consider payments other than those that had been impugned. But that did not reflect any view that goods or services provided by the creditor before the first impugned payment must be disregarded in assessing the ultimate effect of the payment. To the contrary, at 503, the majority gave the example (from Richardson) of where “pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement”. That deposit, subsequent in time to the giving of credit, does not have the effect of depleting the assets available to the general body of creditors because the effect is to be judged by reference to the entire arrangement of which the deposit is a part, which may be comprised of elements which predate and postdate the impugned payment.

117    So in saying one should have regard to “the ultimate effect of the dealings between the parties”, the majority judgment in Airservices requires one to look to all payments (both impugned and non-impugned) and all supply (both past and future) forming part of the continuing business relationship and otherwise falling within the relevant statutory period. If value provided to the company and a subsequent payment against accrued debt are viewed as part of an arrangement which has the effect of giving the company valuable goods and services, there is no depletion of assets. If s 588FA(3) applies then it expressly requires them to be viewed that way.

118    Having so found, we then cannot see any way to reconcile the doctrine of ‘ultimate effect’ and the decision in Airservices with the peak indebtedness rule. We respectfully agree with the following reasons of the New Zealand Court of Appeal in Timberworld:

[81]     If the principle in Airservices Australia is that the ultimate effect must be considered in ascertaining the results of a running account, there is no doubt the peak indebtedness rule does violence to that principle. As earlier discussed, the liquidators contend this conclusion has been misused in New Zealand, incorrectly forming a “complete answer” to voidable claims. They submit preferences in the case of a running account should be assessed by looking to the first payment, rather than supply. That would ensure the “net preferential receipt” is considered, rather than using a running account to constitute in effect a complete defence to a preference claim.

[82]    The problem with this analysis is that it disregards the first advancement of supply, which would fall within the concept of “all transactions” in the running account as per s 292(4B), with no compelling explanation. Commencing with “payment” still requires the liquidator to select a payment, in the middle of the “single transaction” and assess preference only from that point onwards. The relevant question still remains: why should this be the starting point, in light of the clear statutory wording? The liquidators’ position assumes an answer to this question, without justifying it. It goes no further in offering a principled reason why the supplies prior to the first payment should be ignored in the “entire transaction”.

[…]

[84]    It is correct Airservices Australia was not a “peak indebtedness” case, but that was because there was no question the creditor had not been preferred. Whether or not a running account existed, Airservices Australia had clearly provided services in excess of any payment it had received. The key issue concerned the application of the running account on the facts. The central determination of the High Court was the relevance of the doctrine of “ultimate effect” to that quantum assessment. Peak indebtedness did not apply on the facts but Airservices Australia was still a running account case.

    (Footnotes omitted.)

119    Thirdly, we consider that abolition of the peak indebtedness rule is consistent with the stated purpose of Pt 5.7B of the Act which is, in essence, to do fairness between unsecured creditors. The following illustration from the submissions of the Australian Credit Forum to the Parliamentary Joint Committee on Corporations and Financial Services in its 2003 insolvency law inquiry (as set out in Timberworld) is useful to illustrate how the peak indebtedness rule can result in unfairness between unsecured creditors:

[87]    The Australian Credit Forum gave some examples to demonstrate the problems with the peak indebtedness rule. It posits three creditors, Creditor 1, 2 and 3. Each has provided Company X with a $10,000 credit limit. At the beginning of the specified period, the debtor’s level of indebtedness to each creditor is $60,000. At the end of the specified period, the debtor owes each creditor $10,000 once more. In each case, the creditor has provided $60,000 worth of supplies to the debtor, and has been paid $50,000. Assuming for present purposes these are correctly classified as running accounts, and the principle in s 292(4B) (or s 588FA(3) as the case may be) applies, there would be no net preference. Taking the running accounts as single transactions, in respect of Creditors 1, 2 and 3, payments did not exceed supply.

[88]    The Credit Forum demonstrates, however, if each creditor adopts different credit terms, the peak indebtedness results in a different preference calculation, despite, in substance, their having offered equal supplies and received equal payments. Creditor 1 may not require payment on any specific terms; Company X receives the goods advanced, and advances payments after the full advancement of goods to the value of $60,000. The point of peak indebtedness will be $60,000 and the preference will be as much (the previous supplies being disregarded prior to this point).

[89]    Creditor 2 imposes credit terms keeping to the credit limit, therefore advances goods to the value of $10,000 and receiving payment of as much each month. The point of peak indebtedness will only ever reach $20,000, and the preference received after that point will be $10,000. Creditor 3 on the other hand, may impose credit terms requiring payment after three months. It advances supplies to the value of $30,000, after which Company X advances $20,000 and returns to within the credit limit, thereafter receiving goods and paying in $10,000 instalments. In that case, peak indebtedness is $30,000 and the creditor received a preference of $20,000.

[90]     These illustrate the arbitrariness of peak indebtedness in operation. Despite each creditor advancing the same value of goods to Company X and receiving the same payments in return, the peak indebtedness rule can operate to produce vastly different outcomes, merely on the basis of the particular credit arrangements in each case. Contrary to the arguments advanced by the liquidators there is no connection between the “preference” received by one creditor, and the entitlement of another. Each creditor is a trade creditor in precisely the same ultimate circumstances, but is treated differently.

120    The Liquidators say that each creditor in the above scenarios has been treated equally in that they will be permitted to retain only those payments that secured the supply of subsequent goods or services of greater or equal value (that is, those that did not operate as a preference). However, this does not seem to address the unfairness suffered by those who have supplied goods and services of greater or equal value prior to impugned payment.

121    It is true that the arbitrary timing of a single transaction in the absence of the peak indebtedness rule may also result in unfairness, as liquidators may be less inclined to pursue preferences as the amount likely to be recovered may not justify the time and expense involved, and this may result in a lower return to creditors: see McAloon, D ‘“Ultimate Effect” or maximum recovery? – should liquidators be able to apply the “peak indebtedness rule” to running accounts when pursuing unfair preference claims?’ (2006) 14 Insolv LJ 90 at 96. We also accept that unfair results may arise in circumstances where, for example, the continuing business relationship commenced prior to the statutory period and the creditor has provided goods or services within the statutory period that are referable to a payment made outside of the statutory period. There is a certain degree of arbitrariness or unfairness that is inherent in either approach. Yet, in our view, the balance weighs in favour of not applying the peak indebtedness rule. In reaching this view, we take some small comfort in the fact that any unfairness appears to be a foreseeable consequence of the statutory regime.

122    We also note that there are longer statutory periods for other types of voidable transactions prescribed in s 588FE of the Act, with some being as long as ten years. This does not change our position as to the proper construction of the Act.

123    We therefore respectfully disagree with the primary judge’s conclusion that the Liquidators were 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. Ground 1 of the notice of appeal should be upheld.

GOOD FAITH DEFENCE

124    Ground 3 of the notice of appeal contends that the primary judge erred in finding that Badenoch had not established on the evidence that it had no reasonable grounds for suspecting Gunns and Auspine were insolvent at the relevant times or would become insolvent (s 588FG(2)(b)(i)) and that a reasonable person in Badenoch’s circumstances would have had no such grounds for suspecting insolvency (s 588FG(2)(b)(ii)), taking into account Badenoch’s circumstances as a small family owned regionally based logging company.

Relevant legal principles

125    For the purpose of s 588FG(2)(b) of the Act, “suspecting” means “a mistrust of the company’s ability to pay its debt as they became due and of the effect which acceptance of a payment would have as between the appellant and the company’s other creditors”: Sutherland v Lofthouse at [16] (Nettle JA). “Suspecting” has also been explained as involving “an actual apprehension or fear” of insolvency: Queensland Bacon at 303 (Kitto J).

126    The elements that the creditor must satisfy in s 588FG(2)(b)(i) and (ii) each require the creditor to satisfy an objective standard (at least in part) and require the Court to apply a standard of reasonableness.

127    The relevant question under s 588FG(2)(b)(i) is whether Badenoch, “with its perspicacity, the information available to it, and with any analysis of that information that it had made”, had no reasonable grounds for suspecting insolvency at the relevant time: Re Alsafe Security Products Pty Ltd [2016] NSWSC 428 at [33]-[34] (Black CJ); Hosking v Extend N Build Pty Ltd (2018) 357 ALR 795 at [115] (Bathurst CJ, Beazley P and Gleeson JA agreeing). To succeed, Badenoch must “negate any suggestion of actual apprehension of insolvency based on objective circumstances”: Dean Willcocks & Anor v Commissioner of Taxation (2004) 51 ACSR 353 at [28] (Young CJ in Eq).

128    The question under s 588FG(2)(b)(ii) is whether a reasonable person who has “the knowledge and experience of an average business person” (White v ACN 153 152 731 Pty Ltd (2018) 129 ACSR 182 at [123] (Murphy, Mitchell JA and Allanson J) citing Cussen (as liq of Akai Pty ltd (in liq)) v Commissioner of Taxation (2003) 51 ACSR 530 (‘Cussen’)) “in the creditor’s circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor’s insolvency”: Chicago Boot Co Pty Ltd v Davies & McIntosh (as joint and several liquidators of Harris Scarfe Ltd) (2011) 282 ALR 378 at [21] (White J, Nyland and Anderson JJ agreeing).

129    A creditor’s “circumstances” within the meaning of s 588FG(2)(b)(ii) refers to external factors and not the creditor’s individual characteristics such as their perspicacity or financial acumen: Cussen at [30]-[31] (Spigelman CJ, Handley and Tobias JJA agreeing).

Consideration

130    From at least March 2012 Badenoch had information available to it that indicated Gunns was insolvent or would become insolvent, and that Badenoch itself had concerns about Gunns’ ability to pay its debts as and when they fell due.

131    Badenoch had little basis, if any, to avert its suspicions so as to negate the inference of an actual apprehension of insolvency. The evidence was that Badenoch had in fact questioned Gunns’ solvency, issued letters of demand, threatened legal action, suspended, tapered and ceased supply of services, entered into payment arrangements and ultimately terminated the Agreement.

132    Even though Messrs Kenneth and Peter Badenoch may have genuinely believed Gunns would ultimately pay Badenoch’s invoices at some later date, such a belief is insufficient to establish that the appellant held no reasonable grounds for suspecting insolvency. Indeed, the existence of such a belief has limited relevance to the solvency of Gunns as the belief was confined to the payment of its debts to Badenoch (as distinct from all of its debts) and was directed to eventual payment of these debts at some later and unspecified date (as distinct from payment of debts as and when they fall due).

133    In the circumstances of this case, we do not consider there was any failure to consider the family nature of the business or give further weight to Badenoch’s own evidence or the reassurances given by the Gunns representatives. Putting aside the question of whether Badenoch’s position as a family owned company operating in a regional area of South Australia is a relevant circumstance for the purpose of s 588FG(2)(b)(ii), this does not mean that Badenoch was, or ought to have been, oblivious to readily available information concerning the financial position of its sole client and significant debtor.

134    It was also correct for the primary judge to find that a reasonable businessperson, even one without specific financial or legal expertise, would have appreciated the significance of Gunns suspending trading, selling assets, making late and rounded payments from asset sales, seeking to raise capital, restructure and refinance, an experiencing what Mr Peter Badenoch described as a “cashflow crisis”.

135    When considering these matters, a reasonable businessperson would certainly have feared that Gunns was or would become insolvent, notwithstanding any prior history of late payments or reassurances offered by Gunns.

136    In this regard, Badenoch’s submission that it was entitled to rely on Gunns’ reassurances is unconvincing. In our view, any reasonable businessperson in Badenoch’s circumstances would have been alert to the possibility that Gunns may not fully disclose its financial situation and would make his or her own external enquiries into Gunns’ financial position, particularly in circumstances where Gunns’ reassurances were at odds with all other available evidence.

137    There was a compelling basis for the primary judge to find, as she did, that Badenoch had not satisfied its onus of proving that it had (and a reasonable person in Badenoch’s circumstances would have had) no reasonable grounds for suspecting that the company was insolvent or would become insolvent.

SET-OFF ISSUE

138    Ground 4 of the notice of appeal contends that the primary judge erred in not finding that Badenoch was entitled to set off the sum of $568,321.81, being the amount still owing to it by Gunns, against any amount the Court finds it liable to pay the Liquidators pursuant to s 553C of the Act. This ground relates to Ground 1 of the notice of contention, which is addressed further below.

139    As we have already observed, the primary judge considered it unnecessary to determine whether set-off was available as a matter of law, as she found that Badenoch was barred from making such a claim by operation of s 553C(2) of the Act.

140    A creditor is not entitled to claim a set-off against an insolvent company if, at the time of giving or receiving credit to the company, the creditor had notice of the fact that the company was insolvent: s 553C(2) of the Act.

141    The primary judge correctly identified that the test for notice of insolvency under s 553C(2) is different to the test for reasonable grounds of suspicion for the purposes of s 588FG(2)(b), and so engaged in a fresh consideration of the facts.

142    On the basis of the evidence summarised by the primary judge at [127]-[131] J (see also [41] above), it was plainly open to find that Badenoch had notice of Gunns’ insolvency throughout the relation-back period, including at the time of each of the impugned payments.

143    The test is directed at notice of facts that objectively disclose that a company lacks the ability to pay its debts as and when they fall due, rather than the subjective awareness of the fact of insolvency: Jetaway Logistics Pty Ltd & Ors v Deputy Commissioner of Taxation (2009) 26 VR 657 at [21] (Maxwell P, Byrne and Williams AJJA). See also Hathaway Shirt Co Pty Ltd v B Rawe GmbH Co [1989] NSWCA 98 (25 July 1989) at 3-4 per Gleeson CJ (Samuels and Clarke JJA agreeing). It follows that even if Badenoch did not actually draw the conclusion that Gunns was insolvent from the information known to it (or genuinely believed that Gunns would pay eventually), it is enough that it had notice of facts that would plainly support such a conclusion. We do not consider that the primary judge erred in finding that Badenoch was not entitled to set-off under s 553C of the Act.

144    We would add that, by notice of contention, the Liquidators say as a matter of law that the Court may not permit the use of set-off under s 553C of the Act to reduce Badenoch’s liability to make any payment ordered by the Court under s 588FA of the Act. Having regard to our conclusion that the primary judge did not err in her conclusions on s 553C(2) of the Act, it is unnecessary for us to determine this question.

CONCLUSION

145    We will order that the parties confer and within 14 days file an agreed minute of orders (including as to costs) or, in default of agreement, written submissions no longer than 5 pages and proposed minutes of orders.

Associate:

Dated:    10 May 2021