A further twist in the Badenoch decision on the effect of the running account on a Liquidator’s preference claim.  When is the commencement date of the continuing business relationship?

Last month, we reported on the judgment of the Full Court of the Federal Court in Badenoch Integrated Logging Pty Ltd v Bryant [2021] FCAFC 64.

In summary, that decision appeared to overturn previous decisions on the running account “defence” to unfair preference claims.  Previously the running account effect on a preference claims was to reduce the Liquidator’s claim to the difference between the peak indebtedness of the supplier’s account and the closing balance of the account.

However, the initial judgment in Badenoch found that the supplier was entitled to have all its supplies during the preference period taken into account in making the assessment.

But … final orders were not made by the Court following that judgment but were held over pending further submissions from the parties.

The Court has recently made those orders and issued a further judgment in Badenoch Integrated Logging Pty Ltd v Bryant (No 2) [2021] FCAFC 111.

There were two main issues before the Court in this second judgment, notably the commencement date of the running account and the end date of the running account.  The Court dealt with the end date first.

End Date

The Court held that the continuing business relationship ended on the date of the last supply in that case (10 July 2012) but that the invoice rendered three weeks later (on 31 July 2012) was an integral part of the continuing business relationship.

So far, fairly clear.

Commencement Date

Having already determined that the “peak indebtedness rule” about when the running account period commences no longer applies (see our previous article), the Court did not take the opportunity to make a helpful statement of principle about when the continuing business relationship commences.

Rather, the Court was insistent, at paras [14] and [15], that by its determinations in respect of the Grounds of Appeal it was not determining when that relationship commenced.

The Court threw confusion into the mix by highlighting, at para [20], that:

“the relevant continuing business relationship (evidenced by the keeping of (the) running account) commenced in fact long before 26 March 2012 [the start of the six-month relation back period] and long before the date of Gunns’ insolvency.”

Later at para [22] the Court added another layer of confusion by highlighting that the running account might be construed as having commenced years prior to the relation back period.

This has the obvious conclusion that if the entire trading relationship is considered then the defendant supplier is likely to have supplied either more than or an amount equal to its debt.  Or, in other words, as the opening balance of the supplier’s account was $nil at commencement of the relationship – there could never be a nett preference claim.

The Court concluded with the unhelpful words “Whether that is the intended operation of the Act is a question that may be deferred to a case where the outcome depends upon it”.

Stop Press

We are aware that the Liquidator has filed an application for special leave to the High Court to appeal this outcome.  This process is in a very early stage. 

Take-aways from this Case

The main theme from this case is confusion.

Once it had overruled the “peak indebtedness rule”, the Court had an opportunity to provide clarity on the question of how the running account would work in the light of that.  Instead, the Court has layered uncertainty on every preference claim where the running account is or could become an issue.

Many Liquidators, having issued proceedings (which will be materially affected by this change) prior to the publication of these decisions, are now seeking to have those proceedings held pending the outcome of the High Court proceedings.

We will update readers as those proceedings progress.