Chapter closed! High Court confirms the peak indebtedness rule and statutory set-off are no longer applicable to unfair preference claims
- Published 09.02.2023
In a significant day for insolvency professionals, the High Court of Australia (HCA), on 8 February 2023, has now settled two key uncertainties in the country’s unfair preference regime. HCA has confirmed that:
- the ‘peak indebtedness rule’ is now a thing of the past; and
- creditors cannot use set-off to reduce an unfair preference claim.
Running account calculation
The ‘peak indebtedness rule’ was first abolished by the Full Court of the Federal Court of Australia in May 2021 (see our TurkAlert dated 12 May 2021). That decision subsequently went on appeal to the HCA. HCA has now upheld in a unanimous decision1 that the peak indebtedness rule is not the correct method for calculating the deemed unfair preference under a running account. The deemed unfair amount must take into account all payments and transactions which form part of a running account. HCA made it clear that the purpose of the ‘running account principle’ intended by s.588FA(3) of the Corporations Act 2001 is not to maximise the potential claw-back recovery from creditors.
HCA also upheld2 the Full Court of the Federal Court of Australia’s decision in Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Ltd (FCAFC 2021) that statutory set-off cannot be applied by a creditor when defending an unfair preference claim (see our TurkAlert dated 22 December 2021). HCA was of the view that allowing set-off under unfair preference would diminish the pool of assets available to creditors, such pool of assets is restored by liquidators recovering payments that constitute under voidable transactions.
- HCA has now put an end to two key uncertainties in Australia’s unfair preference regime, which should see a reduction in litigation time and costs.
- Liquidators can no longer seek to maximise recovery by using the ‘peak indebtedness rule’ in calculating the deemed unfair preference under running account.
- Creditors may no longer reduce their liability under unfair preference by relying on statutory set-off so as not to diminish the distributable pool of asset to creditors.
Please contact Georgina Wu at firstname.lastname@example.org for further queries relating to unfair preference claims.
2 Metal Manufactures Pty Limited v Morton (HCA 2023)