Navigation

Timberworld: did creditors jump the Gunn?

Posted on July 16, 2020

Since judgment was delivered in Timberworld Ltd v Levin[1] (Timberworld) in 2015, creditors have referred to the New Zealand decision to undermine the “peak indebtedness” rule relied upon by Liquidators in unfair preference claims.

In three recent Federal Court of Australia applications, all filed by the Liquidators of Gunns Limited (In Liquidation) (Gunns), the Court has, for the first time, addressed the impact, or lack thereof, that Timberworld has had on the unfair preference regime in Australia.

Running Accounts & the Peak indebtedness rule

Pursuant to section 588FA(3) of the Corporations Act, a creditor can defend, or limit, a Liquidator’s unfair preference claim on the basis that a “running account” existed between it and the company in Liquidation.

The “peak indebtedness” rule is relied upon by Liquidators to calculate the value of a preference claim where a running account can be established.

The Liquidator calculates this claim by having reference to the highest point of indebtedness in a running account during the relation back period, less the total debt on account as at the relation-back day.

Peak indebtedness – balance of debt on relation back day = value of preference claim

The “peak indebtedness” rule has the effect of enabling Liquidators to continue to pursue preference payments in certain circumstances, even when a running balance defence is raised.

Timberworld

The New Zealand Court of Appeal in Timberworld decided against the “peak indebtedness” precedent set in existing Australian decisions.

The creditors in Timberworld argued that, on a reading of the reciprocal running account provisions in the New Zealand legislation,[2] the “peak indebtedness” rule could not be relied upon.

The Court of Appeal ultimately held that the “peak indebtedness” rule ignored the “express wording used by Parliament”[3] and did “violence” to the doctrine of ultimate effect.[4]

This decision provided Australian creditors with further ammunition to ward off unfair preference claims.

Gunns Limited (In Liquidation)

Despite creditors' continued reliance on the decision in Timberworld, the consequence of the decision was not considered by the Australian Court’s until the Gunns Liquidation.

The Liquidators of Gunns filed three separate unfair preference claims against Gunns’ creditors: Badenoch Intergrated Logging Pty Ltd (Badenoch),[5] Bluewood Industries Pty Ltd (Bluewood)[6] and Edenborn Pty Ltd (Edenborn).[7]

Badenoch, Bluewood and Edenborn all argued that, in light of Timberworld, previous decisions which applied the “peak indebtedness” rule were wrong and that the “peak indebtedness” rule should not be relied upon by Liquidators when calculating claims.

Notwithstanding the creditors’ argument, the Court was “not persuaded”[8] by the New Zealand Court of Appeal’s reasoning in Timberworld, and confirmed that it is correct to “continue to apply the peak indebtedness rule under” the current provisions in Australia.[9]

Where to now?

While the decision in Gunns may appear to be the saving-grace of the “peak indebtedness” rule, it does not have any substantial effect on the unfair preference regime in Australia.

The position remains as it always has been: the “peak indebtedness” rule is applicable and can be relied upon by Liquidators who are faced with a running account defence.

If you receive a preference demand or require assistance with any insolvency matter, please contact Lynch Meyer Lawyers' Insolvency and Restructuring team.

[1] [2015] 3 NZLR 365.
[2] Companies Act 1993 (NZ), section 292(4B).
[3] Timberworld at [69].
[4] Timberworld at [81].
[5] Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713.
[6] Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714.
[7] Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715.
[8] Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714 at [94].
[9] Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714 at [96].

View all articles