Update: Round 4 of Gunns out and shots fired – Badenoch special leave application to the High Court

The Melbourne RIT team recently published an article on the decision of the Full Court of the Federal Court of Australia in Badenoch (No 1) [2021] FCAFC 64. On 24 June 2021, the Full Court published a second judgment that fixed the start and end dates of the ‘single transaction’ between Gunns and Badenoch.

The Gunns liquidators have since made a special leave application to the High Court to appeal both of the Full Court’s decisions.

What are the grounds of appeal?

1. The Full Court erred in concluding that the peak indebtedness rule is not available to a liquidator seeking to establish an unfair preference under section 588FA of the Corporations Act 2001 (Cth) (Act).
2. The Full Court erred in refusing to apply the ‘predominant purpose’ test set out in Sutherland v Eurolinx; i.e. there can 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’.

What does this mean for the Full Court’s decisions?

If the liquidators succeed on both grounds of appeal, order will be restored and the Full Court’s decisions will be set aside. This will be a victory for liquidators across the country, who have been affected by a series of decisions that limited their ability to recover preferential payments under the Act.

Conversely, if the special leave application is denied or if the liquidators do not succeed on appeal, then a High Court decision will likely have put the issue to bed for the foreseeable future.

• If the Gunns liquidators fail on the first ground of appeal, liquidators will not be able to ‘cherry pick’ a date within the relation back period to maximise their recovery under section 588FA of the Act.
• If the Full Federal Court is correct in refusing to apply the ‘predominant purpose’ test, then a temporary cessation of supply does not mean that the continuing relationship between debtor and creditor automatically ceases as long as there is a clear expectation that future debts and credits will continue to be recorded and the parties will return to the usual trading on terms.

Takeaways

Contact us to discuss Badenoch’s impact if:

• you are a liquidator and you are about to commence action to recover unfair preference claims against other parties; or
• if you have received a demand from a liquidator, alleging that you have received preferential payments.

Queries

If you have any questions about this article, please get in touch with an author or any member of our Restructuring, Turnaround & Insolvency team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.