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Will High Court ruling harm or help SMEs?

The two law firms acting in a landmark case have offered varying opinions on whether the abolition of the Peak Indebtedness Rule (PIR) will be to the detriment or benefit of SMEs

user iconJess Feyder 10 February 2023 Big Law
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Judgment in the case of Bryant v Badenoch Integrated Logging Pty Ltd was handed down on Wednesday (8 February) by the High Court of Australia, which saw the cross-appeal lodged by PricewaterhouseCoopers (PwC) dismissed. 

In 2012, PwC was appointed the liquidators of the Gunns Group (Gunns) — a major forestry enterprise in Tasmania — upon its insolvency.

The proceedings began in 2019, when PwC made an application under section 588FF of the Corporations Act, to claw back 11 payments totalling $3.3 million made by Gunns to the respondent, Badenoch Integrated Logging (Badenoch), which provided logging services to Gunns after it was found to be insolvent by the Federal Court. 


The trial judge found that Badenoch had to pay over $2 million to PwC. This decision validated the PIR — enabling the liquidator to recover unfair preference claims. 

The 2019 decision was subsequently appealed, and in October 2022, the Full Court of the Federal Court ruled against the lower court, finding that the PIR did not apply. 

In response to this ruling, PwC lodged a cross-appeal, and a decision was handed down yesterday (8 February), with Justice Jayne Jagot opting to dismiss it, with the majority agreeing with Her Honour.

The applicant, PwC, was represented by Johnson Winter Slattery, with the claim led by partners Paul Buitendag and Pravin Aathreya. The pair have maintained that this outcome could have a detrimental effect on SME businesses across Australia; however, the representatives of Badenoch have expressed the opposite view. 

Mr Buitendag and Mr Aathreya asserted that the PIR works to “achieve fairness between all unsecured creditors by allowing liquidators to pursue clawbacks of certain pre-insolvency payments made by the company”.

Amanda Harrington, one of the partners from Scanlan Carroll Lawyers representing Badenoch on the claim, said — in conversation with Lawyers Weekly — that the decision instead benefits SME businesses. 

“This judgment creates fairness amongst creditors who have continued to trade with the company in good faith,” stated Ms Harrington.   

“The removal of the PIR levels the playing field and protects creditors from unfair treatment where they have continued to provide goods and services to the company in financial trouble and … received payment of a lesser value,” explained Ms Harrington. 

“For decades, the PIR has been incorrectly applied,” she maintained, “which has allowed liquidators to claim all payments made to creditors of the company made in the relevant period while simultaneously ignoring the goods or services which were provided to the company in return for payment”.

The decision, she submitted, will prevent an unfair disadvantage to creditors and unfair gain to the company, which would otherwise maintain both the value of the goods provided and the payment claimed back by the liquidator for those goods. 

Mr Buitendag and Mr Aathreya also spoke to Lawyers Weekly in response to yesterday’s judgment: “The court has confirmed that defendants will be unable to rely upon the existence of a longstanding running account of many years’ standing as an automatic defence to an unfair preference claim.”

But Ms Harrington disputed this claim, arguing that “the removal of the PIR in no way prevents preference claims from being made”.

“It simply means that liquidators must take a fairer approach and offset the value received by the company,” she said. 

“The theory behind the preference claims regime is that funds paid to one creditor are clawed back to be evenly distributed to all creditors,” stated Ms Harington. This judgment stops money from being clawed back from unsecured trade creditors, who have, in many cases, provided goods or services for such payments, only to be paid to secured creditors, being banks.

In October, Mr Buitendag told Lawyers Weekly that the outcome makes it difficult to properly investigate director misconduct, in cases where directors may strip assets from companies.

Ms Harrington opposed this perspective: “The PIR and its application is all but irrelevant to directors striping out funds from the company.

“The judgment does not affect the ability to pursue directors or related entities who strip assets from the company, as the running account defence is only available to those who demonstrate a continuing business relationship which provides value to the company.”

“The application of this regime will now be pursuant to the wording of the Corporations Act 2001 and not in accordance with case law from many decades ago, which were outdated and impractical,” stated Ms Harrington.

“The outcome of this appeal will have a positive impact on small businesses [that] have been heavily affected by unfair preferences and the application of the PIR.

“Many small businesses who are creditors … also end up entering into administration as a result of the unfair preference regime and the application of the PIR.”

“A situation arises where creditors are providing millions of dollars of services, only to have to return all payments received.”

“This [judgment] will result in fewer liquidations and administrations, as creditors will no longer be required to return payment when they can demonstrate that they have provided equivalent goods or services to the company,” Ms Harrington explained. 

Nicholas Edwards, partner and head of restructuring and insolvency at Hamilton Locke, expressed views in alignment with Ms Harrington.

“The Badenoch decision benefits creditors who had a trading relationship with an insolvent company,” said Mr Edwards.

“It effectively removes the ability of a liquidator to ‘cherry pick’ the relevant date that may maximise the claim against that creditor.”

“This was often viewed as a perverse outcome when liquidators chased creditors who often unknowingly continued to support and supply a distressed business.”