Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd

In the matter of Gunns Limited (in liquidation), receivers and managers appointed, the Federal Court was tasked with determining whether payments made by Gunns Limited to Edenborn Pty Ltd constituted unfair preferences under the Corporations Act 2001 (Cth). The Court had to decide on various legal issues, including whether there was a continuing business relationship between Gunns and Edenborn, the applicability of the ultimate effect doctrine, the peak indebtedness rule, and whether Edenborn had a good faith defence. The Court also needed to determine if it had the discretion to not make an order in respect of the preferential payments.

The evidence presented indicated that Gunns had a history of delayed payments to Edenborn, with payments often being partial and not corresponding to the outstanding invoices. Internal emails from Gunns' staff revealed concerns about Gunns' solvency and its ability to meet its financial obligations. Despite these issues, Edenborn continued to work with Gunns, albeit with increasing concern about its exposure and Gunns' payment practices. By August 2012, Edenborn had its debt paid in full, but only after refusing to resume work unless paid in full. The Court found that there was no sustainable business relationship between the parties and that the payments made by Gunns to Edenborn constituted unfair preferences.

The Court rejected the argument that the ultimate effect doctrine should apply, noting that there was a break in the continuing business relationship during the relevant period. The peak indebtedness rule was applied, and the Court found that Edenborn had not established a good faith defence. The Court concluded that it did not have the discretion to reduce the amount payable as a preference on the facts of the case. Consequently, the Court ruled that the payments made by Gunns to Edenborn were indeed unfair preferences.