Bryant & Ors as Liquidators of Gunns Limited and Auspine Limited v Badenoch Integrated Logging Pty Ltd

[2022] HCATrans 42

[2022] HCATrans 042

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A27 of 2021

B e t w e e n -

DANIEL MATHEW BRYANT, IAN MENZIES CARSON, AND CRAIG DAVID CROSBIE IN THEIR CAPACITIES AS JOINT AND SEVERAL LIQUIDATORS OF GUNNS LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 009 478 148) AND AUSPINE LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 004 289 730)

Applicants

and

BADENOCH INTEGRATED LOGGING PTY LTD (ACN 097 956 995)

Respondent

Application for special leave to appeal

KEANE J
GLEESON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA BY VIDEO CONNECTION

ON FRIDAY, 18 MARCH 2022, AT 12.30 PM

Copyright in the High Court of Australia

____________________

KEANE J:   In accordance with the Court’s protocol when sitting remotely, I will announce the parties’ appearances.

MR J.L. EVANS, QC appears with MR B.M. GIBSON for the applicants.  (instructed by Johnson Winter & Slattery)

MR M.G.R. GRONOW, QC appears with MS R.G. MORISON for the respondent.  (instructed by Scanlan Carroll)

KEANE J:   Yes, Mr Evans.

MR EVANS:   Thank you, your Honours.  This application raises separate, but related issues of public importance in the law of unfair preferences, both in respect of the peak indebtedness rule and the purpose test required for determining the existence of a continuing business relationship, but also in respect of what is the proper method if peak indebtedness does not apply as a principle of determining the commencement date of a single transaction under section 588FA(3) of the Corporations Act.

The three questions in respect of which the applicant seeks special leave are identified at paragraphs 4 to 6 of the application for special leave.  We say that each of those questions of themselves would be sufficient to warrant a grant of special leave and the application is made the more strong by virtue of the fact that there are three separate questions, each of which warrant a grant.

The first question which is identified is that in relation to what is described as the peak indebtedness rule – probably better described as a principle.  That principle, we say, is a combination of a liquidator’s long‑recognised right to elect which payments to avoid, in the context of an unfair preference claim, when dealt with in combination with the doctrine of ultimate effect, being the doctrine which was recognised by this Court in Airservices and also has been recognised in numerous cases prior to the Full Court’s decision in the context of 5.7B of the Corporations Act, following its introduction in 1993.   

With respect to the issues which we say are of particular importance with respect to the peak indebtedness rule, we refer to our written submission at paragraphs 44 to 47.  The existence of the peak indebtedness rule and its application to preferences where there is a continuing business relationship is a matter of significant public importance.  There are numerous - innumerable liquidations which occur each year in Australia of corporations.  There are numerous liquidations in which there are preference actions undertaken by a liquidator for the benefit of all creditors.

KEANE J:   Mr Evans, I think so far as the importance of the question is concerned, you are probably pushing against an open door – speaking…..of course, but I think of more significance for your application might be a question as to whether the questions that you are posing, particularly the third, might be resolved against you on the basis of just a view of the facts of the case.

MR EVANS:   With respect to ‑ ‑ ‑

GLEESON J:   Sorry, can I just indicate as to that observation about pushing at an open door, I do not disagree with Justice Keane.

MR EVANS:   Thank you.  With respect to the findings made by the court below, we have challenged the Full Court’s conclusion that the continuing business relationship only commenced after the first two payments – they have accepted that there was a continuing business relationship from perhaps 28 or 30 March 2012, or prior to that date.  The conclusion which the Full Court reached was that it ended on 10 July 2012, or 31 July 2012.

Her Honour Justice Davies found, as a matter of fact, that the relationship ended on or about 30 June 2012.  We say in our written application, particularly in the reply at paragraph 4, that we challenge the Full Court’s conclusion that the correct end date is 31 July 2012.  If that challenge is accepted then, and we are successful in restoring the primary judge’s date, then the peak indebtedness issue certainly arises for determination.

In respect of what would occur with respect to peak indebtedness if that date is not successfully challenged, we still say that this case is an appropriate vehicle for determination of the continued application of the peak indebtedness rule because it is an integral part of every preference claim that the first thing that needs to be done is to identify the transaction.  Then, once a court has identified what the transaction is which is said to be a preference, it then applies the wording of section 588FA(1)(a) and (b) to determine whether or not the transaction is, in fact, a preference.

We say that the peak indebtedness rule, properly identified, is one where the liquidator can effectively define a starting date of the transaction where there is a single transaction due to continuing business relationship.  In this case, the Full Federal Court determined that the transaction only started – or started perhaps on 26 March 2012, or perhaps on 30 March 2012, or perhaps on some other date – which we say was an uncertainty.

With respect to continuing business relationship, we say that the factual – if we look at the predominant purpose test – the factual conclusions reached by Justice Davies as the primary judge were not challenged or found to be in any regard incorrect by the Full Court.  That included her Honour’s findings with respect to the discussions that took place between Gunns…..in or about March and, I think, February to April 2012. 

We say that if one looks at those, as her Honour did, with the application of predominant purpose, then the correct conclusion is that reached by her Honour.  If one looks at it through the prism of sole purpose – as we say the Full Court did – then, applying that test to the same facts as found by her Honour, we say that the conclusion is that reached by the Full Court, namely, that payments 1 and 2 would be seen as part of the continuing business…..

Success, therefore, on the predominant purpose issue, we say, would restore our judgment for an additional $800,000 – even if there is no alteration to the 31 July 2012 or 10 July 2012 end date, which was substituted by the Full Court for the 30 June 2012 end date found by her Honour. 

GLEESON J:   Mr Evans, I am not sure that I accept the way that you have characterised the Full Court’s decision in paragraph 2 of your application for special leave.

MR EVANS:   I apologise, I am not necessarily understanding your Honour’s question.

GLEESON J:   It is not entirely – in fact, it is not clear to me that the Full Court did adopt a sole purpose test in considering the continuing business relationship question.

MR EVANS:   We have done our best, if I may say, to articulate in the application for special leave, what it was that the Full Court did.  The Full Court identifies in the reasons that the predominant purpose test – which is the one best articulated by Justice Santow in Sutherland v Eurolinx – created a relevantly clear and uncomplicated test with respect to the ascertainment of the purpose that operated in respect of a particular payment. 

Justice Santow, in reaching that test, did so by reference to trying to interpret the reasons of the majority of the High Court in Airservices and then to apply those in context where the High Court found that the ninth payment made in the Airservices Case was a preference.  The Full Court, effectively, said that it disagreed with the interpretation of Airservices – which was determined by Justice Santow – but it did not, as it were, clearly articulate whether or not it was putting in place some other test. 

In the reasons, at paragraph 53, of the Full Court, the Full Court seems to say that, as a possible interpretation of what was said by the majority in Airservices – this is in the third sentence:

On the other hand, it also seems possible to conclude that the majority did not accept that there was any mutual purpose of inducing further supply in respect of the final payment –

They then say in paragraph 55 – they refer to:

A mutual assumption . . . will cease in circumstances where the real purpose is the recovery of past indebtedness –

Then, at paragraph 56, they identify the utility of a sole purpose test and say that will necessarily be a clear case but then say, in the sixth line of paragraph 56:

The purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference over other creditors but, ultimately, to determine whether there is an unfair preference, the Court must look at the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings.

Then, your Honours, at paragraph 57, in the final sentence, the court says:

In answering this question –

that is to say, the question of the treatment of a running account:

we consider that a court will need to view the evidence as a whole to ascertain whether the relevant transaction was undertaken to effectively pay an old debt . . . rather than being undertaken for the provision of continuing services or supply of goods.

It is the use particularly of “rather than” which seems to us to adopt the criteria of sole purpose – noting, of course that that is similar to the language that was used in Airservices, which Justice Santow determined could be or was most properly interpreted to mean a predominant purpose test.  But we look at that in the context where paragraph 53, which I took your Honours to, said it was possible to conclude that the majority did not accept that there was any mutual purpose. 

So, the way we interpret paragraphs 53 through to 57 is to conclude that, as best we can glean from the reasons of the Full Court, they have sought to adopt a sole purpose test.  If they have not adopted a sole purpose test then, as we say in our reply, instead what has happened is that a criterion which appeared reasonably certain, the predominant purpose test, and capable of reasonably easy application, has been replaced by something which is now confused and uncertain and that in order to address that confusion, that is the basis on which we say that a grant of special leave is warranted in respect of that question.

I should say we endorse and would seek to agitate that the predominant purpose test propounded by Justice Santow is (a) consistent with Airservices and cases prior to Airservices and that it should be applied as the appropriate criterion for determining whether in circumstances of payment where there are multiple purposes, and in most cases of payment there will be multiple purposes, one might say, then that is an appropriate criterion for determining whether or not the payment should be considered to be part of the continuing business relationship.

I should say we deal with the issue here at paragraphs 33 to 37 of the special leave application.  If the Court grants special leave and determines the application, even on the basis that the predominant purpose test – we do not see that there is proper scope not to be able to argue that if the predominant purpose test is the proper criterion, and it does appear to have been rejected by the Full Court, that we are not entitled to recover with respect to payments 1 and 2.  We say that there is nothing in the Full Court’s reasons, if the predominant purpose test is adopted, which would suggest that there is a basis for substituting a different verdict to that reached by Justice Davies at first instance. 

Unless your Honours have any other questions with respect to either the issue of special leave, and I note in that regard what each of your Honours has said, those are the submissions we would seek to rely upon.

KEANE J:   Thanks, Mr Evans.  Yes, Mr Gronow.

MR GRONOW:   We accept that the peak indebtedness rule is an important point of law with wide practical application.  We say that special leave should be refused because the Full Court decision is plainly correct, and this is not a case of inconsistent intermediate appellate court decisions requiring clarification from this Court. 

In my submission, it is plain from the wording of section 588FA(3) that the Parliament intended that the liquidators would have to take into account all the transactions forming part of the relationship.  In my submission, it is also clear what “all the transactions” means, because 588FA must be read in the context of 588FE.  In this case it is the transactions within the six months. 

I accept that it would be absurd if it was all the transactions in the previous 20 years or whenever the business relationship started, but you have to read the sections in context of each other, and the Parliament has plainly intended to allow six months as the period for a preference of this kind.  Of course, it might be four years if it were a related party transaction, but that is not this case.

The Full Court, in my submission, correctly followed the New Zealand Court of Appeal decision relating to similar legislation in New Zealand, which indeed appears to have been modelled closely on the Australian legislation, and there is no reason for this Court to reconsider the correctness of either decision.  I also accept what Justice Ormiston said in the Peninsula Hotels v Dye case that the Parliament intended to replicate the pre‑existing common law unless the contrary intention appears, but in my submission paragraph (c) of section 588FA(3) does show that, because it says:

in relation to all the transactions –

and those words must be given effect, so they must include all the transactions within the relevant period, assuming, of course, that a continuing business relationship can be established. 

Now, unless your Honours have questions for me on the peak indebtedness issue, I would like to pass to the next issues, which are relating to the test for the continuing business relationship.

KEANE J:   Sure, go ahead.

MR GRONOW:   Thank you, your Honours.  In practical terms that is probably more important, as Mr Evans says, makes a difference of about $880,000 to how much my client is ordered to pay Mr Evans’ clients, because the effect of the Full Court decision was that we got the first four payments, not just payments 3 and 4 as set out in paragraph 5 of the Full Court’s reasons. 

In my submission, the Full Court correctly applied the law, and they certainly looked closely at Sutherland v Eurolinx, but in my submission the Full Court correctly applied the law as it is stated by this Court in the Airservices v Ferrier Case.  I point particularly to the fact that if you look at paragraph 56, the Full Court accepts

there is no doubt that if the sole purpose is to discharge an existing debt, then there is a preference.

That is plainly the case also in Airservices v Ferrier.  If you then go to paragraph 57, the Full Court correctly applies what this Court said in the Airservices Case, particularly if you go, I think about five lines down into paragraph 57 of the Full Court reasons:

Whether there is a preference by reference to the requirements of s 588FA(1) will involve looking at the effect of the transaction (and in the case of a running account or a continuing business relationship, the ultimate effect of the transaction).

That is what this Court has said, and then they go on to say:

There is nothing in the wording of the provisions as to purpose other than the reference in s 588FA(3) to whether a transaction is “for commercial purposes, an integral part of a continuing business relationship”.  In answering this question, we consider that a court will need to view the evidence as a whole to ascertain whether the relevant transaction was undertaken to effectively pay an old debt (in whole or in part) rather than being undertaken for the provision of continuing services or supply of goods.

Again, in my submission that is an accurate statement of the law.  The Full Court correctly says that aspects of the Sutherland v Eurolinx decision should be treated with caution because they appear to place an additional gloss on the wording of the legislation.  In my submission, that is inappropriate.  It is a question of fact, and the question of fact is whether the transaction is for commercial purposes as an integral part of a continuing business relationship, and as the Full Court said, you have to look at:

the evidence as a whole –

and then see whether it:

was undertaken to effectively pay an old debt . . . rather than being undertaken for the provisions of continuing services or supply of goods.

KEANE J:   But is not the problem saying “one rather than another” because the ultimate ‑ ‑ ‑ 

MR GRONOW:   Sorry, I cannot hear your Honour.

KEANE J:   You should be able to hear me, I am ‑ ‑ ‑ 

MR GRONOW:   I can now, your Honour, thank you.

KEANE J:   Thanks.  But is not the difficulty with saying one purpose rather than the other that - the ultimate question concerns the maintenance of a continuing relationship and, at least very often, paying a past indebtedness is naturally spoken of as being integral to the continuance, or to ensuring the continuance of that relationship?  It seems to me that certainly that last sentence in paragraph 57 does seem to be drawing a bright line that is inconsistent with Eurolinx and the Eurolinx view of this Court’s decision, or what this Court said in it.

MR GRONOW:   I respectfully accept what your Honour has said, but in my submission the question is, is it, as a matter of fact, part of the continuing business relationship?  Payment of past debt will always be a purpose - of course the creditor wants to get paid, every creditor does.  Now, if it is the sole purpose, then there is no continuing business relationship and the Full Court said that, and this Court said it in Airservices v Ferrier.  If they are mixed purposes the question is, is it sufficient to take it out of being a continuing business relationship?

Now, in my submission, Justice Santow’s use of the predominant purpose test is inconsistent with what this Court said in Airservices v Ferrier and it places a gloss on the legislation and so, in my submission ‑ ‑ ‑ 

KEANE J:   If that is right, should we not be giving Eurolinx its quietus?

MR GRONOW:   Well, yes, your Honour, I mean – to the extent that they are different, I say that the Full Court got it right and Eurolinx is wrong.  I do not know that they are that different, but to the extent there is a difference, and your Honour has just pointed to one, I say the Full Court is right.  The Full Court is right because it correctly applied the Airservices v Ferrier decision which actually related to the old legislation, but I have never heard anybody suggest it would not equally apply to the current

legislation, particularly the issue of whether there is a continuing business relationship as a matter of fact on the basis of the whole evidence.

Each court assessing this has to look at the evidence, and the question of fact the judge should be asking her or himself is, is this payment an integral part of a continuing business relationship, and the judge should do so without adding in other words about predominant purposes and so on.  So, the question will be, is the concentration on past indebtedness recovery so much so that you can no longer say it is part of a continuing business relationship?

In Airservices, this Court said, well, all the payments were except for the last one, and even though some services were provided after the last one, this Court said, well, everyone knew in the time of the making of the last payment that the relationship was about to be terminated because the airline was in huge financial difficulty.  In my submission, the Full Court has done no more than to correctly summarise and apply the law as stated in Airservices v Ferrier.  Sorry, have I answered your Honour’s question?

KEANE J:   Yes, thanks, Mr Gronow.

MR GRONOW:   Then, your Honours, unless your Honours have further questions for me, I do not think I have anything further to say than is in my written submissions.

KEANE J:   Thanks, Mr Gronow.  Mr Evans, anything in reply?

MR EVANS:   Yes, quickly.  We maintain that the peak indebtedness principle as rejected by the Full Court has been subject of approval by various intermediate courts of appeal as we have set out in paragraph 45 of our special leave application.  We say that the use of the words “all the transactions” in section 588FA(3)(c) is inherently ambiguous, and that is, if I may say, accepted by the Full Court where it said that if it was taken literally it would produce an absurd outcome, and therefore it must have some other alternative meaning.

So, we say that there is an ambiguity there which has yet to be resolved by – or it has led to the resolution of a question by the Full Court in a manner which is inconsistent with the previous decisions and intermediate courts of appeal, which we have identified in paragraphs 45 and 46 of our special leave application. 

With respect to continuing business relationship, the legislation says nothing about what constitutes a continuing business relationship other than the use of the phrase “for commercial purposes”.  The meaning of a continuing business relationship has generally fallen to be interpreted by

reference to the running account cases from Richardson onwards, including some consideration of it in Airservices, but it is by no means the fact that the intention of whether there is to be a purpose test is to be found by reference to the statute, and its wording is to be found by a reference to the authorities that deal with it.

We also say, finally, that the rejection by the Full Court of the principle in Eurolinx, if that is indeed what has occurred, and we say it is, and Mr Gronow accepts that, is inconsistent with numerous previous decisions in which that test had been adopted, and we refer to the cases that we have identified in paragraph 49 of our special leave application. 

So we say that there is, in terms of the criteria laid down by section 35A of the Judiciary Act with respect to circumstances which warrant a grant of special leave, all of them are present in this case.

KEANE J:   Thanks, Mr Evans.  The Court will adjourn briefly to consider the course it will take in this matter. 

Adjourn the Court, please.

AT 1.01 PM SHORT ADJOURNMENT

UPON RESUMING AT 1.07 PM:

KEANE J:   Gentlemen, there will be a grant of special leave in this matter.  Mr Evans, in terms of timing, how long should we allow for the hearing of the appeal?

MR EVANS:   I would have thought a day.

KEANE J:   Mr Gronow?

MR GRONOW:   I would say half a day to a day, your Honour.

KEANE J:   Very well.  Thank you very much, gentlemen.  Special leave is granted. 

The Court will now adjourn.

AT 1.08 PM THE MATTER WAS CONCLUDED