Bryant v Badenoch Integrated Logging Pty Ltd

Case [2023] HCA 2

HIGH COURT OF AUSTRALIA

KIEFEL CJ,
GAGELER, GORDON, EDELMAN, STEWARD, GLEESON AND JAGOT JJ

DANIEL MATHEW BRYANT & ORS  APPELLANTS

AND

BADENOCH INTEGRATED LOGGING PTY LTD            RESPONDENT

Bryant v Badenoch Integrated Logging Pty Ltd

[2023] HCA 2

Date of Hearing: 18 October 2022
Date of Judgment: 8 February 2023

A10/2022

ORDER

1. The appeal be dismissed.

2. Special leave be granted to the respondent to cross-appeal to this Court from part of the judgment and order of the Full Court of the Federal Court of Australia given and made on 24 June 2021.

3. The cross-appeal be dismissed.

4. The appellants pay the respondent's costs of the appeal and the respondent pay the appellants' costs of the cross-appeal, such costs to be set off against each other.

On appeal from the Federal Court of Australia

Representation

B W Walker SC with B M Gibson for the appellants (instructed by Johnson Winter & Slattery)

M G R Gronow KC with R G Morison for the respondent (instructed by Scanlan Carroll Lawyers)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Bryant v Badenoch Integrated Logging Pty Ltd

Corporations – Winding up ­– Insolvency – Voidable transactions – Unfair preferences – Construction of s 588FA(3) of Corporations Act 2001 (Cth) – Where appellants liquidators of debtor company – Where respondent entered into agreement to supply services to debtor company for harvesting and hauling timber – Where respondent continued to provide services to debtor company despite debtor company's increasing indebtedness – Where liquidators applied to have series of payments made by debtor company to respondent within six‑month period ending on relation‑back day set aside as unfair preferences – Where liquidators contended that, if "continuing business relationship" existed so as to engage s 588FA(3), liquidators entitled by "peak indebtedness rule" to choose starting date of "single transaction" within relation‑back period to prove existence of unfair preference – Whether "peak indebtedness rule" part of or excluded by s 588FA(3) – Proper approach to construction of element of s 588FA(3)(a) that "transaction is, for commercial purposes, an integral part of a continuing business relationship" – Whether payments engaged s 588FA(3)(a).

Words and phrases – "business character of the transaction", "continuing business relationship", "peak indebtedness rule", "running account principle", "unfair preference", "voidable transactions", "winding up".

Corporations Act 2001 (Cth), Pt 5.7B, ss 588FA, 588FC, 588FE, 588FF, 588FG.

  1. KIEFEL CJ.   I agree with Jagot J.

  2. GAGELER J.   I agree with Jagot J.

  3. GORDON J.   I agree with Jagot J.

  4. EDELMAN J.   I agree with Jagot J.

  5. STEWARD J.   I agree with Jagot J.

  6. GLEESON J.   I agree with Jagot J.

  7. JAGOT J. Section 588FA(3) of the Corporations Act 2001 (Cth) is a statutory embodiment of the "running account principle" which has long been a part of insolvency law in Australia[1]. The effect of s 588FA(3) is that if "a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example,…

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Details
AGLC
Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2
Case
[2023] HCA 2
Decision Date

CaseChat Overview and Summary

The High Court of Australia considered an appeal by the liquidators of Gunns Limited and its subsidiary, Auspine Limited (together, "Gunns"), against Badenoch Integrated Logging Pty Ltd ("Badenoch"). The liquidators sought to set aside a series of payments made by Gunns to Badenoch within the six months preceding the appointment of administrators, contending these payments constituted unfair preferences under the *Corporations Act 2001* (Cth). Badenoch had supplied timber harvesting and hauling services to Gunns under an agreement renewed in 2008, and continued to do so despite Gunns' deteriorating financial position and late or partial payments.

The central legal issues before the Court were the proper construction of section 588FA(3) of the *Corporations Act 2001* (Cth), which deals with transactions forming an integral part of a continuing business relationship, and whether the "peak indebtedness rule" was incorporated or excluded by this provision. The liquidators argued that if a continuing business relationship existed, they could elect a starting point within the relation-back period to establish an unfair preference under the "peak indebtedness rule". The Court also had to determine the approach to assessing whether a transaction was "for commercial purposes, an integral part of a continuing business relationship" under section 588FA(3)(a).

The High Court held that Part 5.7B of the *Corporations Act 2001* (Cth) does not incorporate the "peak indebtedness rule". Instead, the first transaction that can form part of a continuing business relationship is either the first transaction after the commencement of the prescribed period or the date of insolvency, or if the relationship began after these dates, the first transaction after the relationship commenced, whichever is later. The Court clarified that determining whether a transaction is an integral part of a continuing business relationship requires an objective factual inquiry into the "business character" of the transaction, considering the entire evidence of the actual business relationship between the parties, rather than solely the intentions of the parties.

Consequently, the appeal was dismissed. The Court found that the Full Court of the Federal Court had not erred in concluding that certain initial payments were part of the continuing business relationship, while later payments were not. Furthermore, the Court agreed that the continuing business relationship did not cease until 10 July 2012, and that applying section 588FA(1) to the deemed single transaction under section 588FA(3)(c) meant no unfair preference could be established. Special leave to cross-appeal was granted to Badenoch but was also dismissed.

Orders

Orders of the court

1. The appeal be dismissed.

2. Special leave be granted to the respondent to cross-appeal to this Court from part of the judgment and order of the Full Court of the Federal Court of Australia given and made on 24 June 2021.

3. The cross-appeal be dismissed.

4. The appellants pay the respondent's costs of the appeal and the respondent pay the appellants' costs of the cross-appeal, such costs to be set off against each other.

Background

Background to the litigation

Section 588FG(2) is relevant because it means that an unfair preference under s 588FA concerns transactions entered into or given effect to at a time when either the party to the transaction (that is, the creditor) had reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as a result of the transaction, or a reasonable person in the creditor's circumstances would have had such grounds for so suspecting.The facts The appellants are the liquidators of Gunns Limited (in liquidation) (receivers and managers appointed) and its wholly owned subsidiary Auspine Limited (in liquidation) (receivers and managers appointed) (together, "Gunns"). The respondent, Badenoch Integrated Logging Pty Ltd ("Badenoch"), is a creditor of and former supplier of services to Gunns for harvesting and hauling timber to be processed by Gunns. Gunns and Badenoch entered into an agreement in 2003 for Badenoch to supply Gunns with timber. Under the agreement, Badenoch provided timber in a specified quantity per annum. Badenoch was to provide an invoice at the end of each calendar month and payment was due from Gunns on the last working day of the following month. They renewed their agreement in 2008 for the period from 1 January 2008 to June 2013. Gunns suffered significant declines in revenue from 2010. By late 2011, Gunns' parlous financial position was the subject of significant media coverage. On 9 March 2012, Gunns announced a halt in trading of its shares pending the release of an announcement to the market. Despite repeated efforts, Gunns was unable to raise sufficient further capital as required. Badenoch continued to provide services to Gunns during this time, despite Gunns frequently being late in making payments or only making partial payments. Badenoch took steps to protect its position from Gunns' increasing indebtedness and uncertain financial position in various ways, including threatening to cease supply and ceasing supply for short periods, issuing letters of demand, negotiating a payment plan, and seeking a bank guarantee. Ultimately, in August 2012, Badenoch agreed with Gunns to terminate the agreement on the basis that it would continue to supply some services for a further short period to enable "another contractor [to get] up to speed"[11].[11]Badenoch Integrated Logging Pty Ltd v Bryant (2021) 284 FCR 590 at 609 [78]. On 25 September 2012, and while Badenoch was continuing to supply some services to Gunns, Gunns appointed the liquidators as joint and several administrators. This is the "relation-back day" for the operation of s 588FE, the voidable transactions provision, of the Corporations Act[12]. [12]See s 91 of the Corporations Act. By an application under s 588FF(1) of the Corporations Act, the liquidators applied to have a series of payments made by Gunns to Badenoch during the period from 26 March to 25 September 2012 declared to be voidable transactions. This is the period of "the 6 months ending on the relation-back day" prescribed under s 588FE(2)(b) of the Corporations Act[13] (the "relation-back period"), on which the liquidators relied to impugn the transactions during that period as voidable transactions. [13]By s 588FE(2) of the Corporations Act, a transaction is voidable if it is an insolvent transaction of the company and was entered into or given effect, relevantly, during the six months ending on the relation-back day.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

KIEFEL CJ GAGELER J GORDON J EDELMAN J STEWARD J GLEESON J JAGOT J
The answer to each question depends on the proper construction of the relevant provisions of Pt 5.7B of the Corporations Act and the application of those provisions to the facts of the present case.Summary of conclusions First, Pt 5.7B of the Corporations Act does not incorporate the "peak indebtedness rule". Rather, the first transaction that can form part of the continuing business relationship contemplated by s 588FA(3) is either the first transaction after the beginning of the prescribed period or after the date of insolvency, or (if the relationship started after the beginning of the prescribed period or the date of insolvency) the first transaction after the beginning of the continuing business relationship, whichever is the later. Second, answering the statutory question under s 588FA(3)(a) whether a "transaction is, for commercial purposes, an integral part of a continuing business relationship" involves an objective factual inquiry. What one or both of the parties to the transaction intended (if ascertainable) may be relevant to, but is not determinative of, the statutory question. The task is one of characterisation of the facts, involving an objective ascertainment of the "business character"[4] of the relevant transaction. It is therefore necessary to consider the whole of the evidence of the "actual business" relationship between the parties[5].[4]Richardson v The Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 at 132 ("Richardson"), quoted in Airservices Australia v Ferrier (1996) 185 CLR 483 at 502.[5]Richardson (1952) 85 CLR 110 at 132; Airservices Australia v Ferrier (1996) 185 CLR 483 at 502; see also Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 286 ("Queensland Bacon"). Third, the Full Court did not err in concluding that certain payments were transactions forming an integral part of the continuing business relationship between Gunns and Badenoch (defined in these reasons below as payments 1 and 2)[6]. Nor did it err in concluding that other (later) payments were not transactions forming part of the continuing business relationship between Gunns and Badenoch (defined in these reasons below as payments 5 to 11)[7]. It also did not err in concluding that the continuing business relationship did not cease until 10 July 2012 and that, applying s 588FA(1) to the deemed single transaction created by s 588FA(3)(c) and as required by s 588FA(3)(d), there could be no unfair preference given by Gunns to Badenoch[8].[6]Badenoch Integrated Logging Pty Ltd v Bryant (2021) 284 FCR 590 at 608 [72].[7]Badenoch Integrated Logging Pty Ltd v Bryant (2021) 284 FCR 590 at 609 [79].[8]Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Ltd (in liq) (receivers and managers appointed) [No 2] [2021] FCAFC 111 at [9], [21] ("Badenoch Integrated Logging Pty Ltd v Bryant [No 2]"). Accordingly, the appeal should be dismissed, the respondent should be granted special leave to cross‑appeal, and the cross-appeal should also be dismissed.The statutory provisions

Ratio Decidendi

Legal Principle Established

Established by: KIEFEL CJ, GAGELER J, GORDON J, EDELMAN J, STEWARD J, GLEESON J, JAGOT J

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