Voidable transactions and the peak indebtedness rule

Voidable transactions and the peak indebtedness rule

In a 2021 appeal decision of the full bench (Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64), the Federal Court has overturned decades of precedent by deciding that the “peak indebtedness rule” did not apply to payments made by Gunns to Badenoch in the months prior to an administrator being appointed.

The abandonment of the peak indebtedness rule means that liquidators may be unable to claw back voidable transactions (such as payments made to directors, shareholders or family members in an attempt to defeat creditors) under s.588FF of the Corporations Act 2001.  As a result, liquidators may have less in the pool of funds to pay unsecured creditors and, in some cases, unsecured creditors may miss out on receiving payment or a dividend at all.

The liquidator’s appeal was heard by the High Court on 18 October 2022 and the Court’s decision was reserved.

Nancy Torry, Solicitor – 26th October 2022

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For a more detailed summary of the case and its implications on Australian law, read this article first published on the Lawyers Weekly web site on 23rd October 2022.