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Confirmation Peak Indebtedness is here to stay


In three simultaneous cases being run by the liquidators of Gunns Group, the Federal Court was asked to consider whether the Peak Indebtedness rule applies in relation to a Running Account Balance.

Whilst the three judgments: Edenborn, Bluewood, & Badenoch provide clarity on indebtedness, the hot topic of s553C Set-Off was again skirted.

Peak Indebtedness

The defendants in all three cases attempted to rely on a New Zealand Court of Appeal decision in Timberworld Ltd v Levin [2015] 3 NZLR 365 (“Timberworld”), which held that the peak indebtedness rule does not apply in New Zealand .

The Court was not persuaded that the peak indebtedness rule no longer applies under Australian law and disagreed with the conclusion in Timberworld that the peak indebtedness rule “does violence” to the ultimate effect doctrine as recognised by the High Court of Australia.

Davies J:

184  The Gunns preference claims appear to be the first occasion when an Australian court has been asked to consider Timberworld, as I was not referred to any Australian case which has considered Timberworld and researches have not come up with any cases.  Having considered the reasons given by the New Zealand Court of Appeal am, with respect, not persuaded that the peak indebtedness rule no longer applies under Australian law with the enactment of s588FA or that the Australian authorities which have applied the rule in the application of s588FA were clearly wrong, albeit that s292(4B) of the NZ Act is in materially the same terms as s588FA(3).

s553C Set-Off

Just like in a previous case discussed here – S553 LIQUIDATORS BE AWARE, The Court cited authorities for both and against s553C Set-Off but then elected to avoid this hot button topic altogether by finding that the defendants had notice of insolvency.

It seems that the s553C issue lives to fight another day.