These past months of early 2023 have seen two key high court decisions passed down with significant ramifications on the insolvency and legal landscape in Australia. Metal Manufactures Pty Limited v Morton (2023) HCA 1 (“Metal Manufactures”) and Bryant v Badenoch Integrated Logging Pty Ltd (2023) HCA 2 (“Bryant”) have handed down new rules for preference claims. Respectively, these are:

  • That preference claim set-off actions under section 553C of the Corporations Act 2001 (Cth) (“the Act”) cannot be applied to unfair transactions.
  • That the peak indebtedness rule does not apply to preference claims.

Due to the significant impact of these decisions on recovery actions available to liquidators, we will be going through the context of each decision and how they are likely to affect insolvency procedures going forward.


Metal Manufactures and Preference Claim Set Offs

Metal Manufactures Pty Limited was issued a preference claim in the amount of $190,000.00 by the liquidator of MJ Woodman Electrical Contractors Pty Limited after receiving payments during the relation back period. Metal Manufactures claimed that this amount should be set off due to MJ Woodman receiving goods prior to appointment in the amount of $194,727.23.


For context, a preference claim by a liquidator can be defined as any claim arising from a situation in which a creditor was unfairly preferred over other creditors in terms of payments made to it during the 6 month period prior to the relation back date (typically the date of liquidator appointment).


The federal court upheld that set off under s 553C(1) of the act was not an available defence, as such metal manufactures sought leave to appeal to the high court. This appeal was later denied by the high court, affirming the decision to deny this defence from the federal court.


This defence under the Act has typically been used in the past to negate or reduce liquidator claims in instances where the creditor is still owed money in the liquidation. However, with the High Court’s decision, it seems that this will no longer be a viable defence to a preference claim, which has been the common law standard in bankruptcy proceedings for the last century. In light of this it will be increasingly important for companies to be aware of their trade creditors solvency, and understand that there is a more limited defence to a preference claim should they receive a payment in the relation back period.


Bryant v Badenoch and Peak Indebtedness

Section 588FA(3) of the Act provides that if a transaction is considered part of a continuous business relationship, transactions that occur during the relation back period can be treated as a single transaction with respect to a preference claim.


Historically, liquidators have used the “peak indebtedness” rule as a means of quantifying the exact amount that can be claimed back with a preference. Specifically, taking the difference in value of peak debt owed by the insolvent company during the relation back period and the relation back start date.


In the case of Bryant v Badenoch, Bryant claimed Gunns Limited (In Liquidation) had made preference payments totalling $3,360,876.16 to Badenoch Integrated Logging Pty Ltd during the relation back period. Badenoch claimed a running account defence under s588FA(3), maintaining that the peak indebtedness rule should not form part of the s588FA(1) claim.


The High Court upheld the decision of the Federal Court, concluding that the peak indebtedness rule is excluded by a running account defence and inconsistent with the stated purpose of Part 5.7B of the Act.


Further, the court concluded that certain transactions claimed by the liquidator were part of a continuing business relationship, however several were not. As such in determining the quantum of an unfair preference claim, it is necessary to consider all evidence of a business relationship between the parties. In this case, payments made after Badenoch issued a request for a payment plan were able to be counted as a preference.


Overall, this can be considered a big win for creditors, especially those who might face preference claims as part of a running account. With this decision there is now a substantial precedent for defending the extent of transactions that can be claimed back, as well as lowering the potential quantum of the overall running account claim.


Key Takeaways

These first decisions of the new year represent a bit of a mixed bag for insolvency. Whilst the metal manufactures set off decision is good news for liquidators, the abolishment of the peak indebtedness rule will make certain preference claims less commercially viable.


As always if you have any questions about these court decisions or would like to discuss how they may affect you as a creditor, please send us an email at or call us on 1300 904 946.


This information and the contents of this publication, current as at the date of publication, is general to offer assistance to RRI Advisory’s clients, prospective clients and stakeholders, and are for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.