This article analyses the decision of Ball J in Kennedy Civil Contracting Pty Ltd (Administrators Appointed) (KCC) v Richard Crookes Construction Pty Ltd (RCC); in the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99 and considers the ramifications for the scope of section 32B of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

Key Points:

If you operate a business, it is important to be aware of what can happen if you receive a payment from a customer who subsequently goes into bankruptcy or liquidation, and that payment is found to be an unfair preference payment. Payments that are unfair preferences can be ‘clawed back’ by a liquidator or bankruptcy trustee.

Although the term ‘unfair preference’ is commonly referred to when a company goes into liquidation, the concept of an ‘unfair preference payment’ is not commonly understood. So, what is does ‘unfair preference’ mean and what you should you be aware of?

An administration is intended to achieve one of two objectives: 1. to rescue the company as a going concern; or 2. to achieve a better result for the company's creditors as a whole than would be likely if the company was placed into liquidation

The High Court has handed down its long-awaited decisions in Bryant v Badenoch Integrated Logging Pty Ltd [2023] (Badenoch) HCA 2 and Metal Manufactures Pty Ltd v Morton [2023] HCA 1 (Morton) providing guidance on common defences to unfair preference claims that may be brought by liquidators. The key takeaways for insolvency practitioners are:

The High Court of Australia in Metal Manufactures Pty Limited v Morton [2023] HCA 1 has confirmed the view of the Full Court of the Federal Court of Australia that the "set off" defence under section 553C of the Corporations Act 2001 (Cth) (Act) is no longer available to claims by liquidators for an unfair preference claim made under section 588FA of the Act.

This decision brings finality to claims brought by Creditor Defendants to such claims and no doubt brings much joy to liquidators across Australia.

Co-author: Ben  Gibson, Barrister, Victorian Bar

Case Name:Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2

Issues: Voidable transactions and unfair preferences: abolition of the peak indebtedness rule, the existence of a continuing business relationship.

The abolition of the peak indebtedness rule will likely reduce the quantum of unfair preference claims where there is a running account and render some claims unviable for further pursuit.

Insolvency practitioners and creditors facing voidable transaction claims will need to reassess the value of any potential or threatened unfair preference claims or other voidable transaction claims, following two important insolvency decisions in the High Court yesterday (Metal Manufactures Pty Limited v Morton [2023] HCA 1 (Metal Manufactures); Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 (Badenoch).

It held that:

In a historical first female majority High Court Judgment, Bryant v Badenoch Integrated Logging Pty Ltd[1]saw all seven Judges unanimously uphold the decision to abolish the Peak Indebtedness Rule, and set in place the starting point for calculation of “all transactions” in a “running account”.

If you’re thinking about tidying your corporate structure, now is the time to do it.