PEAK INDEBTEDNESS ISSUE
81 Ground 1 of the notice of appeal contends that the primary judge erred in finding that the peak indebtedness rule applies to claims made in respect of s 588FA of the Act.
82 In construing s 588FA(3)(c) of the Act, it is convenient to start with the language of the provision: "all the transactions forming part of the relationship". In this regard, we agree with the following statement of the New Zealand Court of Appeal in Timberworld at [68] in relation to an equivalent New Zealand provision (s 295 of the Companies Act 1993 (NZ)):
The effect of the section, taken on its face, is to require all payments and transactions within the continuing business relationship to be netted off against one another. This includes both payments to the creditor and the supply of goods to the debtor….The statutory wording does not permit a liquidator to disregard some of those transactions. There is also no basis on which the liquidator can commence with only the first payment, and disregard the first supply of goods. The plain meaning of "all transactions" is just that.
83 As observed by the New Zealand Court of Appeal, the plain language of s 588FA(3) does not seem to contemplate the liquidator looking only at part of the transactions in the continuing business relationship. On its face, s 588FA(3) is intended to give the creditor the benefit of all (not part) of the dealings between the parties. However, the literal meaning of the provision presents some practical difficulty. As Master Burley observed in Olifent (at 200):
… in the case of a running account, the opening balance would, if it were not a nil balance, be no more than the opening entry on the account and it is almost inevitable that, in circumstances where the debtor company eventually goes into liquidation, the closing balance would exceed the opening balance. In that case, a preferential payment would rarely occur.
84 It is clear that a wholly literal interpretation of s 588FA(3) would lead to an absurd result in that trade creditors would effectively be made immune from the voidable preference regime. The question is thus: if "all transactions forming part of the relationship" does not mean exactly what it says, then what does it mean?
85 It is common ground between the parties that the relevant end date for the single transaction within the meaning of s 588FA(3)(c) is either the date of the cessation of the continuing business relationship or the date of liquidation, whichever is earlier. The issue in dispute is when the single transaction is said to begin.
86 Badenoch says that the relevant date must be either the relation-back day or the commencement of the continuing business relationship, whichever is latest. The Liquidators say that, applying the peak indebtedness rule, they should be free to choose any point in the continuing business relationship within the relation-back period. It is accepted that in almost all instances a company liquidator would choose the point of the company's peak indebtedness as, when compared with the closing balance in claiming a preference, this will lead to the maximum net result.
87 In this regard, the parties agree that s 588FA(3) is to be construed by reference to s 588FE of the Act which prescribes time periods prior to the winding up in which transactions may be voidable. It is common ground that the single transaction must begin within the relation-back period, which is six months in the present case.
88 The Liquidators further contend that s 588FA(3) is to be construed by reference to s 588FF of the Act which provides for a mechanism under which a company liquidator can elect which voidable transactions to avoid. It is said that the peak indebtedness rule reflects the liquidator's right of election and there is no principled reason why the position should be different where the relevant transactions form part of a continuing business relationship.
89 It is convenient here to provide an overview of the circumstances in which s 588FA(3) was introduced.
90 Section 588FA(3) was inserted into the 1989 Act by the Corporate Law Reform Act 1992 (Cth). The Explanatory Memorandum to the Corporate Law Reform Bill 1992 ('Explanatory Memorandum') stated (at [1042]):
…where a transaction is, for a commercial purpose, an integral part of a continuing business relationship such as a running account between a creditor and a company (including such a relationship to which other persons are parties), it should not be attacked as a preference, but rather the effect of all the transactions which form the relationship between that creditor and the company should be taken into account as though they constituted a single transaction. This provision is aimed at embodying in legislation the principles reflected in the cases of [Queensland Bacon] and Petagna Nominees Pty Ltd & Anor v AE Ledger (1989) 1 ACSR 547. The effect of these principles is that it is implicit in the circumstances in which payments are made to reduce the outstanding balance in a running account between the purchaser and supplier that there is a mutual assumption that the relationship of the purchaser and supplier would continue as would the relationship of debtor and creditor. The net effect, therefore, is such that payments 'in' are so integrally connected with payments 'out' that the ultimate effect of the course of the dealings should be considered to determine whether the payments are preferences…
91 The Explanatory Memorandum does not otherwise refer to the peak indebtedness rule. It also does not refer to the decision of Barwick CJ in Rees, which is the genesis for the rule.
92 In Rees, in the context of a preference claim under s 95 of the Bankruptcy Act 1924 (Cth), the High Court considered whether a series of transactions on a bank overdraft facility had the effect of giving the bank a preference over other unsecured creditors. It was not in dispute that there was a continuing business relationship between the parties such that this question was to be determined by the ultimate effect of the transactions. However, the bank submitted, among other things, that the whole transaction over the entire statutory period must be considered in order to determine whether there was a preference.
93 The Chief Justice held (at 220-221):
In this case the challenge is not to individual payments…at the time of the receipt of each deposit during the relevant period, the bank was able to retain at least some portion of it in permanent reduction of its account. What part it did retain can be determined by taking the total intake into the account during the period and deducting the outgo...It is sufficient in the circumstances of this case to take the overall effect of the deposits and the withdrawals in the period.
It was also said in argument for the bank that it was not permissible for the liquidator to choose a date within the period of six months and to make a comparison of the state of the overdrawn account at that date and its state at the date of the commencement of the winding up. It was submitted that the proper comparison was between the debit in the account at the commencement of the statutory period of six months and the debit at the commencement of the liquidation - a comparison which in this case would result in a materially lesser figure than that reached by taking the liquidator's comparison. In my opinion the liquidator can choose any point during the statutory period in his endeavour to show from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of peak indebtedness of the account during the six months period.
I am therefore of opinion that, accepting all the findings of the primary judge except his finding as to the bona fides of the bank, the deposits to the company's account during the period 1st December 1960 to 8th February 1961, to the extent that they were applied in permanent reduction of the bank's debt, were not received bona fide by the bank within the meaning of the statute because at the time of their receipt the bank had at least reason to suspect that the company was unable to pay its debts as they became due, and that the effect of the receipt of that money applied as the bank proposed to apply it would be to give the bank a preference, priority or advantage over other creditors.
(Emphasis added.)
94 In a separate judgment, Kitto J agreed with Barwick CJ and did not make any further comment on the relevant start date for the calculation of the transaction. Justice Taylor delivered a separate judgment that did not address this question. The High Court made orders in the form sought by the liquidators declaring that the bank was liable to pay the sum of the total reduction in indebtedness in the period from 1 December 1960 to 8 February 1961 (inclusive) (ie only part of the six month statutory period).
95 Badenoch says that Barwick CJ's statement about the liquidator's right to choose the point of peak indebtedness was obiter dictum. This was also the view of the New Zealand Court of Appeal: see Timberworld at [35]. It is unnecessary for us to reach a view on this point. The statement by Barwick CJ was made in the context of a different statutory provision, whilst we are concerned with the interpretation and application of the Act.
96 We will now turn to the cases that are expressly referred to in the Explanatory Memorandum: Queensland Bacon and Petagna Nominees Pty Ltd & Anor v AE Ledger (1989) 1 ACSR 547 ('Petagna').
97 In Queensland Bacon, which involved the liquidators of the same insolvent company as Rees but different creditors, Barwick CJ (at 282) expanded on his previous statements in relation to the running account defence:
There is… considerable importance for the appellants in the resolution of the question whether these payments should each be regarded in isolation, the immediate effect of the payment to one creditor and not to others being taken as the relevant effect or whether these payments should be regarded as part of the overall series of not unrelated transactions recorded in the running account so that the net effect of the operations from the date of the first impugned payment to the date of liquidation becomes the determinant both of the fact and of the extent of preference….
I have been able to express the question in this fashion without taking any distinction between one of the voided payments and another because, as his Honour dealt with the matter, no fact or event existed or occurred between such limiting dates to warrant any different conclusion being drawn between one such payment and another. But there will be occasions when there will be such facts or events intervening between the first payment which is impugned and the commencement of the liquidation as will require the limiting dates to be different, the terminal date for consideration of the state of the running account being for that reason earlier than the date of the commencement of the liquidation.
(Emphasis added.)
98 The Chief Justice also discussed Richardson and said (at 286):
…it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relationship of debtor and creditor in the running account so that, to use the expressions employed in [Richardson] "it is impossible" - I interpolate, in a business sense - "to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed."
99 Aside from two references to the date of the first impugned payment, there was no other express reference to the potential application of the peak indebtedness rule by Barwick CJ, Kitto J or Menzies J.
100 We will now turn to consider Petagna. In that case, Franklyn J of the Full Court of the Supreme Court of Western Australia (with whom Malcolm CJ agreed) distilled the law in relation to the running account defence into the following six principles (at 564):
1. For the purpose of deciding whether a payment is void within s 95 of the Bankruptcy Act 1966 it is the effect in fact of the making of the payment that is decisive.
2. Where the payment forms part of a wider transaction or where it is sufficiently connected with other items in a running account, it is the effect of the whole transaction, of all the connected items, that has to be regarded.
3. The mere fact that a payment is in discharge of an existing or past indebtedness does not necessarily mean that its effect has to be considered in isolation.
4. In deciding whether payments are so integrally connected with counter-payments that the ultimate effect of the course of dealings has to be considered to determine whether the payments are preferences, it is necessary to look at their business purpose or business character.
5. It is not necessary that a payment should have been made under express arrangements for the continuation of the relationship reflected in the running account, for example, continuance of supply. It is enough if implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relation of debtor and creditor in the running account.
6. The mere fact that a payment is made on a running account does not protect it from scrutiny and if a point comes where payments are made with a view to terminating the running account, or greatly reducing the level of credit granted on the account, the effect of these payments may be a preference. It follows that the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment. However, this does not mean that the connection between such a payment and dealings prior to the chosen date is to be ignored.
(Emphasis added.)
101 The Liquidators say that the first sentence in the emphasised text supports their contention that the date of the first impugned payment is the starting point from which all transactions (including supplies of goods and corresponding payments) are to be combined and considered as a single transaction. The primary judge expressed a similar view: see [108] J. However, if Franklyn J's sixth principle is read as a whole, it appears that his Honour was not referring to the peak indebtedness rule at all. Read in the context of the preceding sentence, the liquidator's freedom to "choose any point during the statutory period" is a freedom to choose the point from which to seek to show that the transactions have ceased to be part of a continuing business relationship. That is different to the peak indebtedness rule, which permits the liquidator, in effect, to choose when the continuing business relationship relevantly starts.
102 In any event, the Liquidators' reading overlooks the important qualification in the second sentence - that dealings prior to the chosen date should not be ignored. This is a significant qualification that is also reflected in the outcome of the case. Even though the first impugned payment was on 4 November 1982, the Court looked at the period from 10 October 1982 (being the date that the running account was said to have begun) up to the date of winding up in determining whether there was a preference. This was fatal to the liquidator's claim, as the extent of supply prior to the chosen date was such that there was no preference.
103 We interpolate that the Liquidators also submit that the Court in Petagna had cited with approval the decision of Gibbs J in Re Weiss; Ex parte White v John Vicars & Co Ltd (1970) ALR 654 ('Re Weiss') where it was found (at 661) that the applicant trustee could choose any later starting point within the relevant period to examine the net effect of a bankrupt's payments to the defendant creditor. It is true that this was the outcome of that case. However, in referring to Re Weiss (at 564), Franklyn J in Petagna was only quoting from another decision (M & R Jones Shopfitting Co Pty Ltd (in liq) v The National Bank of Australiasia Ltd (1983) 7 ACLR 445) that in turn cited Re Weiss in relation to the running account doctrine generally and not the peak indebtedness rule. A mere reference of this nature does not seem to us to amount to a citation with approval.
104 We do not consider Petagna or Queensland Bacon to provide any support for the continued application of the peak indebtedness rule, nor can it be said that Parliament was intending to adopt the peak indebtedness rule in the context of s 588FA(3) of the Act when referring to those cases in the Explanatory Memorandum. In fact, notwithstanding that the peak indebtedness rule may have formed part of the common law at this time, the reference in the Explanatory Memorandum to Petagna lends support to the opposite conclusion: that it was Parliament's intention to allow creditors to have the benefit of earlier dealings within a continuing business relationship when determining whether there has been an unfair preference.
105 Since the introduction of s 588FA(3) (formerly s 588FA(2)), there are a number of decisions where the peak indebtedness rule has been applied. However, Olifent is the only instance where the application of the rule has been expressly considered.
106 In Olifent, the creditor submitted that the provision should be construed so as to preclude the liquidator from picking the point of peak indebtedness as the starting point for the impugned transaction in the context of a continuing business relationship. Master Burley of the Supreme Court of South Australia rejected this submission and held (at 202-203):
If the continuing business relationship commenced prior to the commencement of the six-month period, it does not necessarily follow that the opening balance for the purposes referred to should be taken as the balance as at the date of the commencement of the six-month period. This seems to me to be just as arbitrary a starting point as picking the point of peak indebtedness. In my opinion, the nature and ambit of the running account defence under the former provisions is essentially the same as the defence provided for under the current provisions. The absence of any provision in s 588FA(2) to alter or vary the situation which pertained under the former provisions indicates that the legislature did not intend to alter that position. I therefore consider that what was said by Barwick CJ in Rees v Bank of New South Wales applies with equal force to the current provisions of the Law…
107 The peak indebtedness rule was subsequently applied by Australian courts without further discussion. For example, in Sutherland v Lofthouse, without the benefit of full argument in relation to the application of the rule, Nettle JA of the Court of Appeal of the Supreme Court of Victoria (as his Honour then was) held at [50] (Neave and Redlich JJA agreeing):
Where the balance of a continuing account fluctuates over the relation back period, a liquidator faced with the prospect of having to treat the account as a notional single transaction is entitled to pick the peak indebtedness during the relation back period as the beginning of the arrangement, in order to maximise recovery: Rees v Bank of New South Wales (1964) 111 CLR 210 at 221; Austin and Ramsay, Ford's Principles of Corporations Law, 13th ed, Butterworths, Sydney, 2007 at [28.370]…
108 In Timberworld, the New Zealand Court of Appeal observed (at [41]):
…The Australian courts seem to have assumed the rule had the weight of authority and sufficient pedigree to warrant its direct application. We have located no Australian authorities offering a considered analysis of the rule.
109 To this line of cases, we would add that the construction of s 588FA(3) of the Act was considered by the Court of Appeal of the Supreme Court of Victoria in VR Dye & Co v Peninsula Hotels Pty Ltd (1999) 3 VR 201 ('Dye v Peninsula Hotels'). In that case, Ormiston JA held at [33]-[34] (Winneke P and Tadgell JA agreeing):
The qualification applying to running account payments must be considered as being accepted by Parliament inasmuch as subs. (3) of s. 588FA explicitly recognises it. I would therefore conclude also that the other, formerly existing, apparent exceptions were intended still to apply and, to that extent, the legislative definition must be treated as purposive. In other words the section is still directed against unfair preferences. If that be so, then I would conclude that the new provision should be construed in the same way as the former provision, except to the extent that the language of s. 588FA clearly points to a contrary conclusion.
Consequently, although a number of judges at first instance have expressed different views as to the extent to which the earlier cases may bear upon the proper interpretation of s. 588FA, it is not necessary to examine those in detail for in my opinion it is clear that no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law.
(Emphasis added.)
110 In our view, as a result of the emphasised text, Dye v Peninsula Hotels adds little to the discussion. The language in s 588FA(3)(c) points clearly against the application of the peak indebtedness rule, and so, even if that rule formed part of the common law prior to the introduction of s 588FA, the emphasised text means that the matter of its continued application is left open. There was also no specific consideration of the peak indebtedness rule.
111 For the following reasons, we have determined that Olifent, and the decisions that followed it, were wrongly decided insofar as they applied the peak indebtedness rule to s 588FA(3) of the Act.
112 Firstly, as outlined above, we do not accept that there was any legislative intention to adopt the peak indebtedness rule when introducing the provision into the 1989 Act. The plain language of the statute and the legislative material both support Badenoch's contention that the peak indebtedness rule was not intended to apply in the context of s 588FA(3). The words of s 588FA dictate that where the test in s 588FA(3)(a) and (b) is satisfied, there is taken to be a single transaction encompassing within it all payments and all supplies forming a part of the continuing business relationship. It is that single transaction that is to be the subject of the Court's consideration under s 588FA(1) and s 588FA(3)(d) so as to determine whether or not the single transaction constitutes a preference. To apply a peak indebtedness rule is to impermissibly sever the single transaction into two parts and to ignore the commands in both sub-ss 588FA(3)(c) and (d). There can be no room for the implication of a rule that is inconsistent with the express language of the statute.
113 The Liquidators' reliance on s 588FF of the Act as authorising a company liquidator to elect which payments to avoid is no answer to this. While a liquidator may choose not to impugn particular payments, if they are an integral part of a continuing business relationship then s 588FA plainly requires their effect to be considered by reference to the effect of all the transactions that form part of that relationship.
114 Secondly, s 588FA(3) of the Act embodies the doctrine of 'ultimate effect' which recognises that the general body of creditors are not disadvantaged by payments made to induce trade creditors to supply goods of equal or greater value: see Explanatory Memorandum at [1042]. This is consistent with the purpose behind Pt 5.7B of the Act which aims to balance the interests of unsecured creditors and persons who have engaged in fair transactions with the insolvent company: see Explanatory Memorandum at [1034]. The effect is to set apart certain trade creditors from the general pool of unsecured creditors and provide an incentive to continue providing value to companies in financial distress: Timberworld at [95] citing Allied Concrete Ltd v Meltzer (2015) NZBLC 99-717.
115 This principle was embraced by the High Court in Airservices, where the majority of the High Court held (at 509):
Once the doctrine of ultimate effect is applied, it follows that the payments to Airservices gave it no preference, priority or advantage over the general body of creditors. On the contrary, the general body of creditors benefited from the revenues that were generated as the result of the services provided by and at the expense of Airservices. The value of the services provided exceeded the amount of the payments during the relevant period by several million dollars.
To ignore the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings between the parties would not advance the purpose for which s 122 was enacted. That purpose is to strike down those payments by a debtor during the six-month period prior to bankruptcy that have the effect of depleting the assets available to the general body of creditors. But it is no purpose of s 122 to prevent a debtor from making payments - even payments to existing creditors - if the purpose of the payments is to acquire goods or services equal to or of greater value than the payment.
116 It is true that in the above passage, and elsewhere in Airservices, the High Court referred to the effect of a payment on the subsequent supply of services, and did not consider payments other than those that had been impugned. But that did not reflect any view that goods or services provided by the creditor before the first impugned payment must be disregarded in assessing the ultimate effect of the payment. To the contrary, at 503, the majority gave the example (from Richardson) of where "pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement". That deposit, subsequent in time to the giving of credit, does not have the effect of depleting the assets available to the general body of creditors because the effect is to be judged by reference to the entire arrangement of which the deposit is a part, which may be comprised of elements which predate and postdate the impugned payment.
117 So in saying one should have regard to "the ultimate effect of the dealings between the parties", the majority judgment in Airservices requires one to look to all payments (both impugned and non-impugned) and all supply (both past and future) forming part of the continuing business relationship and otherwise falling within the relevant statutory period. If value provided to the company and a subsequent payment against accrued debt are viewed as part of an arrangement which has the effect of giving the company valuable goods and services, there is no depletion of assets. If s 588FA(3) applies then it expressly requires them to be viewed that way.
118 Having so found, we then cannot see any way to reconcile the doctrine of 'ultimate effect' and the decision in Airservices with the peak indebtedness rule. We respectfully agree with the following reasons of the New Zealand Court of Appeal in Timberworld:
[81] If the principle in Airservices Australia is that the ultimate effect must be considered in ascertaining the results of a running account, there is no doubt the peak indebtedness rule does violence to that principle. As earlier discussed, the liquidators contend this conclusion has been misused in New Zealand, incorrectly forming a "complete answer" to voidable claims. They submit preferences in the case of a running account should be assessed by looking to the first payment, rather than supply. That would ensure the "net preferential receipt" is considered, rather than using a running account to constitute in effect a complete defence to a preference claim.
[82] The problem with this analysis is that it disregards the first advancement of supply, which would fall within the concept of "all transactions" in the running account as per s 292(4B), with no compelling explanation. Commencing with "payment" still requires the liquidator to select a payment, in the middle of the "single transaction" and assess preference only from that point onwards. The relevant question still remains: why should this be the starting point, in light of the clear statutory wording? The liquidators' position assumes an answer to this question, without justifying it. It goes no further in offering a principled reason why the supplies prior to the first payment should be ignored in the "entire transaction".
[…]
[84] It is correct Airservices Australia was not a "peak indebtedness" case, but that was because there was no question the creditor had not been preferred. Whether or not a running account existed, Airservices Australia had clearly provided services in excess of any payment it had received. The key issue concerned the application of the running account on the facts. The central determination of the High Court was the relevance of the doctrine of "ultimate effect" to that quantum assessment. Peak indebtedness did not apply on the facts but Airservices Australia was still a running account case.
(Footnotes omitted.)
119 Thirdly, we consider that abolition of the peak indebtedness rule is consistent with the stated purpose of Pt 5.7B of the Act which is, in essence, to do fairness between unsecured creditors. The following illustration from the submissions of the Australian Credit Forum to the Parliamentary Joint Committee on Corporations and Financial Services in its 2003 insolvency law inquiry (as set out in Timberworld) is useful to illustrate how the peak indebtedness rule can result in unfairness between unsecured creditors:
[87] The Australian Credit Forum gave some examples to demonstrate the problems with the peak indebtedness rule. It posits three creditors, Creditor 1, 2 and 3. Each has provided Company X with a $10,000 credit limit. At the beginning of the specified period, the debtor's level of indebtedness to each creditor is $60,000. At the end of the specified period, the debtor owes each creditor $10,000 once more. In each case, the creditor has provided $60,000 worth of supplies to the debtor, and has been paid $50,000. Assuming for present purposes these are correctly classified as running accounts, and the principle in s 292(4B) (or s 588FA(3) as the case may be) applies, there would be no net preference. Taking the running accounts as single transactions, in respect of Creditors 1, 2 and 3, payments did not exceed supply.
[88] The Credit Forum demonstrates, however, if each creditor adopts different credit terms, the peak indebtedness results in a different preference calculation, despite, in substance, their having offered equal supplies and received equal payments. Creditor 1 may not require payment on any specific terms; Company X receives the goods advanced, and advances payments after the full advancement of goods to the value of $60,000. The point of peak indebtedness will be $60,000 and the preference will be as much (the previous supplies being disregarded prior to this point).
[89] Creditor 2 imposes credit terms keeping to the credit limit, therefore advances goods to the value of $10,000 and receiving payment of as much each month. The point of peak indebtedness will only ever reach $20,000, and the preference received after that point will be $10,000. Creditor 3 on the other hand, may impose credit terms requiring payment after three months. It advances supplies to the value of $30,000, after which Company X advances $20,000 and returns to within the credit limit, thereafter receiving goods and paying in $10,000 instalments. In that case, peak indebtedness is $30,000 and the creditor received a preference of $20,000.
[90] These illustrate the arbitrariness of peak indebtedness in operation. Despite each creditor advancing the same value of goods to Company X and receiving the same payments in return, the peak indebtedness rule can operate to produce vastly different outcomes, merely on the basis of the particular credit arrangements in each case. Contrary to the arguments advanced by the liquidators there is no connection between the "preference" received by one creditor, and the entitlement of another. Each creditor is a trade creditor in precisely the same ultimate circumstances, but is treated differently.
120 The Liquidators say that each creditor in the above scenarios has been treated equally in that they will be permitted to retain only those payments that secured the supply of subsequent goods or services of greater or equal value (that is, those that did not operate as a preference). However, this does not seem to address the unfairness suffered by those who have supplied goods and services of greater or equal value prior to impugned payment.
121 It is true that the arbitrary timing of a single transaction in the absence of the peak indebtedness rule may also result in unfairness, as liquidators may be less inclined to pursue preferences as the amount likely to be recovered may not justify the time and expense involved, and this may result in a lower return to creditors: see McAloon, D '"Ultimate Effect" or maximum recovery? - should liquidators be able to apply the "peak indebtedness rule" to running accounts when pursuing unfair preference claims?' (2006) 14 Insolv LJ 90 at 96. We also accept that unfair results may arise in circumstances where, for example, the continuing business relationship commenced prior to the statutory period and the creditor has provided goods or services within the statutory period that are referable to a payment made outside of the statutory period. There is a certain degree of arbitrariness or unfairness that is inherent in either approach. Yet, in our view, the balance weighs in favour of not applying the peak indebtedness rule. In reaching this view, we take some small comfort in the fact that any unfairness appears to be a foreseeable consequence of the statutory regime.
122 We also note that there are longer statutory periods for other types of voidable transactions prescribed in s 588FE of the Act, with some being as long as ten years. This does not change our position as to the proper construction of the Act.
123 We therefore respectfully disagree with the primary judge's conclusion that the Liquidators were entitled to apply the peak indebtedness rule for the purpose of determining whether there was an unfair preference under s 588FA(1) of the Act. Ground 1 of the notice of appeal should be upheld.