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Liquidators’ rights in this area have always been a contentious issue and the manner in which preference claims have been calculated when there has been repeat trading under a credit account has left many scratching their heads.

Liquidators have been using what is referred to as the ‘peak indebtedness’ approach.  This involves taking the highest balance outstanding on the account during the 6 months preceding their appointment and subtracting the balance at the time of their appointment.  The difference between the two would be claimed back by the liquidator as a preferential payment.  This approach means that a diligent credit manager who managed to get a high outstanding balance down to a low closing balance, while still supplying product would have much of their good work undone.

However, the FCA ruled on Monday that the liquidator’s calculation should take into account the entirety of the trading during that critical 6 month period and only the balance between total payments received less total value of goods supplied can be claimed as a preferential payment.

Placing greater weight on the value of goods supplied during the 6 months leading up to the liquidator’s appointment provides a much fairer picture of what had been going on in that period and will invariably lead to much better outcomes for suppliers who had been supporting their customers to the end.  It also brings Australian practices into line with what has already been the case in New Zealand for some time.

The full judgment can be found at http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCAFC/2021/64.html.