The Running Account Defence to an Unfair Preference Claim: How Bryant v Badenoch Changed the Rules

In Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, the High Court of Australia abolished the peak indebtedness rule, fundamentally changing how the running account defence operates in unfair preference claims. Creditors who supplied goods or services on credit to a company that later collapsed now have significantly stronger defences against liquidators.

If you are a trade supplier, a service provider, or any business that extended credit to a company that has since entered liquidation, you may have received, or may soon receive, a letter from a liquidator demanding repayment of money you were paid months ago. These are called unfair preference demands, and they can be for significant sums. Understanding how the running account defence now works after Bryant could be the difference between returning nothing and returning a fraction of what is claimed.

This guide explains the law in plain terms, what changed with Bryant v Badenoch, how the defence is calculated, and what practical steps you should take if you receive a demand.

What Is an Unfair Preference Payment?

An unfair preference payment is defined in section 588FA of the Corporations Act 2001 (Cth). In broad terms, a transaction is an unfair preference if:

• the company was insolvent at the time of the transaction (or became insolvent as a result of it);
• the transaction was between the company and a creditor; and
• the creditor received more from the company, in respect of an unsecured debt, than the creditor would have received if the transaction had not been made and the creditor had instead proved for the debt in the winding up.

The idea is straightforward: when a company is sliding toward insolvency, any payment it makes to one creditor effectively reduces the pool of assets available to all creditors. The pari passu principle, the rule that unsecured creditors should share equally in a liquidation, is undermined whenever one creditor gets paid while others do not.

The liquidator can pursue preference claims for transactions occurring within the relation-back period, generally six months before the company entered administration or liquidation for arm’s-length creditors, extended to four years for related parties (s 588FE).

Who is at risk? Virtually any business that traded with the company on credit terms in the months before it collapsed, trade suppliers, subcontractors, logistics providers, professional services firms, and banks. Even if you did nothing wrong, you can still face a claim simply because you were paid while the company was insolvent.

Insolvent transactions are further defined in s 588FC, which requires proof that the company was insolvent at the time or became insolvent because of the transaction. Liquidators often rely on balance sheet insolvency or cash flow insolvency tests to establish this element.

The Running Account and the Continuing Business Relationship Defence

Not every payment to a creditor in the relation-back period is necessarily recoverable in full. Where a creditor and a company had an ongoing trading relationship, one where the company bought goods or services on credit, made payments, bought more on credit, and so on, the law treats this differently to a one-off payment.

Section 588FA(3) of the Corporations Act provides the statutory basis for what practitioners call the running account defence (also referred to as the continuing business relationship defence). It provides that where:

1. the transaction is for a commercial purpose;
2. the transaction formed an integral part of a continuing business relationship between the company and the creditor; and
3. in the course of that relationship, the company’s net indebtedness to the creditor increased and reduced over time as a result of a series of transactions forming part of the relationship ,

then all transactions forming part of that relationship are treated as a single transaction for the purpose of determining whether an unfair preference exists.

The practical effect is significant. Rather than examining each payment in isolation and asking whether each one preferred the creditor, the court looks at the net position across the entire continuing business relationship. If the creditor’s overall position did not improve during the relation-back period, because new credit was extended to the company even as payments were received, the preference claim is reduced or eliminated entirely.

Think of it this way: if a supplier continued to deliver goods on account throughout the six months before liquidation, and the payments received were roughly matched by the new credit extended, the running account defence can substantially reduce or even extinguish the preference claim. The law recognises that ongoing commercial credit relationships are different in character from a single payment to pay down a pre-existing debt.

The Peak Indebtedness Rule: What It Was and Why It Mattered

Before the High Court’s decision in Bryant v Badenoch, liquidators had a powerful tool at their disposal: the peak indebtedness rule.

Under the peak indebtedness rule, when a running account existed between a company and a creditor, the liquidator was permitted to identify the point within the relation-back period at which the company’s debt to the creditor was at its highest, the peak, and use that figure as the starting point for calculating the preference. The preference was then measured as the difference between that peak indebtedness and the amount owed at the date of liquidation.

By cherry-picking the peak, liquidators could dramatically inflate the size of the preference claim, even in cases where the creditor had continued to supply goods or services throughout the period. The effect was to limit the benefit of the running account defence, because the liquidator could always choose the most favourable starting point for the calculation rather than looking at the whole relationship from the beginning of the relation-back period.

For example, imagine a supplier owed $200,000 at the start of the six-month window. The debt peaked at $350,000 in Month 2, then fell to $50,000 at liquidation as the company made payments. Under the old rule, the liquidator could claim the preference was $350,000 minus $50,000 = $300,000. Under a full running account analysis starting from Month 1, the preference might only be $200,000 minus $50,000 = $150,000, or even less, depending on new credit extended.

The peak indebtedness rule was widely criticised as unfair to creditors who had acted in good faith and continued to supply the company throughout its difficulties, often on the basis of a genuine commercial decision rather than a suspicion of insolvency. The High Court agreed.

Bryant v Badenoch: The High Court Decision

Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 was handed down on 1 February 2023. The case arose from the collapse of Gunns Limited, a Tasmanian timber company. Badenoch Integrated Logging Pty Ltd had provided logging and transport services to Gunns on a continuing basis. When Gunns entered administration and then liquidation, the liquidators (including Bryant) sought to recover payments made to Badenoch during the relation-back period as unfair preferences under s 588FA.

The central question before the High Court was whether the liquidator was entitled to use the peak indebtedness rule to select the starting point for the running account calculation, or whether the calculation had to commence from the beginning of the relation-back period (or the commencement of the continuing business relationship, if later).

The High Court, comprising Kiefel CJ, Gageler, Gordon, Edelman, Steward, and Gleeson JJ, held that the peak indebtedness rule does not form part of s 588FA(3). The Court determined that “all the transactions forming part of the relationship” for the purpose of the deemed single transaction in s 588FA(3)(c) must mean the transactions from the beginning of the relation-back period, or the date of insolvency, or, if the continuing business relationship started after the beginning of the relation-back period or the date of insolvency, from the beginning of the continuing business relationship (whichever is the later).

In plain terms: the liquidator must start the clock at the beginning of the relevant period and run through to the date of liquidation. There is no longer any ability to cherry-pick a midpoint peak to maximise the claim.

The ruling has three immediate effects:

• The running account is assessed across the whole continuing business relationship within the relation-back period, not from a liquidator-selected high point.
• Creditors who extended ongoing credit to the company, continuing to supply throughout the period, will generally see the preference amount reduced, sometimes substantially.
• The burden on creditors in proving the running account defence has become more straightforward: the calculation is now anchored to an objective starting point, not a figure selected by the liquidator to maximise recovery.

The decision was immediately recognised as one of the most significant developments in Australian insolvency law in decades. It fundamentally rebalanced the position between liquidators and trade creditors in preference litigation. If you are dealing with an unfair preference claim in Queensland or anywhere in Australia, getting experienced lawyer insolvency advice that reflects this new law is essential.

How to Calculate a Running Account After Bryant v Badenoch

The following is an illustrative example only. It does not represent any real matter, client, or case, and is provided purely to explain how the post-Bryant calculation works in practice.

The Good Faith Defence Under Section 588FG

Even if a running account defence is not available, perhaps because the relationship was not truly continuous, or the net position clearly worsened, a creditor may still be able to rely on the good faith defence under s 588FG of the Corporations Act.

Section 588FG(2) provides a complete defence to an unfair preference claim if the creditor can establish that:

1. the transaction was entered into in good faith;
2. the creditor gave valuable consideration (that is, the creditor did something of value, supplied goods, provided services, etc.); and
3. at the time of the transaction, the creditor had no reasonable grounds to suspect that the company was insolvent, and a reasonable person in the creditor’s position also would not have had those grounds.

This is often referred to as the “no reasonable grounds to suspect insolvency” test, and it is both subjective and objective. The courts look at what the creditor actually knew and at what a reasonable business person in the same position would have suspected.

Relevant factors that courts consider include:

• Whether payments were regularly late or demanded under pressure.
• Whether the company made part-payments or sought extended terms, suggesting cash flow difficulty.
• Whether the creditor received any formal notice of financial difficulty (such as a letter from an administrator or a credit report).
• The general commercial context, whether the industry at large was under stress.
• Whether the creditor continued to supply in a normal, arm’s-length manner or altered its terms in response to perceived risk.

If the creditor simply continued to trade normally, extended credit in the usual way, and had no specific information that would have put them on notice of insolvency, the good faith defence can be a powerful complete defence. Our team has successfully deployed this defence on behalf of Queensland creditors, read our detailed guide on why creditors lose the good faith defence and how to preserve it.

Importantly, the good faith defence and the running account defence are not mutually exclusive. A creditor may argue both, for example, claiming that the running account defence reduces the preference to a nominal amount, and that even if some preference exists, the good faith defence provides a complete answer to it.

What Creditors Should Do When They Receive a Liquidator’s Demand

Receiving a letter from a liquidator demanding repayment of money you were legitimately paid can be alarming. Here are the five key steps you should take immediately.

1. Do Not Ignore It

Liquidators typically set a response deadline, often 21 days, before they will commence court proceedings. Ignoring the demand does not make it go away; it simply allows the liquidator to file a claim without you having had the opportunity to assert your defences. Courts expect creditors to engage promptly and in good faith.

2. Get Legal Advice Immediately

Unfair preference law is technical, and the post-Bryant v Badenoch landscape requires a lawyer who understands both the running account defence and the good faith defence in detail. An experienced insolvency lawyer in Brisbane can assess the strength of your defences quickly, advise whether to negotiate or contest, and represent you in any proceedings. See our full guide on unfair preference claims in liquidation for a broader overview.

3. Gather Your Full Transaction History

Collect every invoice, delivery docket, statement of account, remittance advice, bank record, and email relating to the trading relationship with the company. For the running account defence, you need to demonstrate:

• The start date of the continuing business relationship.
• The opening balance at the start of the relation-back period.
• Every credit extended (new goods or services supplied) during the period.
• Every payment received during the period.
• The closing balance at administration or liquidation.

4. Assess Whether a Running Account Existed

Was this a one-off transaction, or an ongoing trading relationship? If you were supplying on terms, invoicing regularly, receiving payments on account, extending further credit, the running account defence under s 588FA(3) is likely in play. The key question post-Bryant is what the net position looks like from the beginning of the relation-back period to the date of liquidation.

5. Consider Whether the Good Faith Defence Also Applies

Did you have any reason to suspect the company was in financial trouble? If not, and if you can demonstrate that from your records, the s 588FG good faith defence may provide a complete answer to the claim, regardless of whether any preference technically existed. Read our detailed advice on responding to an unfair preference demand in Queensland for a step-by-step guide.

How Boss Lawyers Can Help

Boss Lawyers is a Brisbane-based commercial litigation and insolvency disputes firm. We act for creditors, directors, and businesses caught up in the fallout from company collapses, and we understand exactly how the running account defence and the good faith defence work in the post-Bryant v Badenoch landscape.

We can help you:

• Review the liquidator’s demand and assess whether it is legally sound.
• Analyse your transaction history to determine whether s 588FA(3) applies.
• Calculate the running account position under the Bryant v Badenoch methodology to identify the true preference amount (if any).
• Run the good faith defence if you had no reasonable grounds to suspect insolvency.
• Negotiate with the liquidator to reach a commercial settlement where appropriate.
• Represent you in Federal Court or Supreme Court proceedings if the matter cannot be resolved.

We also act for directors who are personally named in liquidator demands, if you are facing a claim as a director, visit our director disputes page for more information.

Call us on 1300 267 711 or contact us online for a confidential discussion about your situation.

Frequently Asked Questions

What did Bryant v Badenoch actually change about the running account defence?

Before Bryant v Badenoch [2023] HCA 2, liquidators could use the peak indebtedness rule to select the highest point of indebtedness within the relation-back period as the starting point for the preference calculation. The High Court abolished this rule. The running account is now assessed from the beginning of the relation-back period (or the start of the continuing business relationship if later) through to the date of liquidation, using an objective starting point that the liquidator cannot manipulate.

Does the running account defence completely eliminate my preference liability?

Not necessarily. The running account defence reduces the preference to the difference between the opening balance (at the start of the relation-back period or the start of the business relationship) and the closing balance at administration. If the company’s debt to you increased over the period, meaning you are owed more at the end than the beginning, there is no preference. If the debt decreased, the preference is the amount by which it decreased. In some cases the running account defence can reduce the preference significantly; in others it may not help much, and the good faith defence under s 588FG may be a better option.

How long is the relation-back period for unfair preference claims?

Under s 588FE of the Corporations Act 2001 (Cth), the standard relation-back period for arm’s-length creditors is six months before the relation-back day (which is generally the date the company entered administration or the court application for winding up was filed). For related party transactions, such as payments to a director, a director’s associate, or a related company, the relation-back period is extended to four years.

What evidence do I need to run the running account defence?

You will need a complete and accurate statement of account showing all transactions between you and the company throughout the relation-back period: every invoice or credit note (new supplies), every payment received, and the opening and closing balances. You will also need to be able to demonstrate that the relationship was truly a continuing commercial one, not a series of disconnected transactions. Tax invoices, delivery records, purchase orders, and account statements are all useful. Your legal team will work with this material to build the running account calculation.

Can I use the running account defence and the good faith defence at the same time?

Yes. The two defences are complementary and are frequently run in the alternative. The running account defence may reduce the size of the preference; the good faith defence under s 588FG(2) may then provide a complete answer to whatever preference remains. Creditors who had genuine ongoing commercial relationships and no specific knowledge of the company’s financial difficulties may be well positioned to run both. A lawyer experienced in insolvency disputes can advise which strategy is most appropriate given your specific circumstances.