Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Peak indebtedness and other insolvency law views from New Zealand

The decision of the Full Federal Court in Badenoch Integrated Logging v Bryant[1] agreeing with New Zealand’s view about the “peak indebtedness rule” that favoured liquidators’ preference recovery actions is currently being debated by insolvency lawyers and practitioners.

As I have commented before, New Zealand case law often provides a useful external oversight of Australian case law, unconstrained as NZ courts are by Australian court hierarchy and precedent. New Zealand courts also draw on Australian case law, given the comparable laws in many areas.

But there is more review of Australian case law that New Zealand courts might like us to reconsider.

Peak indebtedness

Timberworld

It was in 2015 in Timberworld v Levin[2] that the New Zealand Court of Appeal seriously questioned the “peak indebtedness” rule in relation to preference claims under Australian law, derived from the Australian High Court’s decision in Air Services Australia v Ferrier, a running account case where peak indebtedness was not in issue. The rule was nevertheless applied in numerous cases after Australia introduced its new preference provision in 1993.

As the NZCA said,

“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”.

While NZ had largely adopted the Australian voidable transaction provisions in its reforms in 2004, the Court of Appeal said it did not take on the peak indebtedness gloss that Australian courts had started to put on them.

Badenoch

That NZ view was put to Justice Davies in a preference claim matter in the Federal Court of Australia in 2020 but it was rejected and the peak indebtedness rule was applied: Bryant v Bluewood Industries.[3]

Now, on appeal, her decision has been overturned, the Full Federal Court implicitly agreeing with the NZ Court of Appeal’s views as to how the rule had been applied in a number of cases without any real discussion.  The Full Court concluded that the rule was not consistent with the language of the provisions and that several decisions dating from 1996[4] “were wrongly decided insofar as they applied the peak indebtedness rule to s 588FA(3) of the Act”.

The judge-made peak indebtedness rule is in effect abolished.

Examinations summonses

Finnigan v Ellis and Grosvenor Hill v Barber 

At some stage another appeal court in Australia might like to consider the NZ Court of Appeal decision in Finnigan v Ellis[5] which criticised the 1994 Australian Full Federal Court decision in Grosvenor Hill allowing liquidators’ examination summons to seek details of an examinee’s private financial position, in order to assess whether they were worth suing.  The latest Australian case was Pitman v Park[6] in 2020 which made no reference to the NZ concerns. The NZCA said that none of the 19th century cases which were relied upon in Grosvenor Hill went so far as to permit examination on a prospective defendant’s judgment worthiness but that the Full Court had used those cases as a “springboard” for applying a wide scope to the power.[7] It has been followed and applied in Australian cases since.

The NZ Judges saw the issue as a significant matter of principle, referring to the

“underlying tensions between advancing the interests of liquidators in gathering relevant information, and protecting examinees from unfair, vexatious and oppressive examination”

as having been well recognised in both England and New Zealand.

“(H)owever such tensions have not led to the same level of restraint in Australia as there has been in England and in New Zealand. In Australia the gathering of private financial information from an examinee in order to assess judgment worthiness is now unremarkable and commonplace”.[8]

Costs as provable debts

Foots, Nortel and Bradbury

In a slightly different context, the NZ courts have taken note of the changes in case law concerning costs orders as provable debts in bankruptcy, following the Nortel case in the UK.[9]  See Penalties and bankruptcy The main High Court of Australia decision – Foots v Southern Cross Mine Management Pty Ltd, in 2007 – was not referred to in either jurisdiction.

Other issues

There is other comparable case law from New Zealand reported on this website in the area of personal and corporate insolvency including remuneration, proportionality, personal property securities, and insolvent trading.

None of this is to say that NZ courts are always correct in the various critical comments made but when such matters next come before an Australian court of relevant hierarchy, NZ, and UK, law might usefully be examined.

And NZ courts necessarily benefit from comparable law here, its Part 15A voluntary administration regime being largely based on Australia’s Part 5.3A, with NZ courts drawing on Australia’s more extensive case law: see New Zealand and Australian voluntary administration law |

Then there is useful New Zealand insolvency law reform, professional regulation and more: for later comment.

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[1] Badenoch Integrated Logging Pty Ltd v Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) [2021] FCAFC 64.
[2] [2015] NZCA 111; [2015] 3 NZLR 365. See Keay’s Insolvency, 10th ed, at
[3] Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714.
[4] Grosvenor Hill (Queensland) Pty Limited v Barber [1994] FCA 921; (1994) 48 FCR 301.
[5] 2017] NZCA 488; [2018] 2 NZLR 123
[6] Pitman v Park (Liquidator), in the matter of BAM Recycling Pty Ltd (in liq) [2020] FCA 887).
[7] Grosvenor Hill (Queensland) Pty Limited v Barber [1994] FCA 921; (1994) 48 FCR 301.
[8] [35-36].
[9] Bradbury v Commissioner of Inland Revenue [2015] NZSC 80; [2015] 1 NZLR 739

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