Insolvency Law News March 2008
Running Accounts
When a Liquidator makes a claim for a preference payment when can the ‘Running Account’ defence be used?
Where a person or company who is a supplier of goods or services to the insolvent company can show that its relationship with the insolvent company consists of an ‘undistinguished series of transactions’, section 588FA(3) of the Corporations Act may allow the supplier to use the ‘running account’ defence.
Essentially, where this series of transactions is made up of dealings that are integral to the ‘continued business relationship’ of the two companies, such that the net indebtedness of the ailing company waxes and wanes, then the series of transactions will be viewed as a single transaction for the purpose of creating a defence to a preference claim.
If a running account defence is made out, the liquidator will effectively be able to recover from the supplier only the last payment made by the insolvent company, or any excess over the figure at the commencement of the account period.
Commencement of the account period is usually held to be the date from the insolvent company’s peak indebtedness to the supplier.
Failing establishment of a running account, the creditor company will be liable to refund to the liquidator all payments made to it by the insolvent company in the 6 months prior to its going into liquidation (Corporations Act sections 513 & 588FE(2)).
In the recent case of Sutherland v Lofthouse [2007] VSCA 197, the running account defence was refused at trial on the basis of section 588FG(2) of the Corporations Act,as payments made by the ailing company were held to have been made to ensure the continued supply of goods, and so could not be regarded as constituting an undistinguished series of transactions. The defence was also denied as it was held that the ‘irregularity and insufficiency’ of payments made by the struggling company would have alerted a reasonable person in the supplier’s position to the possibility of the purchaser’s insolvency.
The trial judge’s decision was overturned on appeal, and a running account was held to exist. The following examination of motive for payments etc. may shed some light on this decision.
According to earlier authority, the particular motivation for the payment made by the insolvent company must be considered. If the sole purpose for the payment was to discharge an existing liability or reduce the overall indebtedness of the insolvent company to the creditor, then the creditor receives a preference unless the debtor is then able to pay all its debts as and when they fall due. If, however, the purpose of the payment is to induce continued supply of goods and services, no preference is constituted unless the payment is greater than the value of the goods and services supplied. It is important to note that payments made by receivers appointed prior to the institution of a receiver will also be counted as being part of the running account.