Bryant & Ors as liquidators of Gunns Limited and Auspine Limited v Badenoch Integrated Logging Pty Ltd [2022] HCATrans 177 (18 October 2022)

Last Updated: 28 October 2022

[2022] HCATrans 177

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide No A10 of 2022

B e t w e e n -

DANIEL MATHEW BRYANT, IAN MENZIES CARSON, AND CRAIG DAVID CROSBIE IN THEIR CAPACITIES AS JOINT AND SEVERAL LIQUIDATORS OF GUNNS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 009 478 148) AND AUSPINE LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 004 289 730)

Appellants

and

BADENOCH INTEGRATED LOGGING PTY LTD (ACN 097 956 995)

Respondent

KIEFEL CJ
GAGELER J
GORDON J
EDELMAN J
STEWARD J
GLEESON J
JAGOT J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY18 OCTOBER 2022, AT 10.00 AM

Copyright in the High Court of Australia

____________________

MR B.W. WALKER, SC: May it please the Court, I appear with my learned friend MR B.M. GIBSON for the appellants. (instructed by Johnson Winter & Slattery)

MR M.G.R. GRONOW, KC: May it please the Court, I appear with my learned junior MS R.G. MORISON for the respondent. (instructed by Scanlan Carroll Lawyers)

KIEFEL CJ: Thank you. In relation to the cross‑appeal, the Court is minded to hear argument with the argument on appeal and reserve its decision.

MR GRONOW: Thank you, your Honour.

KIEFEL CJ: Yes, Mr Walker.

MR WALKER: Your Honours, the importance of Part 5.7B of the Corporations Act can hardly be doubted, bearing in mind the centrality of limited liability to the activities of trading corporations and the topic of that important part of recovering property or compensation for the benefits of creditors of insolvent companies.

Your Honours have seen throughout our written submissions the significance we repeatedly place at various junctions in our argument on the necessity for what might be called a kind of equality with respect to the plight of the unpaid creditors with an insolvent corporation – in this case, in liquidation.

Your Honours are aware that a sequence of legislation in this and cognate jurisdictions has used a variety of language – some of it less linguistically kind than others, such as fraudulent compared to unfair – and language that employs the concept of an effect of creating a preference which, of course, is a state of affairs departing from a desirable equality. Those are general notions. They have been expressed by different words – though whether the notions have altered is one of the underlying issues in the interpretative questions in this case.

The approach taken by the Full Court below is one which sees that iteration of statute‑making in that important area – regulating commerce – as having worked a severance of the Australian position from that which had obtained previous to the enactment of this wording. In particular, that position which had obtained, by Australian decision – with respect to previous Australian provisions of a bankruptcy and incorporated into insolvent administration of corporations – notions of what are now able to be called unfair preferences.

Your Honours will have seen – not only in our written submissions which reproduce what is found elsewhere – a reference to the common law in this area. One might say, perhaps a little coyly, judge‑made law but made in the sense, ultimately, of interpretation – that is working out the effect of enacted provisions. One is reminded of the more ancient notion of the equity of the statute – for example, that which gives rise as a result of the work of judges, say, to the doctrine of part‑performance in understanding how one is meant – as we would now say – purposively to apply the statute which was, say, the statute of frauds.

In that same spirit, the two related – as we would have it – aspects of unfair preference that arise in this case in our challenge to the decision and reasons of the Full Court are as follows. First, what is variously named as the ultimate effect, rule or doctrine which stands, of course, in contrast to taking – as one would otherwise prima facie take it – that these rules about undue preferences are applied payment by payment. You ask about a payment, a transaction being a payment; is this an unfair preference to be disgorged? So, the first rule is an ultimate effect which depends upon what is again variously described but mostly by the expression “continuing relationship”.

At the risk of it being glib, one way to describe an aspect of the differences between the parties, and what we undertake by way of part of our challenge to the reasoning below, is whether the continuing nature – the period of continuation – is to stretch back as far as it stretches forward; that is, to encompass the whole of the relationship from its beginning to its end; that is, the relationship’s beginning to the relationship’s end.

As your Honours know, we submit that the concern is, and must be, of these provisions and the judicial understanding of how they would work purposefully; that one starts and ends with transactions. Basically, transaction by transaction, payment by payment, but when the first of the rules applies by reference to the ultimate effect of a number of transactions joined by being considered as part of a continuing relationship.

The second rule comes about because of the constant theme of an officer of the Court or a person answerable to the Court by way of accounting for his or her actions – in this case, liquidator’s – whose role it is, in a number of different ways, to make decisions to serve practically the purposes of equality between creditors, but not obviously at all costs, because the matter is ultimately financial and there needs to be consideration of whether the game is worth the candle; that is, the purity of theory concerning an unfair preference counts as nothing compared to whether or not the liquidator’s action is likely to augment the money available for division equally between unpaid creditors of an insolvent corporation.

That is why the rules in question are rules which are applied on the application of the liquidator who makes their choice to do so having considered commercial markers, including the assessment of qualitative questions – to which we will come – in particular, to the so‑called continuing relationship.

Part and parcel, we say, as your Honours know – and before this decision, or before the New Zealand decision, which was called in aid to support the reasoning in the Full Court – was understood in this country as involving the choice by the liquidator of what payments would be the subject of claims for recoupment as undue preferences. And as a subset or aspect of that general – and surely uncontroversial – proposition, it will also be the liquidator who would decide in the case of a punitive continuing relationship which would be the first impugned payment; the first payment to be attacked by the liquidator as an undue preference or, as part of a sequence of dealings which required subsequent countervalue paradigm cases, supply of goods or services in return for payments which would otherwise fall simply to be treated as – each of them – a preferential payment by reason of the circumstances in which they came to be paid. I am going to come back to that.

Now, that led, of course – as one would expect, given the responsibility of a liquidator, that led to what has become known, simply as a label, as the peak indebtedness rule – rather grandiose way of saying that it is no business of the liquidator to be impugning transactions which could not be preferential because they were payments which increased rather than reduced prior indebtedness.

GAGELER J: Do you say it could equally be called the liquidator’s choice rule?

MR WALKER: I am so sorry, your Honour?

GAGELER J: Are you saying that it could equally be described as the liquidator’s choice rule?

MR WALKER: Yes. It sounds a bit like the Holy Roman Empire. An elector – he or she is an elector who decides matters which are critical to whether and how to advance a claim to disturb what would otherwise be a valid disposition of property for the benefit of the general pool of creditors. The fact of having a choice and the extent of that choice is, in our submission, at the heart of the peak indebtedness rule. I will obviously be coming, in particular to the late Chief Justice Barwick and Justice Kitto; refer to these matters in a sequence of cases, but particularly the Queensland Bacon Case, which is important.

GLEESON J: Do you accept that the liquidator’s choice rule is capable of conflicting with the principle that underlies the ultimate effect rule?

MR WALKER: No, I do not, though I accept that answering that question is one of the ways in which to choose between the rival arguments in this Court. Yes, the Full Court plainly saw a contradiction or – I think I paraphrase correctly – an impossibility of reconciling at base these two matters to which – if I may be permitted this observation – that is an impossibility that seems not to have troubled members of this Court in the past, and, more to the point – for reasons I shall put in principal – there are not only not contradictory, they are – given the purpose of all of these provisions, which is about recouping for the benefit of the general pool, unfair preferences – they are at the heart of the matter, both working in the same direction ‑ ‑ ‑

EDELMAN J: But subject to a continuing business relationship and the principles that flow from that, whereas a liquidator’s choice would have the effect, would it not, of fragmenting the continuing business relationship.

MR WALKER: Yes. The short answer is yes. Let me explain. No, I do not mean by any of our argument – written or, I hope, that I will speak – I do not mean by any of our argument to suggest that liquidator’s choice is a fragmenting impulse when it comes to a continuing relationship case.

When it comes to a continuing relationship case, the relevant liquidator’s choice is the first impugned transaction – that is critical, because that is what produces, of course – if the liquidator is doing his or her duty for the evident public purpose, it will be a choice – as the facts available make possible, it will be the choice of peak indebtedness – because previous to peak indebtedness, ex hypothesi, there has not been preferential effect – somebody is being made worse off by the mutual dealings rather than better off. After peak indebtedness, that person receiving payments from time to time – but also providing goods and services from time to time – is getting better because there is a reduction of previous indebtedness alongside the to‑and‑fro of creation of new indebtedness and provision of new value.

GORDON J: It is mutuality of benefit.

MR WALKER: Yes. It is, I think, rarely, outside the certain very complacent religious views of things, it is rarely equal, at any point. That is one of the reasons why, at the heart of the, ultimately, interpretative question, there is a necessity to, we respectfully submit, pay close regard to the way in which the Full Court dealt with what it accepts – without demur – to be the absurdity.

Indeed, we would submit, the profound anti‑purposive absurdity of treating some of the critical words, to which we are about to come, as producing willy‑nilly the liquidator’s application – that is, how he or she has chosen to mount the matter – the effect of, probably, creating a new and perversely preferred class of creditor – namely, those in what might be called a “running account” position with the company.

GORDON J: But that submission also accepts that, truly, you can never really have equality between creditors.

MR WALKER: That is right. But all of these provisions are intended – and “rough and ready” would not be gracious way of describing the parliamentary and judicial attempts. It is an attempt which is practical and capable of being litigated to produce by rules which are sufficiently plain and advanced to enable liquidators and, very often, creditors – paid and unpaid – to work things out without needing to come to court.

It is our submission that that is one of the reasons why – and I am now touching on ground 2 – the nature of the mutual dealings which produce what is called the “continuing relationship” and the badge to be attached to that continuing relationship which will or will not require the ultimate effect doctrine to apply is, at the end of the day, we accept, in every case depending upon its own circumstances. It is a characterisation question.

Just looking ahead to ground 2, upon which I would intend so that your Honours’ desire is to spend less time than on ground 1, we accept that in ground 2, one is, therefore, looking – as this Court did in Airservices – to the nature of the dealings concerning the – I will call it, “creditors’ obvious grievance” about past indebtedness, the company’s obvious desire for future goods and services to be supplied, the balance, or more accurately, always imbalance between the two – and the inferences, by way of characterisation, to be drawn by a court as to whether that is a relationship of a kind which compels ultimate effect – which is a netting exercise – rather than a payment‑by‑payment analysis of preference.

As your Honours know, for example, just to jump ahead in answer to a number of your Honours’ questions, in Airservices the key features were that there was continued provision of the navigation and other services which permitted the airline to keep flying, to the benefit of everyone who was paid from the revenue thus generated.

At the point which distinguished between the impugned payments in that case – those to be recouped and those and did not need to be recouped – was the point at which it was very much curtains in a couple of days, at which point an arrangement for the liquidation by payment, that is, the discharge by payment of the past indebtedness by instalment plan, according to this Court’s characterisation, fell outside the ultimate effect by reason of a continuing relationship because at that point the predominant concern of the creditor was for previous indebtedness to be paid rather than a joint common or mutual concern, obviously at arm’s length and with conflicting interests, of the airline and Airservices for the future provision of services, future provision of ‑ ‑ ‑

GORDON J: That is the critical finding, is it not, I think at 52 where it says in relation to the final payment as distinct from the earlier payments – is the demand is “looking backwards rather than forwards.”

MR WALKER: Your Honour anticipates me, yes.

GORDON J: One is “looking to the partial payment of the old debt” rather than the provision of new services.

MR WALKER: Exactly. Now, that simple phrase, “backwards rather than forwards”, like most phrases in this area, is in danger of not always producing a reliable outcome because it has to be said that anybody in a running account is looking back as well as forwards all the time. That is what the running account, when it is recorded by figures, always records. It is a balance of what goes before as well as what has just been supplied. In that sense, of course, it is never irrelevant to know what happened previously, but it is irrelevant when it comes to understanding the recoupable quality of a payment as an unfair preference, for reasons I am about to come to under the statute.

What I wanted to say about Airservices – and that is jumping well ahead in the sequence of my argument – is to point out that in this Court there has – at least previously before the Full Court’s decision here, there has been no doubt that it is a case by case determination in a putative continuing relationship bearing in mind the concerns, mutual, perhaps opposed and different, of payer and payee, as to whether the payment in question impugned by a liquidator has an unfair preference was made in a context, perhaps for as purpose or through an arrangement which requires it to be included in the overall netting‑off effect or whether it stands apart and returns to the ordinary prima facie position of all unfair preference regulation, namely you do it payment by payment.

You ask, is that payment to that creditor an unfair preference? The significance in Airservices, of course was that with the imminent, well‑nigh certain demise, ceasing to generate revenue, rendering further supply of little or no commercial import – indeed, it had only what might be called public‑spirited safety aspect thereafter for the few suppliers that followed those last payments.

Those were circumstances which this Court held ought to be regarded as showing the cessation of a continuing relationship, the removal therefore of those payments from the netting‑off overall effect which otherwise had characterised the to‑and‑fro between the not particularly successful airline and what may be described as the indefatigable demonstration of the triumph of hope over experience by the supplier of the services, who was paid from time to time of course, but obviously not so as to discharge all prior indebtedness at any point.

STEWARD J: Mr Walker, can I just understand, is the statutory footing for your liquidator’s choice rule, do you say that we find that more in section 588FF?

MR WALKER: Yes.

STEWARD J: And is it the phrase “on the application of the company’s liquidator”? Is the ability to frame the application?

MR WALKER: Yes, it is.

STEWARD J: That is where you get it?

MR WALKER: Yes, it is.

STEWARD J: All right.

MR WALKER: May I – it is very convenient if I may come directly to that in developing propositions 1, 2, 3, and 4, in order to produce – we hope – an argument support of proposition 5 in our outline. And for that purpose, may I go please to the statute. As Justice Steward has just noted, if I can take you please to volume 1 in Part A of the authorities in the book. I am picking it up at page 33, section 588FF, I may just use the last two letters from time to time, where, in subsection (1), the important words:

on the application of a company’s liquidator –

precedes the jurisdictional fact for the power to be exercised, namely that:

a court is satisfied that a transaction of the company is voidable because of section 588FE –

Now, “on the application of a company’s liquidator” means that the application by the liquidator will be such as to raise for consideration of its satisfaction or not by a Court of the nature or quality of what can be said about a transaction of the company being voidable. For all relevant purposes, and certainly in ordinary commerce, by far the most frequent, close to universal experience, is of the transaction as a payment of money. And that will provide the appropriate test, we respectfully submit, for the arguments about interpretation.

For clarity in my argument, as we would advance it, I am going to use the word “payment” often to describe what the statute calls a “transaction”. Holding in mind that notion of a payment of money – which is, after all, the paradigm of a transaction which may putatively be an “unfair preference”. One sees that the first quality, or the conclusory quality, is that it is “voidable” – interesting language, bearing in mind the historical usage of void as against the liquidator; which was always understood ‑ as we have drawn to attention in our written submissions in a way I do not need to elaborate – which is always understood as giving a choice or election to a liquidator as to whether to do the thing, and if so, what to do.

The Court will rule, but the application of the liquidator is that which provides the proposition upon which the Court is to rule. And “voidable”, therefore, is a word which reinforces the reading that we have given to the phrase that Justice Steward drew to my attention, and upon which a deal of our argument is founded, namely, on the application of a company’s liquidator. The quality of being voidable has to be found in another provision; this statute shows the Australian sport of word golf as one goes from hole to hole.

GAGELER J: Mr Walker, will you say any more about section 588FF or have you moved on? I just wanted to ask, you used the language of jurisdictional fact to describe what appears within the commas.

MR WALKER: Yes.

GAGELER J: How do you reconcile that with your liquidator’s choice rule, merely because the ability to apply is given to the liquidator, it does not change the jurisdictional fact of which the Court needs to be satisfied.

MR WALKER: No, no, no. Please do not misunderstand me. When I talk about liquidator’s choice, I am not talking about liquidator’s dictate, let alone unexaminable ruling by a liquidator – far from it. The application of the liquidator, however, is not, as it were, simply saying, your Honour, I am here, I am the liquidator, are there any transactions which you the Court would select for characterisation as being voidable, which, upon being satisfied, your Honour will then determine how, if at all, to exercise discretions under subsection (1)? That is not how it works.

The application is not an open-ended application. It puts a contention. It is adversarial in an appropriate case, as here, and that contention is then tried impartially by the judge, who is not in the position of a liquidator having, as it were, a supervisory role internal, so to speak, of the company’s affairs. The judge is ruling upon a contention by the liquidator in an application brought by the liquidator contending that a transaction – which will obviously involve plurals, a transaction or transactions being the subject matter of the application of the company’s liquidator to the court are or are not, voidable as the statute then determines.

GORDON J: It has two aspects, does it not? It has an aspect which recognises that it is the liquidator that is obliged to bring in and collect the assets of the company ‑ ‑ ‑

MR WALKER: Yes.

GORDON J: ‑ ‑ ‑ in liquidation under 472, 477 and 474. So, it has that aspect. And then the second is the point that you made earlier that it is a choice because there may very well be circumstances in which it is either de minimis or there are difficulties of proof or something which renders the action an action which otherwise would not be wise, to put it in neutral terms.

MR WALKER: Correct.

GORDON J: And, therefore, there is no obligation on the liquidator to seek to recover every dollar and dime.

MR WALKER: Yes.

GORDON J: Is it any higher than that?

MR WALKER: That is certainly a general proposition. It is higher than that in the sense that we have to trace through this word “transaction”, your Honours know where I am going to end up, in FA.

EDELMAN J: The transaction about which the Court has to be satisfied ‑ ‑ ‑

MR WALKER: That is right.

EDELMAN J: ‑ ‑ ‑ on your submission, is, and is only, the transaction identified by the liquidator.

MR WALKER: That is right. That is right. The issue – there is a matter constituted by the liquidator’s application and subject to amendments and other things which are routine in adversarial litigation. That matter is quelled as a controversy by the judge ruling upon the liquidator’s application. That is what I meant in answer to Justice Gageler by “jurisdictional fact”. I do not mean that there is any ipse dixit – any say‑so by the liquidator – that has the slightest weight when it comes to the adjudication by the court of the contentions supporting, or made in, the liquidator’s application.

STEWARD J: You have to go a little bit further though, do you not? Because whilst we talk about the liquidator’s choice, the liquidator has a series of statutory duties ‑ ‑ ‑

MR WALKER: Yes.

STEWARD J: ‑ ‑ ‑ and you would say that they would permit the liquidator to take advantage, in this case, of the happenstance of what was the balance of the running account during a particular period so that it favoured his ability to recover money for creditors and members.

MR WALKER: Your Honour will not be surprised to hear me resist the notion of happenstance, because ‑ ‑ ‑

STEWARD J: Well, there is a degree of happenstance here because it depends on the timing of when payments come in and when supplies are made.

MR WALKER: Things do depend on timing, but not in any “happenstance” sense. That is, there is a narrative – liquidators have accounting skills and access to accounting skills. So, there is a narrative ultimately recorded in words and numbers, and many of the numbers will be dates, which will inform one about these aspects of timing, and I fear I probably will not be giving an exhaustive list.

There is date of payment and there is amount of payment. There is the state of the indebtedness between payer and payee immediately prior to that payment being made. There is also – see continuing relationship questions – the state of affairs thereafter, because all of these cases are done in retrospect. There is the case of matters thereafter; as seen, for example, in the factual analysis carried out in Airservices, and most ‑ ‑ ‑

STEWARD J: You may not need to be too defensive about happenstance, because it equally applies ‑ ‑ ‑

MR WALKER: I am trying to avoid arbitrariness.

STEWARD J: But the arbitrary results here are at play equally on your case as well as Mr Gronow’s. It depends on what happens between two dates ‑ ‑ ‑

MR WALKER: Well – yes, that is right.

STEWARD J: ‑ ‑ ‑ as to who is going to be a winner or the loser.

MR WALKER: Yes, there are winners and losers, but from our point of view the proper outcome of this argument today is one that ought to be informed by understanding the general purpose of the liquidator’s duty to place before the court and to argue for contentions that would produce, by application of these provisions, the appropriate augmentation of what would otherwise be the limited resources for distribution among unpaid creditors by getting back – usually by a recoupment order – the value of payments earlier made by the company and received by a creditor which bear the character to which I am about to come in the next provisions to which my argument turns, which can be characterised as unfair preference – as the statute describes it.

That, in our submission, ought not to be a conclusion which, at any point, is characterised by arbitrariness except in the narrow sense of “arbitrary” as being “bright line”. Yes, it is an unfair preference – or it is not – although, in this case it is not one that raises for consideration any substantive quality of the discretion under 588FF(1).

So, we have to go to 588FE because that is where one finds the various ways – the set of alternatives by which a transaction is voidable – that being the quality to which FF is directed. The contention that a transaction, or transactions, are voidable is the subject matter of the liquidator’s application and the subject matter of the liquidator’s application is a matter for the liquidator’s choice. Under FE, one sees in subsection (1) – leaving aside the date in question – that the modern drafting is that it is voidable because of one or more of succeeding subsections. This is a case which, we think, is firmly centred on subsection (2):

The transaction is voidable if –

and then comes a very important provision, paragraph (a):

it is an insolvent transaction of the company –

and one flags, of course, that you have to go somewhere else to find out that – and that is FC, to which I am going come fairly soon. So, it has to have that quality. It has to have been entered into – or an act requires to have been done for the purpose of giving effect to it – during a particular period.

GORDON J: That is the first artificiality created by the statute.

MR WALKER: Your Honour entirely anticipates me, because one can see from that that it being an insolvent transaction will not be supplied by it being entered into, for example:

during the 6 months ending on the relation‑back day –

It may not – that depends upon facts. In this case, if one is talking about corporate insolvency, that was not for the whole of the six month’s period.

GORDON J: Correct, so that is why the first two payments fell away because insolvency was 30 March and, therefore, the first two payments made by Badenoch were never picked up.

MR WALKER: So, for what might be called the common or garden application – and subsection (2) is the common or garden provision – naturally and properly, given the overall purpose of all of this, you do not take into account – that is, you do not hold as unfair preferences to be disgorged – those that were not insolvent transactions because there was not insolvency at the time. That, as it were, stands to reason, because preference between one creditor and another is the stuff of competitive business, but for insolvency. I can drive differential terms of trade with some suppliers – showing preference to some – I will pay you in 14 days, your quality is better; I will pay you in 56 days, your quality is not so good, et cetera, et cetera. Preferences of that kind are never unfair – they are competition. They are to be, if anything, protected by the law as differential treatment – which is not only not improper, it is a perfectly sensible way of enhancing business outcomes.

So, the very notion that you would reach back – and I am not talking about continuing relationship at this point – just the very notion that, payment by payment, you would ever consider that a transaction is voidable if it was not an insolvent transaction, but it was entered into or given effect to during the six months ending on the relation‑back day – is revolting, in our submission, to the basal notions – which are explicit, they are not some vibe, they are explicit in the definition that you see in FE(2). It has got to be, first of all, an insolvent transaction – to which I am going to come.

Before I move off to FC – which is obviously the next point I have to go to – can I just note for later purposes that your Honours have already seen in our written argument – can I note what follows in the balance of the subsections (2) to (6) – to which reference is made in paragraph (1)(a). Without dwelling on them, your Honours know that for purposes of our criticism of the Full Court’s selection of periods in question – or non‑selection, or suggestions, depending upon how you construe their first and second sets of reasons – can I point out that in subsection (3), you have the concept of the insolvent transaction, which is:

also an uncommercial transaction –

I am going to come back to that matter – but you see that, if that is its character, it is a two‑year period for entry. To remind your Honours, all of this produces the character of being voidable – which is the essential final conclusion before the powers are exercised for, for example, recoupment.

GORDON J: Another artificiality adopted by reference to “period” ‑ ‑ ‑

MR WALKER: Absolutely.

GORDON J: ‑ ‑ ‑ referable to a different kind of transaction.

MR WALKER: And if I may say so, here is a good use of arbitrariness – that is, there is no shadowy case‑by‑case blurred understanding of the period during which one can reach back – there is obvious social benefit to be gained from the clarity of what might be called the arbitrary two years – not two years and one day, two years. The same thing is true with subsection (4). There are evident matters of policy being manifested in enactment here, and all the better for being obviously in bright line terms. Subsection (4) is for a “related entity” insolvent transaction – that is 4 years back.

Subsection (5) is what might be called an insolvent transaction which also displays the age‑old intention to defeat creditors – one sees that those are 10 years, again obviously expressing a combination of disapprobation and balance of commercial and proprietary merit concerning the disturbance of transactions. It is important, when one comes to a later observation by the Full Court, to note that subsections (4) and (5) both commence by describing the kind of transaction as being an insolvent transaction. I will come back to that because of their Honours’ reference, that I will just flag, to them being a different kind from subsection (2).

One then, from subsection (2) of FE, goes back to the definitional provisions of 588FC, because this is the description of when a transaction is an insolvent transaction and your Honours have seen that the progression is the need to be voidable, for that to be true, the need to be an insolvent transaction, and for that to be true, the matters which you then see in FC. There are two limbs, alternatives, for an insolvent transaction. There is the unfair preference, which is this case, and there is an uncommercial transaction. “Uncommercial transaction” is defined in FB. We do not think, at least in‑chief, we need to go to it. Unfair preferences – finally we get to the critical provisions – are in FA.

But before going to FA, I wish to emphasise that as one might expect from the statutory label “insolvent transaction”, that an unfair preference is an insolvent transaction if and only if any of the following happens at a time when the company is insolvent. We know from what might be called the bright line or perhaps arbitrary nature of six months, four years, 10 years, that the statutory period, as I will call them for convenience cannot be thought expect by startling coincidence in some cases perhaps, to be exactly the time when the company becomes for the first time insolvent.

So, there is a factual question when the quality of being insolvent needs to be answered in order to understand how that relates to the time when the transaction was entered into or an act was done or an omission was made for the purpose of giving effect to it or, very importantly, paragraph ‑ ‑ ‑

GORDON J: Do you accept that that is the start date, for your analysis?

MR WALKER: Yes, a start date for the analysis of ‑ ‑ ‑

GORDON J: Both of what is a transaction subject to or potentially subject to being an unfair preference and also for the identification of the continuing business relationship?

MR WALKER: No. For the first bit, yes. For the first bit, critically.

GORDON J: And that is the bit that is the issue between you, at least in part, and the bit that you have to reconcile on the statute.

MR WALKER: Yes. Yes, absolutely. So, under FC(b), can I draw to attention the important provision that a transaction is an insolvent transaction if being an unfair preference

(b) the company becomes insolvent because of, or because of matters including:

(i) entering into the transaction; or

(ii) a person doing an act –

et cetera, so that the critical and obvious, in policy terms, requirement that the payment, which is the transaction, be made at a time of insolvency or be made so as to bring about insolvency, surely informs the whole of the scheme of these provisions, which are explicitly interlocking. Now, we then come, backwards and crabwise, but the statute requires that, to section 588FA – because the last of the Russian dolls is the two possibilities for insolvent transaction of unfair preference or uncommercial transaction, and now we have come to unfair preference.

As it happens, schematically one knows that FA has, as it were, an ordinary case which is something that will fall within, ultimately, the words of subsection (1) and a special case in certain circumstances which falls within subsection (3). This is a case concerning the working out, in particular, for the matter that Justice Gordon has just, with respect, correctly noted as the critical point of difference between us, the words of subsection (3) which are at the heart of the interpretive crux. Subsection (1) again stipulates that the quality of being an unfair preference is “if and only if”, first of all:

the company and the creditor are parties to the transaction –

and second:

the transaction results –

the echo of the word “effect”:

in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor –

so that is pre-existing, in contrast, obviously, to cash on delivery purchases:

more than the creditor would receive from the company in respect of the debt –

that means, the debt pre-existing:

if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company –

And there is the latest statutory iteration of the core concept of being a preference. And being an unfair preference, obviously enough, if it has the qualities that one has already seen attached to it under FC, that is, a payment during or causing insolvency. Now, those in subsection (1) might criticised as perhaps more words than tradition we suggest was necessary to describe a preference, but they are words which are practical words, and they are also words which are describing what Parliament has labelled an “unfair preference”.

This surely is a case where one would not be too cheery of taking into account the ordinary meaning of the word “unfair”, notwithstanding the words in question are definitional. And why I say that is that, obviously, preferences by a company between its creditors are unexceptionable, but for the looming need for pari passu equality in a limited liability insolvency, with respect to payments during periods at maximum of the selected lengths that one saw in the earlier provisions.

Now, at that point, can I just remind you of the one aspect of legislative history that we emphasise, and that the understanding of which – alas, by a kind of construing it – may also be a subsidiary or peripheral point of difference between us. In volume 7 of part E of the book of authorities, at page 1434, the ‑ ‑ ‑

GORDON J: Do you mind saying which authority it is, sorry, I missed it.

MR WALKER: Yes, it is the explanatory memorandum.

GORDON J: Thank you.

MR WALKER: It is item 51 in the index, your Honour.

GORDON J: Thank you very much.

MR WALKER: Your Honours are familiar with this. I will go straight to paragraph 1042 – the reference is to a provision which is the same as subsection (3), to which I am about to come. I will not read it, because it is familiar, but in the middle of it, handily with the underlining for the case names, there is this:

This provision is aimed at embodying in legislation the principles reflected in the cases of Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1967) 115 CLR 266 and Petagna Nominees Pty Ltd & Anor v A E Ledger 1 ACSR 547.

And then there is this description:

The effect of these principles –

this, of course, is the understanding of those assisting the Minister:

is that it is implicit in the circumstances in which payments are made to reduce the outstanding balance –

that is, I would interpolate that as that which pre-exists the payment:

in a running account between purchaser and supplier that there is a mutual assumption that the relationship of purchaser and supplier would continue –

that is, into the future after the payment:

as would the relationship of debtor and creditor.

Now, that is a little clumsy because it is not always obvious that the supplier looks forward to continually having payments in arrears; it depends upon the circumstances:

The net effect, therefore, is such that payments ‘in’ –

and that means afterwards:

are so integrally connected with payments ‘out’ –

and that means, for example, the impugned transaction, so-called:

that the ultimate effect –

“ultimate” means at the end, that is, we are looking back in a winding up in a liquidator’s application, the “ultimate effect” is the netting:

the ultimate effect of the course of dealings –

We interpolate; that obviously means from the first transaction impugned to the end.

GORDON J: Just so I am clear about that – you say the first transaction, you mean the first available transaction in this context from the date of insolvency?

MR WALKER: No. No, when one says the first available, it is not available for a court to choose; it is available for a liquidator to choose.

GORDON J: So that is the debate; the debate is whether or not by reference to the statutory provisions you have taken us through, there is a statutory period chosen – the artificiality you were talking about before.

MR WALKER: Statutory period that is not coterminous with or not congruent with insolvency.

GORDON J: Well, that is the argument. It is whether it is limited by insolvency by reference to the provisions we have just been to, and that therefore one sees from – I think it is the core appeal judgment – the payments on 26 March were not taken into account because it was prior to the period of insolvency ‑ ‑ ‑

MR WALKER: Yes, that is right.

GORDON J: ‑ ‑ ‑ as being the starting point giving rise to the potential pool of transactions and then making a different enquiry about whether or not that period is coterminous with the prior of the continuing business relationship but within that same period.

MR WALKER: Yes. And these raise questions rather than supply answers, which is why we have drawn to attention that when these words were enacted, there is absolutely no hint – indeed, the explicit passage to which I have drawn attention rather suggests firmly to the contrary – that the judge-made law, the accretion to the understanding of antecedent legislation to the same end, namely, governing what are now called unfair preferences, should be displaced, which is outright and overtly the effect of the Full Court’s ruling, taking the cue from New Zealand. Now, I can look ahead – as we have already observed, I do not need to develop much.

In New Zealand there was a sequence of legislative history which seems to have been gravely mistaken, namely the notion that Airservices was a matter that the Parliament of Australia had had available to take into account. It is a misunderstanding; Airservices was dealing with the antecedent legislation but after the new legislation had been enacted, and, in any event, as I shall come to and as your Honours have read in our written submission, Airservices does not say what either the New Zealanders or the Full Court thought it said about these matters.

In particular, Airservices does not suggest that Queensland Bacon was wrong, any more than our friends do, and, in particular, it does not suggest that Richardson’s Case which was called in aid and explained in Queensland Bacon, was to be understood as in any sense exploded or revealed as having been misconceived.

GORDON J: Could I ask whether that extends to the peak indebtedness rule or just extends to the continuing business relationship?

MR WALKER: I am obviously enlisting it for the first, not only the second. Yes, I am saying that, when properly understood, the antecedent jurisprudence took as part and parcel of the liquidator’s choice not only whether to and which transaction but also, where there was a continuing relationship, deciding to make a claim only from the point after which what might be called, commercially, a preference could be become possible – that is only after peak indebtedness.

KIEFEL CJ: But it was never ever rooted in statutory terms, was it? It comes out of the ether.

MR WALKER: I have got to say no to both of those, though I accept that is the challenge for us. May I explain. Why I started by reference to the equity of the statute is that the only way of understanding these cases is that the harshness which would be inapposite for a jurisdiction to relieve against unfair, undue or – let alone fraudulent – the harshness of saying to a person who is stuck with a failing business, by continuing to supply while receiving some but not enough money to discharge prior indebtedness – of having that person suffer that every one of the payments they received, each, say, but the last in return for continued supply – enabling other suppliers, no doubt to be paid some if not all their debts – being required to disgorge more than the excess constituted by repayment of prior indebtedness compared with the value of continued supply. That did not come out of the ether and cannot be said as deracinated – it had a root in an understanding of the equity of those statutes, which was about preferences and which used, at times, the word “effect”.

EDELMAN J: The problem with the doctrine of the equity of the statute is that after about the 18th century, it became understood that courts did not really have the power that was claimed under many of those decisions ‑ ‑ ‑

MR WALKER: Absolutely.

EDELMAN J: ‑ ‑ ‑ on the equity of the statute to make decisions on ethical loans, where that was contrary to the intention of Parliament.

MR WALKER: Quite so, but it has not disappeared, the notion – the notion is, however, confined, appropriately, the courts subordinating themselves to Parliament, to matters such as purposiveness.

EDELMAN J: Is this a submission that this is a doctrine‑like part performance that, although its origins might have been suspect, in terms of notions of parliamentary sovereignty today, is so well‑entrenched in the understanding and the common law background against which the statutes were enacted that the statutes need to be read in light of the doctrine? Or, is it, as you say, a purposive principle that when one reads statutes according to their simple purposive terms that in light of ordinary principles of statutory interpretation, one reads this principle as applying, despite words such as “all” in (3)(c)?

MR WALKER: The answer is the latter – that is, I am bound to say, and so say, that what Sir Garfield and Sir Frank were expressing was not the Court’s disobeying Parliament – so it was not how some may characterise – probably anachronistically – part performance in relation to statute of frauds – but, rather, it was, and is, a purposive understanding of what it mean for something to be a preference – to have an effect, in modern parlance, to be unfair.

EDELMAN J: It is just, really, non‑literal purposive construction.

MR WALKER: That is right, that is right. So, in answer to the Chief Justice’s question, it certainly does not come out of the ether because it is rooted in the looking for an effect in a commercial sense. These are commercial provisions. That is why “running account” is at the heart of matters.

KIEFEL CJ: But that is what the ultimate effect is concerned with. One question that you have to deal with ‑ ‑ ‑

MR WALKER: It is the ultimate effect of what, yes.

KIEFEL CJ: ‑ ‑ ‑ is the consistency of this with the ultimate effect.

MR WALKER: There is no inconsistency with it unless (1) – and this is an important point in our argument – unless (1)(c) says that ultimate effect is to be traced from the beginning of the continuing relationship – which is one of the possibilities thrown up by the lack of express words – that would be absurd, for the reasons sufficiently demonstrated in the Western Australian case, Olifent – to which reference has been made. If you go back to the beginning of the relationship, practically never will you find that an overall preferential effect, because the music plays, the music plays, eventually it stops, the creditor is left standing without a chair – that is, is a creditor. So, they would never have preference over all because, like everybody else, they are left without prior indebtedness having been reduced – because they started at nil.

It is for those reasons that, on any view of it, the literal words have to be understood, and how better nowadays than purposively. The scheme that we say comes out of the provisions to which so far I have gone in the statute, is a scheme which looks for the liquidator – exercising appropriate judgments all subject to adjudication by the court – nominates those transactions – payments, if you like – which are putatively unfair preferences and may have – either as the only way or as an alternative way – the framing the matter concerning, say, 15 payments – look, all 15 or, alternatively, eight of these, are manifestations of a continuing relationship and I accept that I can only get what the ultimate effect rule will give me for that.

Now, that gives rise to a question which we do not think has been expressly the subject of decision in this Court before, namely, when you have provisions which enliven the Court’s power to order recoupment only because of a relationship with insolvency, temporal or causative, as we have drawn to attention, of the payment in question, whether one would commit the absurdity that the Full Court recognised in this case – paragraph 84 of their reasons.

If you did trace through the unfortunate possibility of a, we would say, excessively literal understanding of the word “all”, because a commercial relationship does not commence on a day that nobody would have remarked on the day it occurred, namely, six months before the relation‑back. That all lay in the future, the capacity to nominate that date. The relationship does not start then and, if I may say so, neither the day that would be equally unobservable, perhaps to many companies and suppliers, namely, the first day of insolvency. It is for those reasons that the logical choice is, if you are talking about all transactions in a relationship, it is either the whole relationship, which is absurd, as everybody agrees, or it is something else.

EDELMAN J: But the something else is where the battle is joined here and the two options, are they not, under (3)(c) is that one reads the transactions as though either it is all the transactions after the point of insolvency or all the transactions after the date selected by the liquidator.

MR WALKER: Yes, your Honour is right. May I say this, however, that the first is, we submit, precluded for reasons I have already put, which I would like to try now to develop in conclusion. That is, the statutory text, no more than the jurisprudence that the Parliament had in mind when enacting it, did not look to the commencement of a statutory period which as I say is known retrospectively from, say, an order of winding‑up, counting back, nor from the day of insolvency which is often only known retrospectively and with the assistance of experts to‑and‑fro, leaving only as a matter of fairly obvious fact the familiar task of a court deciding when a commercial relationship commenced, which had certain qualities. That is factual and well within court adjudication.

But everyone joins in rejecting that because the relationship may have started 15 years before and happily proceeded in a way that saw supplies made – payments made until the end of days. That would mean no preferences exactly for people who perhaps because of that long human relation, social relation, were the object of unfair preference as everything started to turn disastrous.

Now, if that is the case, then one asks what is contrary to what we select by reference to the peak indebtedness, which is an aspect of liquidator’s choice. What is wrong with that, as your Honours’ predecessors plainly regarded as appropriate in, we would submit, solidly cognate legislative setting, bearing in mind that it accords with the obvious need not only to place the matter in a period of relevant insolvency, but also to restrict the court’s function – task, I should say – to consideration of that which financially could even begin to qualify at the outset as a preference. That is, the point from which the past indebtedness started to decline.

GORDON J: I think the big hurdle, is it not, is subsection (3).

MR WALKER: Yes.

GORDON J: You have to overcome the language. The way I read your outline of oral argument is you say where that payment is an integral part of the continuing business relationship, the effect of that payment ‑ ‑ ‑

MR WALKER: Yes.

GORDON J: For my part, I find that difficult to fit with the textual language and the text in subsection (3) where, as I read it, it applies to all the transactions forming part of the relationship – we will put aside the argument what they are for the moment ‑ ‑ ‑

MR WALKER: Yes.

GORDON J: ‑ ‑ ‑ as if they together constitute a single transaction, and to pick out the Chief Justice’s question, what is the ultimate effect of that single transaction? One is not looking at a particular payment within the single transaction or the single relationship.

MR WALKER: No, that is true. All of that is true.

GORDON J: So, I would be grateful if you could develop how it is on paragraph 3 of the outline, which seems to be one of the critical planks of your argument.

MR WALKER: Without doubt.

GORDON J: Sorry, I missed that, Mr Walker.

MR WALKER: I am sorry, your Honour?

GORDON J: I missed what you just said.

MR WALKER: Without doubt, that is correct. I accept all of that, and may I say – and it should be evident from our written material – of course there are difficulties, which is why I have repeatedly pointed out that the most obvious literal meaning of the word “all”, which is to exclude nothing, with respect to the literal understanding of the word “relationship”, which is a factual matter, is on all sides accepted as just a nonsense, which would remove the highly beneficial possibility of unfair preferences being recovered by reason of dealings in a continuing relationship after a certain point, particularly with respect to insolvency. But “all” and “relationship” do not permit any regard to whether there is insolvency or not, and do not permit any regard to a statutory period or not.

So, we start – we accept that it is always a challenge, a difficulty, for somebody who says the words do not mean what, to an ordinary reader, they appear to mean. But that, after all, is one of the tasks of a court, where there is an evident purpose, and a canon – which is surely still a very solid support in interpretation – is that you avoid absurdity.

That is, surely, Parliament could not have meant you go back 25 years in the relationship between a logger and a sawmill, and observe that – as you might expect – they, starting at zero in the books, have had a running account, and now there is an amount which is a lot closer to zero for that particular logger than for all the other loggers.

The idea of not ever being able to say, because of that – because there was to‑and‑fro, all those 25 years – that there was any unfair preference when one could see from the time when there were trading difficulties, that there were payments made, either no continuing relations, just payments made and therefore, they are plainly going to be got back if they were not cash on deliveries. If they were payments for prior indebtedness, then they were preferences. Or, if there is continuing relationship ‑ as you would expect in such a 25-year business – then it is only the net effect that will be able to be taken.

Now, in our submission, why you would not start at a point when somebody started to better their position, that is, from peak-indebted design, as serving the evident beneficial purpose of having that creditor contribute back to the pool, so as to take the same rate of a proportion loss as others who did not receive the benefit of that decline from peak indebtedness. In our submission ‑ ‑ ‑

STEWARD J: Just going back to your comment that “all” the transactions cannot really mean “all”. The ultimate effect rule assumes that the company receives value equal to the payment it makes out for the goods and services that has received. Is not one way of dealing with (3) to simply ask the question, when the continuing base of business relationship ends, it is just a question of working out who owes what at that point at the end of the relationship.

MR WALKER: That is the netting, yes. So, if it is a case of a ‑ ‑ ‑

STEWARD J: So, you could take into account all the transactions going back from 25 years. It does not really matter, because at the end of the day, the question is who owes what.

MR WALKER: But if you take the log of a period ‑ that is, if you go back to the very beginning ‑ there will not be a preference because the person will be a creditor at the end. And any money owing is more than zero.

STEWARD J: Will it not just turn upon the timing when payments are made? Because that is what is happening here.

MR WALKER: Well, it all depends on timing, but it ‑ ‑ ‑

STEWARD J: But timing when goods and services are received, and when payments are made for them.

MR WALKER: Perhaps I could try to answer in this way. It is a commonplace in this area, we submit, to look at the case of a supply cash on delivery where there is no payment of a debt. There is also a commonplace of a running account that payments are applied to past indebtedness, and credit is given for the present supply. Financially, they are six of one, half a dozen of the other.

The point about a running account is that it imports or conveys the possibility of a relationship, although it is not just relationship simpliciter that gives rise to the ultimate effect rule. Obviously, it has to be a relationship which has, as a mutual end, the continuation of the supply, which renders it not unfair that there be payments to reduce prior indebtedness.

In other words, there is a scorn, one sees, implicit in the reasoning of this Court in the previous cases, to the notion that this would turn on whether somebody adopts the form of, well, from now on, it is cash on delivery. So, I will keep dealing with you, but it is all cash on delivery, no credit, and you are not paying previous debts, et cetera.

GLEESON J: But the point of looking at the running account is that the creditor was providing value ‑ ‑ ‑

MR WALKER: Exactly.

GLEESON J: ‑ ‑ ‑ throughout a period that turns out to be the period of insolvency.

MR WALKER: Exactly, and that provision of value was for the benefit, if you like, of everyone. Or, more to the point, it meant that the payments – I do not mean in the term for which, in the terms of consideration, I mean in the continuing relationship, which is aptly described, with respect, by the parliamentary draftsmen within 588FA(3) as the give and take, the to‑and‑fro, there is value being received. Of course, the fundamental question whether something is a preference at all will be answered by reference to the ultimate effect doctrine, in many cases by saying no preference, because this poor old supplier had a greater indebtedness at the end of this period than at the beginning.

It would be to pile insult on injury to say to that person, well, they have had an unfair preference because it can be seen that the value of what they supplied – and this is Airservices, of course – the value of what they supplied during that period exceeded the value of what they received by payments from time to time. That is the whole point about the payments which escaped recoupment in Airservices. The airline had received more than the value of what it had paid during that period. And that is seen as being for the benefit of the body of creditors, even if, of course, it permits an insolvent company to keep trading. That is why the subject cannot be characterised as a preference.

That is a judicial understanding of what it means to constitute a preference in grafting of it – because of the purpose of the provisions, a notion of continual relationship where we are told in the explanatory memorandum that FA(3) is intended to capture what was talked about in relation to those, what is called, the “principles” in those cases. The principles are just the judicial working‑out of what the statute requires but with a heavy focus on purposiveness.

In this case, now that subsection (3) has been enacted, we can add to that, and surely now understanding that, above all else, one would avoid absurd and self‑defeating absurdity whereby you never get any of these people contributing, however disastrous they think the organisation of deck chairs on the Titanic might be, because if you look at the whole of the relationship, they started at zero – they have ended up in a position where there is nothing that calls to be recouped. There has been no, as it were, overpayment.

GORDON J: Mr Walker, in the EM to which you took us, you referred to Queensland Bacon and Petagna as being the principles set out in those authorities which were to be enacted in the provision you just took us to.

MR WALKER: “Embodied” was the word, yes.

GORDON J: Thank you, “embodied”. Do you propose to take us to those passages in those judgments to show us what it is that they are actually referring to?

MR WALKER: Yes, as to some. I am not going to do it exhaustively. The written material – particularly the judgment below – provide detail that I do not need to go to.

GORDON J: You do not challenge their analysis of those authorities?

MR WALKER: I do as to Petagna in the Full Court.

GORDON J: Thank you.

MR WALKER: And, for the reasons that we have written – in particular, the use made of a single sentence in Justice Franklyn’s reasons is one to which I will come back, briefly.

KIEFEL CJ: I see the time, Mr Walker.

MR WALKER: I am sorry, your Honour.

KIEFEL CJ: The Court will adjourn for 15 minutes.

AT 11.18 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.33 AM:

KIEFEL CJ: Yes, Mr Walker.

MR WALKER: Your Honours, it is the words of subsection (3) of FA that we say said to embody what I described as principles in passages to which I am to go – starting with Queensland Bacon.

Subsection (3) uses the word “transaction” in ways that require some more sharply delineated understanding. In subsection (3) paragraph (a) – the first line, it must be – bearing in mind that this is a definition of something as an “unfair preference” – which is one of the ways in which something may be an insolvent transaction – which is one of the ways in which there may be recoupment ordered – it must be that that is a payment which is impugned as being an unfair preference. Bearing in mind the words that immediately follow, we seem to be talking here about what I will call a single payment – the notion that Sir Garfield Barwick seem to have in mind when he talks about payments “in isolation” – that is treated singly.

(3) Where:

(a) a transaction –

or as we would put it, a single payment:

is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) –

and Parliament’s parentheses picks up exactly the way in which the matter had been generalised in earlier judgments, a “running account” is the classic example:

between a company and a creditor of the company (including –

I do not need to worry about the second parenthesis. Then comes some words which, read literally, provide difficulty in the sense that it would drive an absurdity:

(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced –

So, with respect to what we put about peak indebtedness, I draw to your attention “increased and reduced”:

from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) –

which is the primary rule concerning a comparison with what would happen if there is no recoupment, and what would happen upon recoupment:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship –

and that is the phrase at the heart of our difficulty, but it is the phrase which, read according to ordinary meaning, produces an anti‑purposive absurdity, which could not have been intended, bearing in mind the conjuring explicitly of Queensland Bacon by the Minister:

applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction –

so, there is another use of the word “transaction” – it is now for this construct which comes from aggregating all the transactions forming part of the relationship – whatever that means.

The single transaction is then referred to in the important provisions of paragraph (d), which is part of the consequence of paragraphs (a) and (b) in subsection (3) being true. The second part of the consequence is that:

(d) the transaction referred to in paragraph (a) –

that is the one that refers to the payment having been “an integral part of a continuing business relationship”:

may only be taken to be an unfair preference given by the company to the creditor –

and so, we still have this, surely, notion of purposiveness by the notion of preference and unfair preference:

if, because of subsection (1) as applying because of paragraph (c) of this subsection –

that is the command in paragraph (c) to apply subsection (1) to transactions and “all the transactions” referred to in subsection (c):

the single transaction referred to in the last‑mentioned paragraph –

paragraph (c) – that is the one that is constructed by all the transactions forming part of the relationship together constituting it – if, because of that:

the single transaction referred to in the last‑mentioned paragraph is taken to be such an unfair preference.

Which we think, with respect, is a simply‑expressed reference to what might be called the netting or overall effect approach illustrated in Queensland Bacon and all the cases that have proceeded on that basis. So, it is taken to be an unfair preference.

We would submit, bearing in mind how we know all these definitions fit together, first of all it has an effect of being a preference which, just as it wold not be for cash on delivery, would not be if the indebtedness was increasing rather than reducing, notwithstanding the payment which is impugned, it is taken to be a preference is there is a reduction in the prior indebtedness by the overall or aggregate consideration and taken to be unfair, obviously, if it falls in circumstances including particularly a relationship with insolvency which is critical in order for an unfair preference to be an insolvent transaction that can be the subject of clawback on the application of a liquidator.

So, that is how we say that the carpentry of FA, particularly the words – difficult for us, we accept – in subsection (3), particularly paragraph (c), fit together in such a way as to not only plainly embody the need to pay regard to the overall effect where there is continuing relationship, but also – because of the central concept of there needing to be a preference, the obvious appropriateness of treating peak indebtedness as a point from which one would start the exercise as a liquidator of impugning a transaction or, more usually, transactions – a number of transactions. Now that, we accept, leaves open the question, well, what does one do about the apparently intractable universality of the words:

all the transactions forming part of the relationship –

and we submit that what Parliament has in mind is looking forward to what eventually becomes the insolvent administration, and from that vantage point, seeing the period from the impugned transaction and thereafter as, by reason of a continuing relationship during that period – during that period – requiring ultimate effect to be the maximum that the liquidator can be permitted to recoup.

GLEESON J: The reason that the statute is looking at the continuing business relationship is because the creditor is adding value to the company’s assets ‑ ‑ ‑

MR WALKER: That is right.

GLEESON J: ‑ ‑ ‑ during the period of insolvency.

MR WALKER: During a period – well, it will turn out, because of what insolvent transaction requires definitionally – it will turn out to be during insolvency. Yes.

GLEESON J: So, why would you exclude the contribution, the transactions, which contribute value to the assets prior to the peak indebtedness?

MR WALKER: Because if you include all of them, that is, long preceding insolvency ‑ ‑ ‑

GLEESON J: No, no. All I was I was saying – the point of talking about the continuing business relationship is not because of the great affection between the creditor ‑ ‑ ‑

MR WALKER: No, no.

GLEESON J: ‑ ‑ ‑ and the debtor, it is because they have a relationship during the period of the insolvency.

MR WALKER: Well, it is not during the period of insolvency; it is during the period in which there is to‑and‑fro. During the period where:

net indebtedness to the creditor is increased and reduced from time to time –

To use the language of paragraph (b). So, it is a period characterised by – to use the language of some of the cases – payments out and payments in, or value in.

GLEESON J: But, again, it does not matter that they had that relationship before the company became insolvent.

MR WALKER: I accept that.

GLEESON J: What is important is that the creditor is adding value to the company during the period of insolvency, and so it is the to‑and‑fro during the period of insolvency that is of interest.

MR WALKER: Your Honour, in policy terms I could not possibly disagree with that. The question, obviously, for the Court is, does the statute say that about ‑ ‑ ‑

GLEESON J: Well, the purposive ‑ ‑ ‑

MR WALKER: ‑ ‑ ‑ the identification of the relationship by reference to it period, which includes the relevant inception. I do not mean of relationship, I mean inception of the period that the Court will treat pursuant to section 588FA(3) as requiring the netting that paragraph (d) requires once you have a continuing relationship case.

That statute does not say what your Honour has put to me, in terms – not in terms. I am not saying it is an unavailable interpretation, I am just saying it does not say so in terms. We know that all of this is to be determined in an application brought by a liquidator who may not know when insolvency started – that is often a contested issue – quite often, part and parcel of these very proceedings – this kind of proceeding. They will know the arbitrary date, but the arbitrary date provided by the statute is on all sides, surely now, discarded as a date which is the date from which you look at unders and overs in order to reach net effect, because it is entirely arbitrary and may, as in this very case, precede insolvency and that outcome is, with respect, surely not in question.

Literally, of course, the words would have suggested most plainly the duration of the relationship as a relationship, regardless of insolvency and regardless of arbitrary periods, both of which are probably only knowable in retrospect. They are both knowable only in retrospect. But everyone agrees in discarding that most obvious plain meaning of the words.

It is for those reasons that what I am going to try and persuade your Honours, by reference to the case law, particularly that which we submit has been evocatively tagged in the explanatory memorandum, that the relationship that is of interest is dealings following the impugned transaction, which diminish the real effect in terms of preference – let alone unfair preference – of the payment which is the first impugned transaction which, on its face, say it is a payment of $100, plainly makes that creditor better off by that reduction of $100 in pre‑existing indebtedness – and says, but there is a relationship in which that payment is made.

It may have started a long time ago as a relationship, but what matters is from that payment on, until the end of that relationship – which is ground 2 – from that period on, there were unders and overs, ins and outs, credits and debits, all for a purpose – which can be characterised in very general terms at the moment before I come to the Eurolinx point – it can be characterised as being, with a mutual understanding, that by some of the payments which are otherwise preferential – the payments by debtor to creditor – there is secured, there is gained continued supply of the wherewithal for trade to continue for the benefit, in theory, of everyone.

It is the relationship, then, that 588FA(3), we say, looks at a transaction which can only be identified, not by the judge selecting something, but by the application by the liquidator naming it, or impugning it – to use the jargon – and asks of that transaction whether it is an integral part of a continuing business relationship where “continuing” means continuing past it. It does not mean continuing up to it, it means continuing past it, because it is only the effect of subsequent supplies that could sensibly have the effect of diminishing what would otherwise be the extent of preference represented by receiving $100.

EDELMAN J: Mr Walker, is your argument that against the possibility that the date from which subsequent engagements between the parties ‑ ‑ ‑

MR WALKER: Dealings, yes.

EDELMAN J: Dealings between the parties ‑ ‑ ‑

MR WALKER: Payments and supplies perhaps, yes.

EDELMAN J: ‑ ‑ ‑ would be considered is the date of insolvency on the basis that, to use your metaphor, the Russian dolls had established that bounded period through 588FE.

MR WALKER: Yes. That is already done, definitionally.

EDELMAN J: But you say that that cannot apply because the relation‑back date does not always coincide with the date of insolvency?

MR WALKER: That is right, exactly so. So those are ‑ ‑ ‑

EDELMAN J: So, choosing the date of insolvency is really just again choosing, for whatever purpose one wants, a particular date.

MR WALKER: May I say, who would choose it? Does the liquidator say, I think insolvency occurred on Wednesday 13, and does that mean that even though the liquidator is wrong, it occurred on ‑ ‑ ‑

GORDON J: Well, there is usually a fight about it, is there not?

MR WALKER: I am sorry, your Honour?

GORDON J: Often there is a trial about trying to work out when insolvency is.

MR WALKER: Very often.

GORDON J: I assume that is what happened here, was there not? There was a debate and there was a judgment about what date insolvency was.

MR WALKER: Yes. It is a very common requirement of case management.

GORDON J: Yes. I unfortunately remember them.

MR WALKER: What I am saying is that this statute does not say that the relationship in question is to be dated – notwithstanding the history between the parties as commercial entities, for the purpose of subsection (3) the statute does not say the relationship, which requires to be taken to be such an unfair preference – see the closing words of paragraph (d) – is one which starts with insolvency. This is all about preferences and the inquiry about preference is triggered by payments, and payments are impugned because they may be preferences, a matter to be adjudicated by the court.

They cannot be preferences, ordinarily, in the understanding of that, if – see the jurisprudence referred to in the EM – if the same or more value was received in return for the payment. In other words, put paid to the nonsense that you will distinguish by people who are clever enough to structure subsequent supply as cash on delivery only.

So this Court, having said, no, we will take it in a commercial way, it will not matter whether you structure it as COD or not, if there has been supply of services at least as valuable as the payments alleged to be impugned as being preferential, then there will not be a preference because when you do the numbers there has been none of the unfair advantage gained. So, that is just the ordinary – we do not understand it to be contested – operation of the ultimate effect doctrine or rule or principle which is a judicial explanation of how statutes of this kind work.

I accept the challenge here is whether, in the refurbishment of the language, notwithstanding the invocation of, say, Queensland Bacon, as being embodied – whatever that really means, what parts of the Bacon are embodied – a horrible sort of nutrition question, your Honours – the real difficulty for us is whether what we are calling for convenience the peak indebtedness rule comes along. And we understand that the Full Court, indeed, in New Zealand it was suggested that there was always, in principal, a tension – apparently, irreconcilable – between the overall ultimate effect notion and the peak indebtedness notion; in our submission, not so, for reasons I have already put and going to develop further.

If I am right in that, then it does become a question of trying to understand what is the jurisprudence, what were the approaches, the notions, the concepts – that you could see in Queensland Bacon that can be sensibly described as being embodied in this legislation. Now, it may be the EM is mistaken, and that simply records an aim which the marksman has not hit. And if your Honours reach that conclusion, then the EM can be swept to one side.

But, for the reasons we have tried to put in writing, and that I have already addressed and will continue to develop, it cannot be said that the wording of subsection (3), particular of paragraph (d) to which I have just made some comments, it cannot be said that they are alien to the notions that you will see in the passages to which I now come.

So, Queensland Bacon – it is [1966] HCA 21; 115 CLR 266, it is number 22 in the book, in volume 3. So, this was one of many cases, itself including quite a few proceedings, from the commercial collapse of Hennessy’s Self Service Stores in Queensland. At page 282, the Chief Justice draws together the threads coming from the previous few pages of factual recitation which shows the sadly familiar story of suppliers continuing to supply, more or less innocently, to an entity which, in retrospect – hence, everyone in the courtroom – was not able to pay all of them in full, let alone on time.

Now, in particular, the exposition of facts in the preceding pages has the familiar running account features: supply of goods, receipt of money, not, as it were, a succession of blunt cash on delivery transactions. Running account – credits and debits, balances from time to time. Halfway down that page, at 282, the Chief Justice fairly, with respect – says:

There is thus considerable importance for the appellants in the resolution of the question whether these payments should each be regarded in isolation –

that is this notion of payment being in isolation:

the immediate effect of the payment to one creditor and not to others being taken as the relevant effect –

one sees that expression “being taken as the relevant effect”:

or whether these payments should be regarded as part of the overall

series of not unrelated transactions –

leaving aside the elegance of the double negative, one sees the echo of language later in subsection (3)(a):

recorded in the running account so that the net effect of the operations –

and then come words which of course we rely upon:

from the date of the first impugned payment –

Now, his Honour cannot surely have committed the naivety – his Honour of all judges – of thinking that, by coincidence as it were, the first impugned payment was the first time there was any commercial relationship between the people in question. So:

from the date of the first impugned to the date of liquidation –

because that is the period during which the unfairness of something which be called a “preference” falls according to the policy of the statute law in question to be determined. That:

becomes the determinant both of the fact and of the extent of preference.

That, with great respect, is a clear and, in our submission, in policy terms, very persuasive description of the need to ensure that you are really looking at a preference and, if so, how much. Hence the notion of an:

overall series of notunrelated transactions recorded in the running account –

is inseparable from this notion of:

the net effect . . . from the date of the first impugned payment to the date of liquidation –

Without any suggestion that his Honour was committing the solecism of supposing that the overall series, as a matter of commercial conduct, happened to be simply the first of those impugned payments. His Honour then goes on to discuss matters including – on the next page, page 283 – the important antecedent authority of Richardson. One sees the kind of language which, taken literally, would reach back into an absurd past with the self‑defeating result of never any unfair preference. In the middle of that page where his Honour quotes from Richardson in the course of explaining that, as a source of the overall effect doctrine:

“The second thing is that the effect is a consequence of the payment and that where the payment forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction –

A “whole transaction” is by no means the same as continuing relationship shown by running account, but it is obviously related conceptually, and hence his Honour notes that, in Richardson’s Case, the illustrative example is of course – as you might suppose – a running account of a grocer. At the top of page 284, with the quotation from Richardson selected by the Chief Justice, the statement is that the payments:

possessed in point of fact a business purpose common to both parties which so connected then with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference”.

So, you are looking forwards, there is countervailing supply as well as payment – contended, perhaps, to be preferential – and you take them all into account when considering the question of whether the first impugned, the earliest impugned payment was a preference, (a), and, if so, to what extent, (b). So, net obviously can produce results either side of zero. It is for those reasons that, in our submission, it cannot fairly be said that those who prepared the EM could have had any notion of reaching back before the impugned transaction for the purposes of the netting off.

Of course, you cannot leave out of account what had happened before the first impugned transaction because it is the payment of prior indebtedness. There was prior indebtedness. But for the purposes of the continuing relationship netting or ultimate effect principle, one starts with the first impugned transaction, leaving us with the task of: well, why is it then proper for the Court to proceed on the basis that the liquidator, whose application it is, can choose as the first impugned transaction the transaction which records peak indebtedness? As your Honours know, there is another set of reasons why his Honour, to which I am about to come, which to an extent explains that.

I am reminded by my learned junior that at page 282, after the passage I took your Honours to, and leading into the treatment and quotation from Richardson, the Chief Justice returns in a slightly different context to the notion of the period in question to which a relationship will bring about the legal necessity to look at overall effect only. That is the sentence halfway through the paragraph commencing “I have been able”. Halfway through that, his Honour says:

there will be occasions when there will be such facts or events intervening between the first payment which is impugned –

And the impugning, of course, at the election or choice of the liquidator:

and the commencement of the liquidation –

Et cetera, et cetera. Could I then take your Honours forward to paragraph ‑ ‑ ‑

KIEFEL CJ: But Chief Justice Barwick is not saying that the first payment which is impugned is at the choice of the liquidator. He does not say it anywhere in this case, does he?

MR WALKER: No. It is the word “impugned” that does that, your Honour. I accept what your Honour says. In the days of void as against the liquidator, it required the liquidator to say so. Obviously, sometimes it will not be in the interests of the general body of creditors to set things aside which have been of benefit, et cetera. Nowhere – as I think I said in opening the appeal – nowhere has, I think – certainly this Court has not – I do not think any court has said that a liquidator, by say‑so, makes things what they are not.

But, as I said earlier to Justice Gageler, that is no part of our case – that there is some unexaminable proposition stated by a liquidator in or about an application that affects any of the issues between the parties in this case or about the operation of these laws. Rather, that these are applications by an officer of the Court directed by his or her efforts at the equality in question between creditors and, in particular, aiming at transactions which, in the history leading up to the winding‑up – and, as it happens for this subject matter, during insolvency – ought to be considered by reason of their being impugned by the liquidator, the Court does not get to consider it of its own motion – and the Court does not get to take sides. It is an impartial, judicial determination of the matter between parties.

It is for those reasons, in our submission, that there does not need to be anything beyond the word “impugned” to make it clear that what his Honour was talking about is the transaction alleged by – contended by – the liquidator to be a preference.

GORDON J: Could I ask one further passage, finally, please, just in relation to that, and it is the top of 286 ‑ ‑ ‑

MR WALKER: Yes.

GORDON J: ‑ ‑ ‑ where his Honour, in the sixth line, says:

“In my opinion, it is enough if, on the facts of any case –

MR WALKER: Yes.

GORDON J: Is that consistent with your submission, down to the end of the paragraph, being the bit his Honour has adopted from Richardson?

MR WALKER: Yes, is the answer. The payment made there is, again, the same payments as his Honour has been discussing from 282 onwards – and that is always, say, at the top of 284, the first full paragraph there:

one in which the payment is part of a larger single transaction and the other where the payment . . . is none the less linked in some fashion . . . “running account”.

That is the second of those. So, in each case it is a payment and we know already from what his Honour has said in the middle of 282, that as to the application of these provisions, it is the impugned payment. So, no, there is nothing at the top of 286 – in answer to Justice Gordon – which is either an inconsistency within Sir Garfield’s reasons or not supportive of the way in which we urge they ought to be read.

I note at 300 that, albeit as conferee, his Honour refers to a passage – to which I am about to come – in Rees v Bank of New South Wales – the case in the same winding‑up, 111 CLR – to which I am about to come – with respect to the need to characterise specific payments for another of the elements that may be in dispute between such parties. There is no hint that there was any sea‑change being recorded between the Bank of New South Wales v Rees Case and the Queensland Bacon v Rees Case.

Could I take you then to the Bank of New South Wales v Rees Case [1964] HCA 47; 111 CLR 210, volume 4, number 23 in the book of authorities. Could I note the argument by Mr W.B. Campbell QC, as he then was, at page 214 as recorded in the note, about half an inch from the bottom:

The 1st December 1960, the commencement date chosen by the liquidators, is an arbitrary date.

That is “arbitrary” in a pejorative sense I think:

The overdraft was at its highest about that time.

I interpolate, and that surely was no accident. Then there follows an argument which obviously resembles to a degree the anti‑peak indebtedness argument to be found in and between the lines of the reasoning below in this case and in the argument against us. So, it will not do, with respect, to suggest without deciding, as in the Full Court here, that these may be obiter dicta by the Chief Justice. They were his response to an argument which would have an effect upon what I might call the financial outcome. The Chief Justice turns to that in the well‑known passage that starts halfway down 220, talking about Price’s Case, which is a banking case:

But 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 unnecessary to endeavour to assign this remainder to particular deposits, for the position as to the bank’s knowledge in relation to the company’s solvency and in relation to the effect of any permanent reduction in the company’s indebtedness to the bank was the same throughout the period. Nor is there any need to analyse the course of the overdrawn account during the period to determine whether a preference which had been obtained at one point of time was foregone by the making of further advances which for the time being may have exceeded the extent of the preference.

So, the Chief Justice is explaining, in somewhat different words, what I called the overall or ultimate netting effect. His Honour said:

It is sufficient in the circumstances of this case to take the overall effect of the deposits and the withdrawals in the period.

Now, I have got to persuade your Honours, and there is nothing in this case that made it an issue. But “in the period” was, not surprisingly, the period which was proposed by the moving party in that case to be the period commencing with the first impugned payment. The Chief Justice then said, noticing the matter that I have noted in the summary of argument in that case:

It was 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 . . . at that date and its state at the date of the commencement . . . 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 –

Now, I interpolate, of course, that is to take a period where, for all one knows, without there being a holding, there was not insolvency. At least for the whole of the period. The Chief Justice continued:

a comparison which in this case would result in a materially lesser figure than that reached by taking the liquidator’s comparison.

It is to be recalled that all of this does not abolish somebody’s debt; it just requires them as creditor to be treated equally with others, so it is regarded as socially, commercially beneficial – the policy of this statute is to augment that which is available to creditors, pari passu. His Honour then continues, in the passage to which criticism has been directed:

In my opinion the liquidator can choose any point during the statutory period –

and the words that follow are important for our argument:

in his endeavour to show that from that point on there was a preferential payment –

In other words, having selected on the merits what in the history is the earliest time or the first payment that might fall to be recoupable if the court accepts the propositions of characterisation as an unfair preference. That, in our submission – there is nothing arbitrary about that, that is enlisting the liquidator’s judgment, subject to adjudication by the court, for the very purpose to which these provisions are directed. His Honour then continues, in the passage that has been subject to the more pointed criticisms:

and I see no reason why he should not choose, as he did here, the point of the peak indebtedness of the account during the six months period.

The fact that it is all joined in the same sentence is surely because it is the same idea. If you want to show something is a preference, starting at the date after which that creditor had reducing indebtedness, by payments which were not enjoyed by others, not shared, pari passu, is, in our submission, inherently, convincingly and appropriately directed to the very purpose of all of these provisions.

That is why, in our submission, peak indebtedness is but an aspect of the liquidator exercising the liquidator’s unquestionable right to choose, (a), whether to assert a payment is a preference, and (b), whether to assert or not there was a continuing relationship, we have called in aid the ultimate effect or net effect approach.

KIEFEL CJ: Justice Kitto at the bottom of 221 – last couple of lines, and the top of 222 ‑ ‑ ‑

MR WALKER: I am about to go to that very passage, your Honour.

KIEFEL CJ: I will let you do that then. Because it is that statement by him considering the ‑ ‑ ‑

MR WALKER: That is exactly the passage ‑ ‑ ‑

KIEFEL CJ: ‑ ‑ ‑ immediate effect and the ultimately produced effect, which is referred to in Queensland Bacon v Rees.

MR WALKER: Exactly.

KIEFEL CJ: So, that is the only purpose of the reference to Rees v Bank of New South Wales.

MR WALKER: Your Honour, that is an available, but, in our submission, not to be preferred view – if I can use the word. The preference ought to be that the overall principle is that for an unfair preference to be found there are cases of continuing relationship where you must pay regard to the value received, and the arrangement under which value is received after the payment which has been impugned.

And it is that after the payment which has been impugned that I want to draw to attention in Mr Justice Kitto’s reasons. His first substantive paragraph starts with the point I have been labouring concerning the liquidator’s election – the word “attack”, rather than “impugned” is used, but it is just Anglo-Saxon for Latin:

The liquidator attacked as a voidable preference each individual deposit made to the credit of the company’s overdrawn bank account in a period of a little over two months before the presentation of the petition for winding-up –

So, his Honour actually starts by noting a period as chosen – no doubt by consideration on the merits of what the trading history showed – by the liquidator in the attack in court. And the liquidator attacked it as a “voidable preference”:

but only to the extent to which the deposit was represented in the excess of deposits over payments out made in that period.

So that it was defined, according to the case that his Honour was considering, by reference to the choices of the liquidator – no one is suggesting they were matter equal, or in any sense binding a court who would adjudicate on the correctness of the propositions – that the attack was on payments during a period.

Now, there is nothing different between what Mr Justice Kitto is saying there concerning the liquidator’s choice and what Sir Garfield said, with respect, concerning the approach. In any event, we know that Sir Frank thought that was so, that is, nothing to pick, because the first sentence of his reasons is of course to declare that he is of the same opinion as the Chief Justice.

So, there are no differences, either when you consider the substance of that first substantive paragraph or when you consider the understanding by the judicial writer himself that he was of the same opinion as that which I have already taken you to. Now, Richardson is called in aid by Mr Justice Kitto as well, and at the foot of 221 you will see a reference to that case as being one where:

the liquidator conceded that the arrangements made between the bank and the company from time to time during the period were such that by a common business purpose of the company and the bank each deposit was so connected with subsequent payments out –

So, you look at each payment which could be considered, even in isolation, as a preference and you noted that they had this feature, that there was a connection that comes from what we now call a continuing relationship. And it is a connection with subsequent payments so that, while one might be able to say in a split second after the payment is made, that is a preference, that is money that went to that creditor and not to other creditors, this doctrine says, which surely Parliament was enacting, see 588FA(3), there needs to be a look at then what happened thereafter. Not what had happened before.

What had happened before is relevant because it shows there is prior indebtedness, some of which was being discharged by the payment which is the first impugned so-called transaction. That is why we say when one understands the notion of what I will call the composite or single transaction that 588FA(3) requires, that one must be talking about something which is capable of being considered to be comprised of transactions or payments themselves candidates to be satisfied as undue preferences.

Agreed, as a matter of policy, that might suggest that the earliest date would be the earliest time of insolvency, but there is absolutely no text to support that. That is preserved or stipulated in any event by the requirement in the definition of voidable transaction and insolvent transaction. At the foot of 221, having referred to that connection with subsequent payments:

the question whether the deposit had the effect of giving the bank a preference was to be decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact.

And “ultimately”, we earnestly press your Honours, means by reference to facts thereafter occurring, and that is certainly what his Honour did in the next paragraph of conclusion concerning the way in which the result in that case turned out.

Your Honours, as to the other case that was referred to in the explanatory memorandum, can I deal with that by taking your Honours, please, in the core appeal book, to page 111. It is the first set of reasons by the Full Court, paragraph 100. There, their Honours set out what they describe as Justice Franklyn’s distillation of the law in relation to what is there described, and not inappropriately, as the “running account defence”.

We draw to attention, as their Honours did, and we say laid excessive weight on, the last sentence following the second‑last sentence, as it would, of proposition 6, there emphasised by the quotation. The first is, in our submission, surely a faithful expression of what follows from, really the two Rees Cases – Queensland Bacon and Bank of New South Wales:

It follows that the liquidator can choose any point –

It follows because, as point 6 makes clear, the court is looking for the effect as a preference, and that is the significance, of course, of peak indebtedness. If you are going into a running account it is from peak indebtedness on that it is sensible to talk about a preference:

It follows that the liquidator can choose any point during the statutory period –

Now, any point during the statutory period is simply a reflection of the fact that you are not allowed to go earlier than that. That is the point of it being a statutory period. It does not mean that you can do it eeny, meeny, miny, moe:

in his endeavour to show –

And those are words that obviously pick up Chief Justice Barwick’s words. So, the choice will be by a responsible office of the court on the merits of the commercial history before him or her: where do I say from now on I can characterise payments by this company as being preferential, if not singly, then by net effect? The obvious example to that, simply as a matter of numbers, is from peak indebtedness on and not before. His Honour then goes on in the sentence introduced with the words:

However, this does not mean that the connection between such a payment and dealings prior to the chosen date is to be ignored.

But it does not go on anywhere to say that that qualifies or removes the basal task of the liquidator which permits him or her to choose any point in an endeavour to show that, from that point on – looking forward, subsequent, ultimate – there was a preferential payment. So, whatever that last sentence meant – and it goes nowhere else in Petagna – it certainly did not mean that it was the tail that swallowed what went beforehand.

That, in our submission, in a nutshell is why the Full Court was wrong in its use of that sentence in Petagna. Can I show you how that is done. Paragraph 102 on page 112 turns to that sentence. Nowhere does that point out why, apart from simply falling foul of the adjudicative role of the Court – that is, the liquidator’s claim failing – why that cast any doubt upon the significance of what Justice Franklyn had summarised accurately as to the jurisprudence in the sentence preceding that one.

In paragraph 103, there is a reference to what might be called the judicial consideration of the various cases, the threads of which were drawn together in Petagna. None of those, in our submission, cast the slightest doubt on the notion of peak indebtedness or the liquidator’s choice extending that far . And, the distinction between a:

running account doctrine generally and not the peak indebtedness rule –

seen at about line 22 in paragraph 103, is not a distinction which, with respect, finds any reflection in the reasoning of those cases. M & R Jones does not draw a distinction, so as to say, curate’s egg style, this part is good and that part is not. Paragraph 104, their Honours’ reasons at this point culminate in the notion – in the finding, I should say – that Queensland Bacon does not:

provide any support for the continued application of the peak indebtedness rule –

Language which suggests that – as they go on to hold – the new statutory wording had displaced an outcome or result or consequence or working out by this Court of what the former statutory wording had done – notwithstanding what the EM had said, and notwithstanding the contextual meaning of the words “newly enacted” as we have tried to argue them. Their Honours note, as it were, that state of affairs namely:

the peak indebtedness rule may have formed part of the common law at this time –

I stress that means the judicial working‑out of what the statute calls for. It said:

the reference . . . to Petagna lends support to the opposite conclusion –

Well, not in any of the propositions up until the problematic reading of the Delphic last sentence of proposition 6 quoted from Petagna. Their Honours conclude at this point 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.

By that, they mean paid creditors, not the unpaid ones. It means that at that point, until – one recalls the absurdity they have themselves noted about a literal reading – that one would go back as long as one could in order to show, we started at zero, we have ended at zero, there is no preference. Could I remind you of that absurdity – page 107.

STEWARD J: Just before you do that, are you going to address the explanation at paragraph 101 of the sentence that you remark on from Petagna? Namely, the liquidator is free to choose when the relationship comes to an end, and thereafter the payments are preferential.

MR WALKER: Why do I not do that right now, your Honour? It really is difficult to mistake the input of his Honour’s words in paraphrase:

his endeavour to show that from that point on there was a preferential payment.

So, “from that point on” are words which mean the same as the word “subsequent” or “thereafter” being in the passages to which I have already gone.

STEWARD J: I think the Full Court think that the point is from the preceding sentence:

if a point comes where payments are made with a view to terminating the running account, or greatly reducing ‑ ‑ ‑

MR WALKER: What I am trying to say is, the phrase is “from that point on”. That means identifying a time and saying, what is the effect of subsequent dealings – it is the beginning.

Your Honour asked me to consider the sentence in 101 which includes handily the underlying words “ceased” and “starts” to point up the difference. Their Honours, with respect, are simply wrong; that the words in question quite plainly refer to permitting the liquidator not so much as to choose when the continuing business relationship starts – but perhaps it is all in the adverb relevantly – to choose when, for the purposes of the current statutory manifestation of this policy – namely the continuing business relationship provision in subsection (3) – one looks to that which requires to be netted off, (a) to see whether it is a preference, and if so, (b) by how much. It is quite plain from the phrase the point from which is the latter, and we do not have an explanation for 101 except that it is a plain misreading of Mr Justice Franklyn.

In any event, the uncertain support for either party before your Honours to be gained from an EM is multiplied when one sees that they bother to tell the world where you will find, for example, Queensland Bacon in the Commonwealth Law Reports, but not the particular passage that they had had in mind. So, it produces argument of a kind that your Honours, I am afraid, are forced to consider, but, in our submission, it is really difficult to see any indication in any of the extrinsic materials, which is mostly a negative. You have got the positive contribution that we have drawn to attention. It is difficult to understand why in policy one would ever commit the absurdity which the Full Court recognised, as I said I would draw to your attention, in their own paragraph 84, page 107. It is clear that what their Honours call a:

a wholly literal interpretation –

It is frankly just ordinary English meaning of the word “all” and “relationship”. That is called a “wholly literal interpretation”:

would lead to an absurd result –

And we embrace that, of course. It is why you would not ‑ ‑ ‑

GAGELER J: So does your opponent. I mean, this is not in issue.

MR WALKER: Yes. But, your Honour, this is to answer the question concerning the reading of Petagna as somehow having the effect that their Honours say; namely, that the cannot be a peak indebtedness rule because that is inconsistent with Petagna.

GAGELER J: Mr Walker, can I just locate this parsing of Petagna? It is all for the purpose of interpreting the EM as a step – no?

MR WALKER: No, I have moved on from the EM.

GAGELER J: I see.

MR WALKER: It is all for the purpose of understanding what, if any, difference from Queensland Bacon and, for that matter, the Rees v Bank of New South Wales and, for that matter, Richardson – what, if any, difference has been worked by the enactment of subsection (3)? Now, the EM plays a role in that because we would be – we would not be doing our job if we did not draw to attention that is what the EM says. We accept entirely that the aim may have miscarried. That is ‑ ‑ ‑

GORDON J: I thought this was directed at the last sentence in outline number 1.

MR WALKER: It is. And all of that leads to, in our submission, this conclusion that what one sees quoted from Olifent, page 113 of the core appeal book, paragraph 106 of the Full Court – do not need to quote it. But that conclusion, which is then picked up in VR Dye Co [1999] 3 Victorian Reports 201, which you will find relevantly quoted in paragraph 109 by the Full Court – they are, in our submission, not shown to have been wrongly decided, as the Full Court plainly holds by a combination of their paragraphs 110 and 111, to which I do not need further to go.

Their Honours did give attention to the wording of subsequent payments after first impugned payments – see paragraph 116, at the foot of page 115 – all in making good the proposition which, notwithstanding their paragraph 84, they had expressed in paragraph 113, simply echoing the unconstrued language of the statute – namely, the effect of all the transactions that form part of that relationship. But the question is, how far back do you go? Bearing in mind that that may be that insolvency was a tip of the iceberg of otherwise happy and completely unexceptionally commercial deals.

Paragraph 118, on page 116, is where – as I have already pointed out – their Honours find an irreconcilable difference between ultimate effect and peak indebtedness. Given the time, I do not wish to develop further what I have already said about Airservices, except to say that, quite apart from the anachronism committed by the New Zealand Court of Appeal concerning the delivery of reasons in Airservices and the enactment of the new statute, there is, in our submission, plainly in Airservices a simple and straightforward consideration of the effect of a continuing relationship from the time of the first impugned transaction. There is discrimination practised by the judicial adjudication in that case by reference to “preference” and by reference to cessation of continuing relationship – the last payment just before the airline collapsed.

That, in our submission, is entirely consistent with what I will call Queensland Bacon and that, in turn, suggests that it is no accident that nowhere in Airservices is there any noticing that Queensland Bacon, for example, or Rees v Bank of New South Wales were authorities which had to be understood by carefully distinguishing between the ultimate effects doctrine – or running account doctrine – on the one hand and peak indebtedness being an aspect of the choice by the liquidator on the other hand – there being some irreconcilable difference. Nothing of the kind appeared to members of this Court in the course of the working out over a long time of matters which would obviously call for some such remark if there were some fatal tension to be seen in the jurisprudence. There is not and there was not.

Could I come back to a question I noted when I took you to the form of the statute. In their Honours’ paragraph 122 at page 118, you will see the reference to:

longer statutory periods for other types of voidable transactions –

We have drawn to attention at least two, where they are the same type, albeit with special features – that may be special features are the only things that their Honours are drawing to attention, but it is difficult to see, with respect, how any of that answers the proposition as we have put it, that to select the commencement of the statutory period would be arbitrary in a derogatory sense.

It risks including within the claw‑back for payments during insolvency payments which were not made during insolvency and it throws up, in our submission, the incapacity to find sufficient textual support for choosing that for subsection (2) any more than subsections (4) or (5) – six months, four years, 10 years. They are, in our submission, in the non‑derogatory sense, arbitrary limits which do not have anything to do with the preferential nature of the state of affairs shown by a running account.

Your Honours, again, given the time, I do not wish further to elaborate beyond what I have already said with respect to propositions 6, 7 and 8. Proposition 9, I have already largely dealt with in answer to some of your Honours’ questions. As we note, an interpretation which requires attention only to the net effect of payments and supplies following insolvency at least avoids the perverse and anti‑purposive effects that we have attributed to readings which would either go back to, what everyone agrees, is absurd. The whole of the relationship or goes back to the, say, statutory period.

It has the huge weakness that it is for a liquidator to decide in the interests – as he or she sees it – of the body of creditors and taking into account difficulties of proof and the like – is the game worth the candle – it is for the liquidator to select that which will be the targets of the contention that here is an unfair preference. It is not the law emphatically; that is, the statute does not define unfair preference that will be recouped as any payment made during insolvency.

There is no possible way of understanding either subsection (3) or the jurisprudence that was not in any way disturbed by the enactment of subsection (1) of FA which, of course, accepted that there could be payments made to suppliers during insolvency which were not preferential – the same or better value received for the payment, just like a cash on delivery – though not cash on delivery – and the procuring of further supply which it would be perverse for the body of other creditors to complain about if that contributed to a continued capacity to pay some of them some of what they were owed.

It is for that reason, in our submission, that one comes back, not as a counsel of despair, but because it accords with an explicitly articulated state of the law beforehand; namely, that the liquidator would choose which is the first transaction to impugn and, for that matter, how to impugn it. So, if the liquidator decides a single transaction and it is a continuing relation, well, the liquidator will lose if the continuing relation shows there is no preference. It is for those reasons that the substantive and obvious choice that, in our submission, serves the evident purpose of these provisions requires the transaction referred to in subsection (3) and particularly in its paragraph (d) to be that composite which starts with the first payment which is impugned so as to be part of the so‑called single transaction which must be taken to be an unfair preference by reason of its other qualities such as, for example, the net figure favouring the creditor rather than the company.

Your Honours, as you see in our ground 2 – before I go to ground 2, I really should draw to your Honours’ attention the way in which their Honours in the Full Court returned to this matter in the reasons for judgment that followed upon differences concerning the form of orders. In the core appeal book, pick it up at page 134. I note there that in paragraph 9, their Honours recite that services ceased to be provided on 10 July:

On 10 July 2012, the continuing business relationship ended.

But there was an invoice on 31 July and:

the sum invoiced . . . must therefore form part of the single transaction to which s 588FA(3)(c) refers.

Invoices are circumstances not in themselves transactions. Payments on invoices are relevant transactions. And then, under the heading “Commencement date”, there is a reference to the way in which the case had been framed concerning period – to remind your Honours, the date of the appointment of administrators is 26 September, hence the statutory period, insolvency on 30 March, and then, in paragraph 11, a:

Dispute . . . concerning the start date of the continuing business relationship –

I interpolate everyone below, I think it is to be taken as meaning the start date of the netting calculation by reason of continuing business relationship. No one was concerned with the fact that there had been a long relationship between the parties long before any insolvency, as their Honours note, indeed, in paragraph 12. Paragraph 13 then notes how the matter arose. The last sentence of paragraph 13 notes – I am not sure I can entirely explain – that is said to form:

no part of the issues arising for determination on the appeal.

These are, after all, reasons concerning differences between the parties as to orders. In paragraph 15 there is some, as it were, drawing back by the court:

By concluding that payments 1 to 4 were transactions forming an integral part of the continuing business relationship, this Court should not be understood as finding that the relevant relationship commenced on 26 March 2012 –

notwithstanding the period of payments started on 26 March:

or on the date on which the relationship commenced in fact, or any other date . . . By dismissing the cross‑appeal this Court should not be understood as having made any findings as to the date upon which the continuing business relationship commenced.

And their Honours are surely not referring back to what the history noted in their paragraph 12 was referring to, but rather the commencement for the purposes of the statutory count – the statutory netting exercise. In paragraph 20 on page 137, they return to this notion of the:

business relationship (evidenced by the keeping of running account) commenced in fact –

They emphasise that:

long before 26 March 2012 and long before . . . insolvency.

They note that nobody had addressed on that. All they say on the:

commencement of the . . . statutory period, or any other date.

Their Honours then say that:

Our conclusion as to the end date . . . renders it unnecessary to resolve the dispute concerning the start date, presented (as it is) as choice between two dates in March 2012 and no earlier date.

Then, in paragraph 22, their Honours, however, note the effect of – I do not know whether it was one of the candidate readings in their Honours’ understanding or not – “questions may arise”:

if the continuing business relationship commenced at the beginning of the running account . . . questions may arise as to whether Badenoch “received” anything . . . the single transaction is that evidenced by the whole of the running account, Badenoch appears to have supplied more than it has received, such that there could be no unfair preference. Whether this is the intended operation of the Act is a question that may be deferred to a case where the outcome depends upon it.

It can be seen then that the further reasons do not supply any further explanation, with respect, in particular to the peak indebtedness aspect of our argument at all and, perhaps, takes some steps back from the way in which those matters had been addressed in the first set of reasons.

That brings me very briefly to ground 2, where, in our submission, it turns out that their Honours are, in fact, posing – contrary to the persuasive reasoning of Justice Santow in Eurolinx – that the difference is to be seen, by reference to the importance – relatively speaking – of the motive, or purpose, of securing further supply. Can I show your Honours how that is then dealt with by their Honours. The passage in Eurolinx, which we submit to your Honours is most persuasive and is a principled understanding of what falls out from understanding how the outcome was produced by the reasons in Airservices, is in paragraph 52 of the Full Court at page 100 of the core appeal book. I will not quote it given the time, but your Honours see the care with which Justice Santow in his paragraph [151], looked in order for the running account defence to continue to be available, for:

there still remains at least a substantive mutual purpose of continued supply which does not come to be subordinated to a predominant purpose of getting paid. It may well be so subordinated where the payer is known to be about to go under and the payee by its actions, such as demands for payment, signals that this has now become its predominate purpose.

Airservices, looking backwards, not forwards. That is what happened in Airservices and his Honour, with great respect, with unexceptionable judicial technique, had tried to understand from the statements of principle and the decisions the outcome in Airservices, what was being applied and how it was meant to operate. With respect, no one has since then suggested any conceptual defect in the way in which Justice Santow sought, faithfully, to understand what this Court had done. His Honour goes on:

Further supply after that point is reached will not then suffice to negate that predominant purpose.

In paragraph [150] this notion of subordination is used. In paragraph 54 of the Full Court’s reasons in core appeal book 101, that is, with respect, not given sufficient credit as persuasive reasoning, not binding their Honours of course, in the sentence at the end of that paragraph, saying:

it would be wrong to say that a mutual assumption of a continuing business relationship ceases whenever the balance tips ever so slightly in favour of recovering past indebtedness, such as where a creditor insists on payment of an ordinary invoice before continuing supply on terms.

Well, it will all depend upon circumstances, and testing it by what might be called cases on the boundary is not a proper way to test the acceptability of the principle. Obviously, there has to be a material difference, relatively speaking, between a motivation of getting past indebtedness paid and a common purpose of securing further supply. There has to be a material difference before the way in which Justice Santow suggests it should proceed ought to proceed. After all, the person maintaining the benefit of the running account doctrine from a continuing relationship to secure supply can hardly complain about needing to show that, notwithstanding threats to sue and cessation of actual supply, it was really not all about getting paid in the past, but it was predominantly aimed at securing further supply.

That will lend itself to factual determination of circumstances; what their Honours describe as tactics being practised by a creditor who becomes, as it were, a very unwilling or indeed refusing future supplier; and there will be cases that call for evaluative assessments by the judicial tribunal. None of that, with respect, suggests there is anything wrong with the approach taken by Justice Santow. Their Honours in the Full Court at paragraph 56 query – tend to suggest that the relationship would only cease:

if the sole purpose is to discharge an existing debt –

Now, their words cannot really be understood as suggesting that is the test, but they say that would be sufficient. The Airservices majority’s comments are then referred to by the Full Court using the familiar expression:

the “ultimate effect of the transaction”.

And then, at the end of paragraph 57, on page 102 of the core appeal book, the Full Court decision with which this appeal is concerned, come to this expression:

ascertain whether the relevant transaction was undertaken to effectively pay an old debt (in whole or in part) rather than being undertaken for the provision of continuing services or supply of goods.

As if it is one or the other, when Justice Santow, with respect, more accurately – with respect to the reality of commercial life – looked to what might be called the relative cogency of the reasons.

I need hardly tell your Honours that the facts – and, given the time, I will not take you to the further materialise. The facts that the learned trial judge referred to, which the Full Court did not depart from, record Badenoch’s asking for payment as a condition of any further supply. The payment was of past indebtedness. The conditionality was substantial; it was not an attempt to negotiate. It was saying we have stopped supply – we will stop supply and we will not resume supply if we do not get past indebtedness paid.

GLEESON J: They never achieved that.

MR WALKER: I am sorry?

GLEESON J: They never achieved ‑ ‑ ‑

MR WALKER: They did not achieve it, but we were talking about a relationship where there is a mutuality of understanding between the parties. I do not mean there is happy concord – far from it. We are not suggesting that its cessation is enough to cease the relevant relationship, but we are saying that, on the facts of this case, this was plainly a point that had been reached when the predominant purpose was looking backwards not forwards – to use the expression in Airservices.

May it please your Honours.

KIEFEL CJ: The Court will adjourn until 2.15 pm.

AT 12.57 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.15 PM:

KIEFEL CJ: Yes, Mr Gronow.

MR GRONOW: Thank you, your Honours. I propose to deal with the issues in the same order that with Mr Walker did; that is, peak indebtedness first, then the second ground of appeal, then the application for leave to cross‑appeal.

Firstly, on the issue of peak indebtedness, I respectfully adopt what the Chief Justice said before lunch about the formulation of it by Chief Justice Barwick in the Rees case, where I think she said it came out of the ether; it is not in the statute. With respect, that is correct. Section 95 of the Bankruptcy Act 1924 is not inconsistent with the peak indebtedness doctrine, but neither does it imply it.

It was the law in the country, from at least 1964 onwards, because of the majority of this Court said it was. There has been a controversy about whether those comments were obiter dicta or not. The New Zealand Court of Appeal says they were; Mr Walker says they are not and so did his predecessors below. The Full Court thought it unnecessary to determine it. In my submission, that is correct. That does not matter for you because it is a different statute and, of course, you are not bound by previous High Courts anyway.

In my submission, however, under the present law which is section 588FA, it plainly is inconsistent with the continued application of the peak indebtedness doctrine. I respectfully agree with what Justice Ormiston said in the VR Dye v Peninsula Hotels case, that it was intended more or less to enact the pre‑existing law, save when the contract intention clearly appears from the statute. I say it clearly appears from subsection 3 of section 588FA. I would like to briefly take your Honours to that provision, which is tab 3 in the authorities folder, and it is at page 28. Subsection (1) is the definition of when:

a transaction is an unfair preference –

And if all those things are satisfied, then one has an unfair preference within the meaning of section 588FA, unless one can bring it within subsection (3), which requires it to be:

for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor –

and also:

(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction –

In addition to the use of the word “all” which was extensively discussed before lunch, in my submission, it is also very important that it says:

to all the transactions forming part of the relationship –

The focus is on the relationship, not on other matters such as, for example, which payments the liquidator has chosen to impugn or attack.

EDELMAN J: But the relationship existed prior to insolvency as well ‑ ‑ ‑

MR GRONOW: I accept that, your Honour.

EDELMAN J: ‑ ‑ ‑ in some cases.

MR GRONOW: Of course. In this case it did. In this case it existed for many years prior to insolvency, particularly with Auspipe Limited. That is why I accept it would be an absurd result if you took it back 20 or 30 years to the very beginning of the relationship. You have to read this section in context with 588FE, which tells you when the transaction will be voidable.

GLEESON J: But the reference to increasing and reducing seems to correlate with what is said in Petagna at 566, which talks about the indebtedness being increased and reduced in the period from October 1982 to February 1983.

MR GRONOW: Yes, your Honour.

GLEESON J: It seems to me, it would be helpful to have it clarified that that period precedes – or it includes transactions that preceded the payments that were sought to be impugned.

MR GRONOW: Yes, your Honour. But, I think, even under the pre‑existing law, it appears to be only limited to the statutory period. I note that in – just let me find this – Queensland Bacon v Rees, which is in the folder of authorities at ‑ ‑ ‑

GORDON J: Tab 22.

MR GRONOW: Thank you, your Honour. If you look at what Chief Justice Barwick says, he actually refers to the statutory period, at pages 220 to 221. Sorry, I am in the wrong ‑ ‑ ‑

GORDON J: Or do you want Rees v New South Wales?

MR GRONOW: I think you might be right, your Honour. Thank you, your Honour, my mistake. If you look at the bottom of page 220 – this is a passage that Mr Walker referred to before lunch:

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 –

So, the old law, when it was section 95 of the 1924 Act, it would appear that it was limited to the six months. In my submission, that has not changed, but you no longer look in 588FA, you now have to look at FE. That is simply because in the redrafting of the statute, they have spread it out a bit and put different bits in different provisions.

GAGELER J: Is it FE or is it FC?

MR GRONOW: Well, it is both, your Honour, because it has to be an insolvent transaction under FC, and then, if it is both an unfair preference and an insolvent transaction, then you go into FE – or, rather, it has to be either an unfair preference or an uncommercial transaction to get within FC, and then if the company is also insolvent, it is an insolvent transaction, then it can be voidable under FE.

In this case the period of six months because it is only an unfair preference. It was not alleged that it was uncommercial or anything else. It is put against us that that could lead to an absurd result where you have one of the longer periods – for example, under subsection (5) or (6), where the period might be four years if it is a related party transaction or 10 years if it is a creditor defeating disposition.

In my submission, that is not an absurd result for two reasons. Firstly, if a liquidator is seeking to impugn something that is an unfair preference and no more, and relying upon the related party provision to get four years, then the liquidator ought to have to be subject to the defence for the same period. If it were an uncommercial transaction, then the liquidator can still have two years or four years and the defence will not apply – because it is sufficient if one of the provisions is satisfied. So, if it is an unfair preference and the other requirement to satisfy it is voidable, or if it is an uncommercial transaction and the other requirement to satisfy it is voidable, in the case of the creditor defeating disposition under subsection (6), it has to be one or the other, and then you get 10 years.

Now, it is hard to see in practice how a transaction with the intention of defeating or delay creditors would not also be uncommercial. As a matter of fact, if there is such a thing and the liquidator is relying on the 10‑year period for a simple preference and no more, again, in my submission, it is quite appropriate that the defence should apply for the whole 10 years. When it is said it is an arbitrary period, it is the period set by Parliament. In the New Zealand case, I think the period was two years, which is what their statute says. But, again, that is a matter for the New Zealand parliament. I respectfully disagree with the proposition that it is arbitrary.

GORDON J: It is arbitrary in the sense that Parliament has chosen a date.

MR GRONOW: Yes, your Honour, but ‑ ‑ ‑

GORDON J: That is arbitrary. They have made a decision to choose a date, a period of relation‑back for different times of transactions.

MR GRONOW: They have, your Honour, but in my submission, that should not be seen as being a criticism of it. That is the period – Parliament might decide next week to amend the statute to make it three months or 12 months. That would be a matter for Parliament.

KIEFEL CJ: That is just within the bounds of legislative choice.

MR GRONOW: Yes, that is what I say. It is certainly what the statute says. Parliament has chosen to say that the period for avoiding something that is an unfair preference and an insolvent transaction, but no more, is six months.

KIEFEL CJ: So, you would say that the difference here is between legislative choice and liquidator’s choice?

MR GRONOW: Yes, I would, your Honour. And, again, I respectfully agree with what Mr Walker said. It is not really fair to call it an arbitrary choice of the liquidator, as in Mr Campbell QC’s submission of picking the peak indebtedness. Well, of course the liquidator is going to pick that.

KIEFEL CJ: Mr Campbell QC became Chief Justice of Queensland.

MR GRONOW: Indeed, he did, and I think he was subsequently Governor, your Honour.

KIEFEL CJ: He was indeed, Sir Walter Campbell.

MR GRONOW: Yes. In my submission, it is not a criticism of a liquidator or that the peak indebtedness doctrine to say it is arbitrary. Of course the liquidator is going to choose the most favourable date. But, in my submission, it is now inconsistent with the statute for her or him to do so. We say they cannot choose it here because the statute says otherwise.

In my submission, all the authorities about reading the statute down and so on are not relevant because it is quite clear what it means, and it has a clear practical application. As I say, here in the present case, it is the six‑month period, or the date of insolvency, whichever is later. Here the insolvency was found as a fact to be – I think it was 30 March, which was slightly into the six‑month period. And so that is the date at which the requirements are satisfied, because it has got to be unfair preference and an insolvent transaction and within the six months. It has got to be all three of those before it is voidable under 588FE.

EDELMAN J: How does that alternative construction fit with purposive argument to the effect that the reason for constraining the transactions to which 588FA(3)(c) refers is to ensure that the creditors that have obtained the advantage of, effectively, the extension of a continuing business relationship do not obtain that benefit at the expense of the particular creditor?

MR GRONOW: In my submission, they do not because they are adding to the assets of the company by providing it with valuable goods and services.

EDELMAN J: That type of argument would fit if one said that the cut‑off point was the point of insolvency, but your argument is it is either the point of insolvency or the relation‑back period, whichever happens to be the earlier.

MR GRONOW: No, the later, with respect, your Honour, because it has got to be both within the period, and insolvent, and an unfair preference.

EDELMAN J: I see.

MR GRONOW: To get under 588FE, which is what tells you whether it is voidable, you have got to satisfy all three of those things.

GORDON J: So, insolvency could be before it?

MR GRONOW: Yes.

GORDON J: So, before the relation‑back day but that is, in a sense, not determinative because then the relation‑back day is the period that is attached.

MR GRONOW: Yes. If Justice Davies had found as a fact the company was insolvent six months earlier than she did, then the relevant would be the six months before the commencement of liquidation. Here, she found it was a few days afterwards. And your Honour Justice Gordon, I think, asked this before – your Honour was correct. There was a separate inquiry and her Honour actually made findings and delivered reasons. I do not think I have a copy here. And she heard expert evidence about the state of the accounts and made a finding of fact about when the companies became insolvent.

GORDON J: And it is that reason why I asked Mr Walker this, at core appeal book page 85 in the chart, that the payments on the 26th and the 28th to your client were not part of the ‑ ‑ ‑

MR GRONOW: Yes, that is correct, your Honour. Yes. That chart was, in fact, taken from expert evidence that we led at trial from a Mr Lipson, who is a chartered accountant. I think everyone is agreed that his analysis was correct. His job was, among other things, to identify the date and amount of each payment.

Your Honours, in my submission, the alternative construction of the section involves adding words into the section such as, from the date of the payment, and, in my submission, there is no basis for doing that here. The section is perfectly intelligible as it is. One does not need to add any words to it. It is not a case where there is a drafting error, or anything like that. All I say is you have to read it in the context of the other provisions, including section 588FE. Nothing should turn upon the fact that it happens to be in a different section, rather than in the same section.

STEWARD J: Mr Gronow, what do you say about Mr Walker’s reliance upon FF and the words:

on the application of company’s liquidator –

or the phrase?

MR GRONOW: Mr Walker is entirely correct. He says it is a jurisdictional fact; it is. The liquidator can decide what transactions to attack. Nobody is saying that she or he cannot. A liquidator might have all sorts of commercial and legal reasons for deciding to impugn some transactions but not others. They are matters of the liquidator’s judgment. But if the liquidator does decide to impugn unfair preferences that are in the context of the continuing business relationship, then the defence applies for the whole of the relevant period, not just the part chosen by the liquidator.

STEWARD J: I suppose another way of putting it is the liquidator cannot choose parts of a transaction to impugn.

MR GRONOW: If it is a whole – that is correct, your Honour. Once you say it is a single transaction, then the liquidator does not get to choose which parts of it. The liquidator can still say, I have decided to attack these payments but not these ones for whatever reason, but the defence applies to all of them, provided they are within the relevant statutory period.

I accept that under the old legislation – particularly the word “void” as against the liquidator or the trustee was always taken to mean “voidable” – and a preference payment in particular is a perfectly lawful transaction, until the company goes into liquidation and it gets attacked by the liquidator. It is simply a case of a company paying a creditor money which the creditor is owed. It only becomes unlawful when it comes under one or more of the arms of 588FE, and the liquidator then, having established that, goes along to court and says, I would like some of the relief in 588FF.

Now, in my submission, your Honour, the current law is entirely consistent with the policy behind this area of law as set out by this Court in Airservices. I accept what Mr Walker said, which was that even though it was decided after the new regime was enacted in 1993, it relates to the previous legislation because I think it – the facts happened in 1991. And I would just like to draw your Honours’ attention to some of the passages in Airservices v Ferrier that I rely upon, particularly at the bottom of page 507 and about a quarter of the way from the top:

Throughout the six‑month period, Airservices provided Compass with services whose value far exceeded the value of the payments that Compass made during that period. At the end of the six‑month period, Airservices was more than $8 million worse off than it had been at the commencement of the period. It gained no advantage over the general body of creditors unless one takes the jurisprudentially unsound view that, for the purpose of s 122, the court looks only to the debt that the payment discharges and ignores the business context of the payment.

I will not read the rest of it. I will just note that down the bottom of that paragraph, from May 1991 onwards:

each monthly statement served –

on Compass:

contained the warning “OVERDUE – Lien being considered”.

Then going down the bottom of the page:

The facts recorded in the “running account” indicate that Compass and Airservices had a continuing relationship which contemplated further debits and credits and that the individual payments were intended to continue and not determine that relationship. The various payments must therefore be regarded as so connected with the continuing provision of services, that is the ultimate and not immediate effect of each payment on the relationship of Compass and Airservices that is relevant.

In my submission, what one takes from that is, firstly, whether there is a continuing business relationship is a question of fact. According to previous decisions of this Court and others, one requirement is that there is a mutual contemplation or expectation or assumption – all those words are used – or intention or purpose that the debtor/creditor relationship will continue in the future, and the statute requires that there be increase and reduction in debits and credits – that is what it says.

The purpose of the defence is to prevent the unfairness to a creditor like Airservices or Badenoch which is continuing to supply valuable goods and services to an insolvent company, thus augmenting the general body of what is available to the general body of creditors. In the case of Compass, they could keep flying airplanes and charging passengers money; in the case of Gunns and Auspine, they could keep running their logging mills because Badenoch was harvesting logs and bringing them down to them, and that allowed the companies to keep trading for longer and get money that would help creditors.

GORDON J: Do you accept what is at the bottom of page 501 and the top of page 502 in Airservices about purpose and predominant purpose?

MR GRONOW: Sorry, your Honour. Just let me:

If a payment is part of a wider transaction (54) or a “running account” . . . the purpose for which the payment was made and received will usually determine –

Well, I certainly accept that, your Honour:

If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is –

Solvent. I certainly adopt that, your Honour. I was going to come to that, but I am happy to come to that now. I say that means it is the sole purpose; to the extent that Eurolinx says otherwise, then it is wrongly decided.

GORDON J: I do not know if that – if you go on, it says:

But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless –

one exceeds the other.

MR GRONOW: Yes.

GORDON J: And therefore, that is what looks to the ultimate effect. You do not challenge that, do you?

MR GRONOW: Certainly not. And that is exactly what the statute says when it tells you to look at it as a single transaction. If the end result is that the net indebtedness is increased at the end of the period, there will be no preference at all. If it is reduced, there will be a preference, but not as great a one as there might otherwise be.

For example, if, at the beginning of the period, $2 million is owing and at the end $1 million is owing, there will be a preference of $1 million. But that sum would always be considerably less than if you took each payment in isolation. And if you changed the fact, if it was the other around – if it is $1 million at the beginning and $2 million at the end, then there is no preference at all. But what you look at is the net amount, and that is what the High Court says in Airservices. It is also what the statute says. But when you look at it as a single transaction, in my submission, those two formulations have the same effect.

Just on the Eurolinx point, your Honours, there are other statements which we have extracted in our submissions where Justice Santow says things that are entirely consistent with Airservices. We just say to the extent he is saying that it is a predominant purpose test rather than a sole purpose test, then you should prefer Airservices. In Airservices, it was decided that the last payment was a preference because everybody knew Compass was about to cease operations. There was no mutual contemplation of the further relationship of debtor and creditor.

EDELMAN J: And you take the sole purpose test from the sentence that is talking about:

If the sole purpose of the payment is to discharge an existing debt –

MR GRONOW: Yes. If it is a mixed purpose, then it is part of a relationship. And it is always going to be a mixed purpose because the purpose of making a payment is always going to be to reduce the debt.

GLEESON J: Is that passage not just dealing with the easy case? The sole purpose is the easy case?

MR GRONOW: It is, your Honour, but, in my submission, it is also that it is the only case. Because, there will usually be mixed purposes in making the payment. If the sole purpose is to reduce past indebtedness, then continuing relationship is not satisfied as a matter of fact. If, on the other hand, the purpose is partly to discharge past indebtedness and partly to induce further supply, then, in my submission, it is not.

GORDON J: It is difficult to take passages out of context but, if one reads on in that passage in Airservices that we just looked at, then – I think this is what you said before, Mr Gronow – it is a question of fact. They say at the bottom of that page:

If the purpose of a payment is to secure an asset or assets of equal or greater value –

So, they are actually explaining that one has to undertake a factual inquiry in order to determine what has been acquired as distinct from what has been given up.

MR GRONOW: Yes.

GORDON J: So, sole purpose test is one aspect only of the inquiry.

MR GRONOW: Your Honour, with respect, they are slightly different questions. Under the current statute – which, of course, was not being considered in Airservices Australia v Ferrier – you look at the single transaction and you would, of course, have to look at whether the value of what was acquired exceeded the value of what was paid. To the extent that it did, there would be no preference; if it did not, there would be. For example, if the company acquired goods and services worth $1 million but paid $2 million, then there would be a preference for that, perhaps – that might contravene all sorts of other provisions. But, in my submission, none of that is inconsistent with what the current statute says – is of looking at it as a single transaction.

STEWARD J: Is there a danger of looking at places like Airservices to determine the meaning of the words used in (3)?

MR GRONOW: With respect, yes, your Honour, although in my submission, the overall effect is very similar.

STEWARD J: It may be, but the question we are looking at here is whether as a matter of fact (3)(a) and (b) are satisfied.

MR GRONOW: I respectfully agree with your Honour. That is correct.

STEWARD J: Yes.

MR GROWNOW: And then going to (c). That is right. But that is what this Court has to do. And although you might also be assisted by the statement of the purposes of the running account defence in Airservices v Ferrier – and I would just draw your attention to pages 507 and 508. I would also draw your attention to 509 and 510. It starts at the top of page 509 and then goes through to line 7 on page 510. I will not read that, but, in my submission, that is entirely consistent with the interpretation that I submit, which is that it is to prevent the unfairness of the creditor who continues to provide valuable goods and services to a company in financial difficulties and actually augments the value of what is available to other creditors.

Part of the reasoning is it would be a great disincentive to suppliers or banks to continue to deal with companies in financial difficulties if they thought, well, you know, anything they pay us we are going to give up as a preference if it goes into liquidation and we will not get any credit for the value of what we provided, whether by way of bank loan or goods and services. And apart from the banner of fairness of course – the section is headed “Unfair preferences” – it is also as a matter of commercial policy that that is not a desirable thing to do, in my submission.

GORDON J: In Eurolinx, paragraph 148 – I just wanted to understand which aspect of Eurolinx you do not like. There is a description by Justice Santow of the “essential prerequisites” for a continuing business relationship, and the two prerequisites are set out.

MR GRONOW: Sorry, your Honour, just let me find that.

GORDON J: It is on page 1270 of the joint book of authorities, if that helps, under tab 46.

MR GRONOW: Thank you, your Honour. Yes. Is that paragraph 148, your Honour?

GORDON J: Yes, it says:

For that defence to be maintained, there are some essential prerequisites.

MR GRONOW: Yes:

First, there must be no cessation of that mutual assumption of payment and reciprocal supply –

I do agree with that, because on the authorities that would terminate the continuing business relationship.

GORDON J: And do you take issue with the second prerequisite?

MR GRONOW: No, your Honour. Indeed, I say that is an accurate statement of what it says in Airservices v Ferrier ‑ ‑ ‑

GORDON J: Thank you.

MR GRONOW: ‑ ‑ ‑ because it is one operative provision. The part I quibble with is the “predominant purpose”, because that then requires you to weigh up the different purposes and say, well, this purpose was more important than that purpose. In my submission, that is not an inquiry that the Court can or should undertake. The issue is, was there still a continuing business relationship that had not terminated and then were these payments made within it. So, it is the next sentence I disagree with:

I would add that such purpose must not come to be subordinated to a predominant purpose of recovering past indebtedness.

In my submission, the correct formulation is that in Airservices where they talk about a sole purpose, and that is because once it is a sole purpose then there is no longer a continuing business relationship and no longer the mutual contemplation or assumption of further debits and credits.

EDELMAN J: It may be of difficulty in glossing the statute in this way; may be difficult to say that there is no case where there is only a predominant purpose of recovering past indebtedness that there would be no continuing business relationship. I mean, what amounts to a relationship might not be able to be boxed into categories of either sole purpose or no sole purpose.

MR GRONOW: In my submission, the issue is whether it is inconsistent with the continuation of the relationship, and as Justice Steward was saying earlier, you have to got to look at the statute, which says:

Where:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship . . . and

(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced –

I accept that if the sole purpose is to pay off existing debts, and it is not made with a contemplation to the future relationship, then it is a preference; it does not meet that test because the relationship is terminated as a matter of fact.

EDELMAN J: But you say the relationship as a matter of fact could never be – it would be terminated if something falls short of being the sole purpose. In other words, if there is some slight purpose of continuing a relationship.

MR GRONOW: If it is a purpose, your Honour. So, I said I was happy with the previous sentence in Eurolinx, where Justice Santos says:

Second, those payments must continue to have as at least one operative, mutual purpose, namely inducing further supply.

KIEFEL CJ: Just so I understand what you are saying, if that purpose is present, it does not matter that the supplier is also seeking to insure payment because there is some concern about liquidity?

MR GRONOW: With respect, yes, that is correct, your Honour. That is what I am saying. And that is because in every such situation, of course the supplier wants to get paid. There will never be a case where a supplier or a bank – because most of the cases are either trades suppliers or goods or services or banks. In every case, of course, they want to be paid. And their main purpose will be to get paid what they are owed.

GORDON J: Just so that I am clear, I will ask one other question. At application book 97, or core appeal book at paragraph 48, the Full Court set out a series of propositions from (a) to (h), in the context of a “continuous business relationship”.

MR GRONOW: Sorry, your Honour, you are in the ‑ ‑ ‑

GORDON J: Core appeal book 97.

MR GRONOW: Yes. Core appeal book, and it is tab 9?

GORDON J: I do not know. It is page 97 of the core appeal book, paragraph 48 of ‑ ‑ ‑

MR GRONOW: Yes, 48 and following. Yes, your Honour.

GORDON J: Do you take issue with any of those paragraphs?

MR GRONOW: No, I respectfully agree with each of those, your Honour.

GORDON J: Are they incomplete?

MR GRONOW: Sorry?

GORDON J: Is it incomplete?

MR GRONOW: No, your Honour, because (a) sets out the basic test for Queensland Bacon v Rees, and the others seem to be qualifications of it.

GORDON J: Thank you.

GLEESON J: Does the last sentence of paragraph 57 qualify anything that is said in 48?

MR GRONOW: Paragraph 57. Sorry, your Honours, that is – “in answering this question”, is this page 102?

GLEESON J: Yes.

MR GRONOW: At 57:

In answering this question, we consider that a court will need to view the evidence as a whole –

I certainly accept that, your Honour. It is a question of fact. The Court’s problem with the evidence – often will be drawing an inference from what happened, like this Court did in Airservices v Ferrier with the last payment. They said everyone knew that Compass was about to stop trading, so you cannot say that there was a mutual assumption. That has been destroyed by the other facts that happened.

STEWARD J: Can I just ask the question about the statutory test? I am sorry to labour the words of the section, but there would be nothing inconsistent with a trade creditor pursuing an old debt and only pursuing it to get repaid in the course of an ongoing business relationship and that be integral to it.

MR GRONOW: Again, it would depend on the facts, with respect, your Honour. You would still have to have the mutual assumption.

STEWARD J: I am just trying to understand why those first two payments made on 26 March, I think, are excluded – presumably because they predate insolvency. Yes, I see.

MR GRONOW: Yes. That is because her Honour found it was not insolvent until the end of March.

STEWARD J: But could you have a trade creditor pursuing past indebtedness and that still be within a continuing business relationship and be an integral part of it?

MR GRONOW: If one of the purposes is to induce further supply – so, for example, if the company says, well, we had better pay that trail debt to the trade creditor because we need them to supply us in future and otherwise they will not because they are very cross with us, on the other hand, in another case where it is simply to get that debt paid and nothing else, then it would fail the sole purpose test from Airservices v Ferrier.

STEWARD J: Are the purposes the same of the trader and the debtor?

MR GRONOW: Not necessarily, your Honour. Indeed, the company wants to get the goods and services ‑ ‑ ‑

STEWARD J: So, it pays to induce whilst the trade creditor might want nothing more than to be repaid.

MR GRONOW: Correct. But the trade creditor might say, in the context of this relationship, rather than pull the plug on this person in financial difficulties right now, we will keep supplying, provided they keep paying us.

STEWARD J: So, really, to use your expression, we are looking to see when the plug is pulled.

MR GRONOW: Yes.

STEWARD J: Yes, I see.

MR GRONOW: This section – the defence will only apply in practice in a situation where you have a company in financial difficulties, otherwise it will not go to insolvent liquidation and you will not have a liquidator saying, this is an unfair preference, I want it back, please.

All of the cases on the facts are going to be in difficulties like Compass Airlines was. As the High Court says at 509 and 510 of the report at tab 12, they were slow payers, there were all sorts of difficulties. Airservices started saying overdue lien may be claimed on the accounts because Airservices wanted to get paid, but the fact is Airservices still kept supplying them with air traffic control services that enabled them to keep flying their aeroplanes and charging customers to use them.

GORDON J: I am sure you are going to come to it, Mr Gronow – does that explain why payments 5 – and I know it is your application for cross‑appeal – but why payments 5 and following fall away, because you had written a letter of demand saying that there would be a tapering‑off of services and, as a result, a letter of demand or the proposal that there be immediate payments is accepted on the second on 2 August?

MR GRONOW: That is what the Full Court said. If they are right, then I will obviously – if you agree with them, then I will lose the cross‑appeal and you probably will not even give me leave. I say that they still come within the section because the fact is further supply was induced. It is not sufficient that the relationship or that supply be terminated for a while, if it is then resumed. I say that those payments were still made in the context of Gunns and Auspine getting further supply from Badenoch so it could keep the timber mills going. On the evidence, Badenoch was actually harvesting logs on the very day the administrators were appointed. So, in my submission, on what I say section 588FA means, the defence is still available for those payments, but the Full Court thought otherwise, for the reasons it gave.

EDELMAN J: Well, if it is a sole purpose test, then all you really need is a skerrick of a purpose in order to keep the relationship going to keep a continued supply of goods.

MR GRONOW: Yes, your Honour. But provided that is a purpose. I am happy with it having to be a substantive purpose or something like that but ‑ ‑ ‑

EDELMAN J: I suppose in almost every case where there is a continuing supply, there is going to be at least some suspicion of insolvency given the company difficulties.

MR GRONOW: Yes, your Honour. And indeed, in the passage that Justice Gordon just drew our attention to, that is specifically one of the things that the Full Court said does not stop the continuing business relationship. As I said before, all of these cases will occur in the context of accompanying financial difficulties and they are all going to be slow payers, whether it is Gunns in this case or Compass Airlines in the Airservices v Ferrier Case.

GORDON J: The thing that is against you, arguably, is the letter that is sent on 31 July which says:

we are willing to meet –

in effect, the supply of logs:

in the short term with a gradual tapering off while another contractor gets up to speed.

MR GRONOW: Yes, your Honour. Further, it was contemplated that the relationship would wind down in three to four months from July. I accept that but, in my submission, that does not mean that the relationship terminated in July; what it meant was that the parties contemplated it would terminate in the future.

GORDON J: Well, it may – one of the qualifications it may be is this question of fact about whether or not what is being received by your client is greater than what has been proffered and therefore there is a point at which you have acknowledgement there is to be an end to the arrangements, there is a tapering off and then there is a negative, in effect, because your client is getting more than what it is providing, which is one of the things referred to in Airservices.

MR GRONOW: Yes, I agree, your Honour. That is if you looked at that in isolation. I accept that if you looked at payments 5 to 11 in isolation, we would have to pay the total of the payment, which I think was $1.2 million, less the services provided, which was two hundred and something thousand. But, in my submission, what happened in July did not terminate the relationship. It changed it and it meant the parties contemplated that it would be terminated within three or four months.

In my submission, that is not the same as actually ceasing it and, whatever you say on the previous authorities, on the current version of section 588FA(3), the issue is, is the relationship still extant, is the level of the company’s net indebtedness to the creditor increased and reduced, et cetera. In my submission, the relationship was between the same parties. They were doing the same thing at the same agreed rates. It is just that by that point they had both contemplated that their relationship would cease at a point in the future in about October or November of 2012. But I say that is different to the relationship ceasing.

I accept that there are authorities against me, in particular the M & R Jones Case, which was the one that Justice Franklyn referred to in Petagna. He referred to the six principles which are extracted in the M & R Jones Case – which is in the bundle – Justice Wootten said that after the bank manager changed the terms of the overdraft facility, at that point, the payment after that was a preference. But in my ‑ ‑ ‑

STEWARD J: Mr Gronow, were there any findings of fact made about why Gunns made, for example, payments 9, 10, and 11? Was it, for example, to induce the supply on 25 September?

MR GRONOW: We say it was, your Honour. We say that is an inference to be drawn. Now, we did not have a person from Gunns in the witness box saying, that is why I did it, but in these circumstances you never do.

STEWARD J: But did Justice Davies make a finding of fact along those lines?

MR GRONOW: No, she did not give us the payments.

STEWARD J: Okay. All right.

MR GRONOW: Her view was that it was not part of a continuing business relationship, so her finding of fact was against us.

STEWARD J: Right.

MR GRONOW: But, in my submission, the appropriate inference from the facts, coupled with the further supply, is that they are made to keep supply going. The other point which Mr Walker made before lunch, which I agree with, is that the applicable periods in these cases are not known at the time. So, my client certainly did not know that Gunns Group was going into administration on 25 September, in particular. But probably the people at Gunns making the payment did not know that either. We do not know. But it is unlikely that the people at Auspine in South Australia would have been told by head office a couple of weeks earlier, by the way, we are going to appoint administrators. So, all the parties are operating in the dark, in that they do not really know what the periods are going to be.

EDELMAN J: The section 588FA(3)(b) speaks of “the relationship”. Does that not require that the relationship here, after the letter of demand was issued, be the same relationship as the one beforehand?

MR GRONOW: I accept that, your Honour.

EDELMAN J: And at some point, when terms and conditions of a relationship sufficiently change, new relationships form.

MR GRONOW: I accept that, your Honour. But in this case, they were supplying under the same contract. The point of Badenoch’s all the time was actually to get Gunns to supply within the contract. They had a contract with Auspine for years before Gunns took it over, and they had a succession of contracts. Here, what they were saying is, we want supply according to the contractually‑agreed terms, which includes that we render an invoice every month and you pay us within the time agreed.

GORDON J: I am sorry, Mr Gronow, what date are we talking about in that exchange with Justice Edelman?

MR GRONOW: Were you talking about July, your Honour?

EDELMAN J: The March 2012 letter of demand.

MR GRONOW: Sorry, sorry – I apologise. I thought it was July. But, in my submission, it is the same issue. Badenoch was dissatisfied because Gunns was not paying according to the contract. Badenoch said, why should we keep supplying services if we are not getting paid on the contractually‑agreed terms that we have been operating on for some time. And supply was in fact recommenced after that because – we would say it was because we were supplying in order get paid; Gunns was paying in order to get supplied.

EDELMAN J: Just so I understand, the July 2012 letter of demand, you say, falls into exactly the same category even though it was not provided under the same contractual arrangements? There was a renegotiated plan.

MR GRONOW: Yes, but I say it is still the same relationship even if the parties renegotiate it. Parties in a continuing business relationship can renegotiate the terms all the time, and they commonly do. Provided they both agree, then that that is all right. Indeed, in Airservices v Ferrier the High Court said, I think at 509, that it did not require there to a contractual relationship. Just let me – yes, they say:

The Full Court also held that there were no current credit arrangements under which Compass could reasonably expect that, so long as it paid accounts according to those arrangements, Airservices would continue to supply services. We doubt the correctness of that conclusion. But in any event the absence of such an arrangement does not mean that each of the payments must be isolated from the ongoing relationship and seen as giving an immediate preference.

So, my submission is you do not necessarily have to have a contractual arrangement under which the supplier must keep supplying so long as they are paid:

To do that would be to miss the whole point of the doctrine emanating from Richardson, Queensland Bacon and Rees, which is designed to ensure that the effect of a payment that induces the further supply of goods and services is evaluated by the ultimate effect that it has on the financial relationship of the parties. An arrangement of the kind referred to by the Full Court is powerful evidence of a connection between a payment and subsequent supplies. But its absence is not decisive. If other facts indicate that the payment was made to induce the further supplies, the creditor is entitled to have the ultimate effect of the transaction examined.

Your Honours, I think you discussed with Mr Walker before lunch the sixth proposition which Justice Franklyn extracted in Petagna from the M & R Jones Case, and I just want to look at that briefly. It is convenient probably to go just to the Full Court reasons in the core appeal book at tab 9, and it is page 111.

KIEFEL CJ: I am sorry, Mr Gronow, what was that reference again?

MR GRONOW: It is the core appeal book, tab 9. It is the Full Court of the Federal Court reasons page 111, paragraph 100.

KIEFEL CJ: Thank you.

MR GRONOW: They look there at the Petagna case where Justice Franklyn extracted principles. In fact, he took them from the decision of Justice Wootten in the M & R Jones Case. Petagna was referred to in the explanatory memorandum, as you will recall, from before lunch.

Now, you and my friend, Mr Walker, had a discussion about paragraph 6 of that summary, and the last two sentences:

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 that the connection between such a payment and dealings prior to the chosen date is to be ignored.

In my submission, the Full Court was correct in its interpretation of that passage, saying that it is about the – 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.

GLEESON J: That is what Justice Franklyn in fact did. At 566 he looked at the dealings prior to the chosen ‑ ‑ ‑

MR GRONOW: With respect, that is entirely correct, your Honour, that is right. If you go on to the next sentence:

However, this does not mean that the connection between such a payment and dealings prior to the chosen date is to be ignored.

I agree with that. Now, for the reasons I have set out in our submissions, we say that the Olifent Case was wrongly decided, as are all Australian cases applying the peak indebtedness rule to the new statute – the 1993 statute – and I do not think I need to go through those unless your Honours want me to.

In summary, I say that whether there is a continuing business relationship is a question of fact. I also say it applies to the entire statutory period or the insolvency period, whichever is the later, and that the interpretation urged against us involves putting an additional gloss on the section, which is unnecessary and, in my submission, impermissible. Unless your Honours have further questions for me on peak indebtedness, we otherwise rely upon our written submissions on that point.

KIEFEL CJ: Yes, thank you.

MR GRONOW: Thank you, your Honours. I should just say that, in my submission, the explanatory memorandum is silent on the point of peak indebtedness. The two cases referred to do not deal with it and I respectfully – and I have forgotten which one of your Honours it was – one of your Honours said the word “impugned” does not mean impugned by the liquidator; just means the ones that are being attacked in the decision of Chief Justice Barwick. Those two cases are relevant obviously because they show what Parliament was intending, but neither of them embodies or deals with the peak indebtedness doctrine. It is not otherwise mentioned, nor is there any mention of it in the relevant paragraph of the Harmer Report which is in the preceding tab in the authorities.

I would next like to talk about the second ground of the appeal, and particularly take your Honours to what the Full Court said at paragraphs 68 to 71 – this is tab 9 of the core appeal book, and it starts at page 104. This is about my client getting the first two payments included in the continuing business relationship. At trial, the trial judge found that only payments 3 and 4 were – the Full Court said we can have 1, 2, 3 and 4. They say at paragraph 68:

The fact that Badenoch applied additional pressure in order to have two invoices paid does not mean that there ceased to be a mutual assumption of a continuing relationship of debtor and creditor. Rather, there was a clear expectation that further debts and credits would be recorded and the parties would return to trading on terms (albeit with a $1 million credit limit). It follows that, even though there was a temporary cessation of supply, there was no cessation of a mutual assumption of payment and reciprocal supply at least from 30 March 2012 onwards.

They also talk about:

Badenoch’s state of mind –

and in particular, at paragraph 70 – which is correct – the primary judge found that:

Messrs Kenneth and Peter Badenoch –

who were the Directors of the company:

had a genuine belief that Gunns ultimately would be in a position to pay all of Badenoch’s outstanding invoices. The primary judge had the advantage of hearing the oral evidence of both of these witnesses and forming a view as to their state of mind and we do not see any error in her conclusions.

The other point they make is that to the extent they were:

reservations about Gunn’s willingness . . . to pay –

they were:

addressed in the course of the negotiations in March –

GORDON J: So, there are two facts upon which they rely. One was that there was this understanding, as I read the findings of the trial judge, that they still had faith in Gunns and otherwise, they just wanted some, in effect, security to protect their exposure ‑ ‑ ‑

MR GRONOW: That is right, your Honour, yes.

GORDON J: ‑ ‑ ‑ by bringing it back within the $1 million terms of trade.

MR GRONOW: Yes.

GORDON J: And then if you look at the payments, it is payments followed by invoice for March work, followed by a payment, followed – or an invoice for the April work. Is that right?

MR GRONOW: That is correct, your Honour, yes.

GORDON J: Then into payment in full of the March work, followed by invoice for the May work and then payment 4.

MR GRONOW: Yes. And, in my submission, the findings were that Badenoch thought they were going to get paid – they were just satisfied at being paid late and outside terms. I think, just your Honours, based on what your Honour Justice Gordon said, if you look at the second half of paragraph 71:

The response from Gunns, which included a payment schedule for the January and February invoices, and the fact that two payments (prior to payments 1 and 2) were actually made within the week ought to have gone some way to allay Badenoch’s concerns. It is in this context that Badenoch resumed supply, and that payments 1 and 2 were made.

So, in my submission, the second ground of appeal should also be dismissed. The Full Court was correct, on the factual findings made by the trial judge, to find that payments 1 and 2 were part a continuing business relationship, as were payments 3 and 4.

If I could next go to the cross‑appeal, I accept that – this goes with paragraph 76 of the Full Court’s reasons, tab 9, page 106. They say, correctly:

From July 2012, the nature of the relationship between the parties began to change. Badenoch insisted that Gunns enter into a payment plan for the repayment of all past debts (totalling approximately $1.36 million) as a precondition to supply of any further services.

That is true and:

Badenoch submits that the payment plan was at least in part designed to ensure that Badenoch continued to supply future services to Gunns and shows that it expected to be paid for those services.

They do not accept the submission. In my submission, Badenoch gave evidence of that. The trial judge believed the witnesses and Badenoch did, in fact, supply future services. I agree, they were not to the value of what was paid – the payments were about – the payments 5 to 11 totalled $1.2 million; the services were a bit over $200,000. But, in my submission, a change in the relationship – and the contemplation that it would cease in the not too distant future – do not mean the relationship had ceased as at the points of the last payment in September.

EDELMAN J: A point will come when the relationship so changes that there is a new relationship between the parties.

MR GRONOW: I accept that, your Honour. In my submission, that point had not yet come.

GORDON J: You have got three facts, have you not? You have got – I think you accept – change in the nature of the relationship, tapering of services and more payments than services provided.

MR GRONOW: That is all correct, your Honour. Certainly, the parties had contemplated that there would be a transition and the relationship would terminate later in the year – three or four months from the end of July.

GORDON J: That is in the context of supply of services having terminated on 10 July and having to be renegotiated to commence again, by reference to these terms.

MR GRONOW: That is correct, your Honour. But, in my submission, again that is a continuation of the relationship. The purpose of the negotiations – like the earlier ones – were so supply could resume. Gunns was, presumably, not paying out of the goodness of their heart. They were paying because they wanted further services. Badenoch was supplying the further services in order to get paid.

I note that there is an extract from Mr Peter Badenoch’s evidence, down the bottom, second half of paragraph 78:

Mr Peter Badenoch said in cross‑examination that provision of further limited services was “absolutely” about getting Badenoch’s debt paid down, and that the “reality” was that “if [Badenoch] were not supplying that mill, we would have had to wait longer for our money”.

Now, in my submission, that is just simply a reference to the differing purposes of a supplier and an acquirer. The acquirer wants to get the goods and services, the supplier wants to get paid for them. But it was still contemplated that the relationship would go forward into the future, and that they would still be debtor and creditor and there would be mutual debits and credits. Badenoch was still supplying services on credit in September when the administrators were appointed.

Unless there are further questions, your Honour, I may rely upon my written submissions.

KIEFEL CJ: Yes, thank you, Mr Gronow.

MR GRONOW: Thank you, your Honour.

KIEFEL CJ: Anything in reply, Mr Walker?

MR WALKER: If it please your Honours. May I pick up first a matter that your Honour Justice Gleeson has asked. In Petagna, proposition 6 is taken from proposition 6, as it happens, of Justice Wootten, in M & R Jones Shopfitting, which is reported in (1983) 68 FLR 284 and is found starting at page 999 of volume 5 of the seven‑volume part D of the authorities.

EDELMAN J: Tab 37.

MR WALKER: Thank you, your Honour. And the passages to which we draw attention to make good what we have said in our written submissions, to the effect that that is telling in its adoption by Justice Franklyn because Justice Wootten was plainly accepting the appropriateness of peak indebtedness, can be seen from the second paragraph of Justice Wootten’s reasons, at 284 of the Federal Law Reports, where one sees the reference to the argument that relied upon the remarks of Chief Justice Barwick in Rees; that is, the Bank of New South Wales Case, and you see the reference to the “highest debit” in the last sentence of that paragraph.

Then you find the actual words that the Full Court had construed, by Justice Franklyn, are in fact – their origin can be seen at the top of page 290 of the Federal Law Reports. We see, in particular, the two sentences obtained when quoted from Justice Franklyn; the emphasis in the reasons of the Full Court in this case. That is a circumstance that, in our submission, would suggest that, unless there were some other explanation, it is not possible to read Petagna which lifts – and appropriately – from M & R Jones Shopfitting those words. It is to be regarded as somehow intrinsically or necessarily as displacing, leaving no room for, the peak indebtedness rule. It would appear to be the contrary from that context.

Going back to the candidates for the commencement of the period in which one counts money in and value out, or vice versa, so as to reach an overall or ultimate or net effect, so as to judge whether there is a preference and, if so, by how much, it is to be recalled that with respect to insolvency – and assuming that the statutory period truncates that period to be no earlier than the statutory period – that there is still the possibility for payments after insolvency accepting, for the sake of argument, that that needs to be within the statutory period that need not be preferences for a number of reasons, including the most obvious; namely, cash on delivery, more benefit obtained, or at least equal benefit obtained as the payment bore value. And not only confined to that straightforward proposition, also confined plainly enough to the notion of a continuing relation thereafter.

Peak indebtedness remains the most obvious way of demonstrating the preferential quality which would make it proper as well as worthwhile for there to be exploration and, if appropriate, litigation to compel a return of payments after that point. Because, up to that point, though there is a payment, though it is within insolvency, if there is an increase of indebtedness it is very difficult to understand how, as a matter of fairness, it could be regarded as preferential.

It is for those reasons in our submission with that smorgasbord of possibilities – your Honours have now been through all the possibilities, starting with the plainest of the linguistic possibilities which is the most unacceptable, absurd possibility and then moving through the others; statutory period, insolvency, and some other indeterminate combination of the two. In our submission, one is left with what was in fact actively being practised in this very area, which was going to be the subject of law reform of that useful kind of clarifying matters, by using different words which naturally give rise to the possibility that a different effect was being enacted from that which it was replacing. We were told, at least in the EM, that there was not going to be a different effect by the replacement; relevantly, with respect to whatever is to be understood by the reference to Queensland Bacon, for example, or for that matter, Petagna.

In our submission, there could not be a plainer or more explicit indication that, however one interprets these words, difficulty with their so‑called “wholly literal” effect – as the Full Court correctly found in their paragraph 84 – however one interprets it, there is an obvious candidate that the practice by liquidators in making application to recoup unfair preferences should continue to be informed by their principal selection of peak indebtedness during a continuing relationship. When I say, “during”, I do not mean that that requires looking backwards, I mean that, by picking peak indebtedness, the object of the exercise – being to identify either the existence or, if so, the extent of a preference – can concentrate on the matters that will truly concern the Court if there is contest.

Your Honour the Chief Justice poses the question as to whether this does not boil simply down to something that might have been said in Alice in Wonderland. The question is, who is to choose – is it Parliament or the liquidator? Whose choice is it? Plainly, of course, it is the words enacted by Parliament which govern. But, for all the reasons we put – and, in principle, not much, if at all, at odds with our friends, with respect to method – those words have to be understood and everyone combines in rejecting the most obvious linguistic meaning of the relevant words in subsection (3).

It was part of Parliament’s choice – is how we would seek to persuade your Honours – that the established practice – perhaps too grandly called a principle or rule, but nonetheless pronounced in confident terms by Sir Garfield Barwick – to which of course one can have recourse as being that against which, by way of background and current practice, the new enactment should be understood and applied. Once one does that, then one is left with, in our submission, an avoidance of these conundrums about what do you do about insolvency that commences before a statutory period and what do you do about – as we would submit respectfully is perhaps a more embracing question – the fact that the statute simply does not say that payments during insolvency are unfair preferences; and for obvious reasons. Many a payment during insolvency is to be clung to by the liquidator because of the value greater than it which it elicited in return, to the benefit of everyone.

It is for those reasons, in our submission, that it does not come down to rejecting the sovereign Parliament’s choice – of course sovereign Parliament’s choice is what governs in favour of a liquidator’s choice – but, rather, recognising that the liquidator is understood by the newly‑enacted provisions to be making a choice; FF, the liquidator’s application. And thereafter, impugned is always and only ever at the suit of the liquidator. It is for those reasons, in our submission, that we can avoid, we hope, the stricture of preferring a liquidator’s mandate to Parliament’s command.

We do adopt, with respect, as to the reading of the reference to sole purpose at the top of page 502 in Airservices, particularly the proposition that – I think as Justice Gleeson put it – that does not describe what I might call the exhaustive understanding of when a relationship ceases or ceases to have the effect for which the judicial understanding of the law as it then stood would have produced by way of the ultimate effect rule. Rather, it is simply illustrating the neatest and easiest case in which that is obviously so.

In relation to what can be gathered from Airservices, it is to be recalled that there was the discrimination practice by the actual final orders in Airservices, which once final grounding, so to speak, was imminent and inevitable, payments thereafter fell outside the continuing relation, not withstanding there were services – they might be called minor, but as Justice Santow later observed, they were probably for the sake of safety – not withstanding that there was some minor supply afterwards. In other words, it will not suffice that the relationship was such that somebody is just there and then suddenly without any remission or any qualification cut off. In Airservices, that plainly produced a situation which their Honours in the pithy phrase depicted as:

looking backwards rather than forwards –

And the fact that “forwards” included a few, what I might call, run‑off services did not avail. By then, it was looking backwards, not forwards. Similarly, in this case, it is plain – and I am now moving to the merits where they have reached of the cross‑appeal. Your Honours will recall that there was on 31 July in the document that you will find in the appellants’ book of further materials, volume 1, page 329, the letter of 31 July 2012 of which your Honours are familiar. The reference to a proposal:

to investigate the opportunity for a transition to a mutually acceptable termination of the agreement at the end of three or four months.

And the arrangement required whether there was an immediate commencement of instalments, obviously to discharge the prior indebtedness. Now, that looked forward to negotiations which would come to a head pretty soon. One sees it being left open on the next page until 2 August, and then a return to obviously the threats of litigation that had been made earlier.

We know that eventually resulted in the August arrangement, to which your Honours’ attention has been drawn, by which there was – you will find that starting at 347 in the same bundle.

GORDON J: It starts at 335, does it not, when the proposal that is set out in the letter is accepted, I think.

MR WALKER: It does. There is a whole sequence of correspondence. On 2 August, your Honours see that the acceptance by Gunns is importantly described as being – that is on 335:

a mutually agreeable termination of our harvesting agreement –

and the tapering or run‑off is then well and truly reflected – and this is after the event, but it shows the nature of the relationship having already changed – at 348 and following, where one sees that the mutual release which is going to come with the termination – which is going to have a future effect – effective date – all because of the past indebtedness acknowledged and agreed to be paid in paragraph 5 on page 349 – and all under the sword of Damocles, that there would be judgment for the whole – see clauses 6 and following.

In our submission, it follows from that that the reasoning of the trial judge, which your Honours will recall, starts with the facts that start at page 28 of the core appeal book, paragraph 75. Paragraph 77 is the letter of 31 July. Paragraph 84 is the “Deed of Variation and Release”, to which I have just taken you. When one then turns to those threads being drawn together in paragraph 97 – foot of page 33, top of page 34 – the principles are there taken by her Honour – with respect, correctly – from Airservices with the features it had in common with this case.

Then, in paragraph 99, there is a limitation of those payments, which her Honour found were made as part of a continuing – and I do stress “continuing” as being relevantly contradicted by tapering. Yes, the point of a taper is that the thing does not immediately stop but is a mode of what might be called civilised or decent cessation. It is not bespeaking continuation.

Her Honour says that the evidence substantiated that all the other payments were made when they were:

looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services.

The neat phrase, with respect, from Airservices – which was well and truly, as a matter of factual characterisation on the circumstances of this particular case, available to her Honour to find. I draw to attention, that in the summation by her Honour in that paragraph at the end of 99(c), second last
line, in order to highlight it in terms of what I call Eurolinx point, her Honour does use “predominate purpose”.

Now, it is obviously a question of characterisation, and most questions of characterisation are not about what might be called pure or unalloyed qualities. It is for those reasons, in our submission, that as a matter of practicality of a kind that should inform the understanding of the concept of a continuing relationship used in the statute taken from the preceding case law, that the approach as a matter of method is unimpeachable, upheld by the Full Court and leaving only the case where my friend, with great respect, notably does not challenge primary findings of fact but says that there is an error of characterisation because of the small component of what I will call tapering endgame services.

That, in our submission, does not truly give rise to any question of law or principle which transcends the particular circumstances of the facts in this case. Though I accept we have now argued the merits of the point, it is for those reasons that the cross‑appeal does not warrant a grant of special leave but, if special leave were granted, should be dismissed on the merits. May it please the Court.

KIEFEL CJ: Thank you, Mr Walker. The Court reserves its decision in this matter and adjourns to 10.00 am tomorrow.

AT 3.33 PM THE MATTER WAS ADJOURNED