Two High Court decisions in February 2023 changed how unfair preference claims against suppliers are valued. A liquidator can no longer start a running account at peak debt, and a supplier cannot set off what it is still owed. Claims now turn on objective evidence of why each payment was made and what the supplier knew.
Why this matters now
ASIC data show 14,153 companies entered external administration for the first time in 2025–26. Liquidators routinely pursue suppliers who were paid in the months before a collapse. Our Queensland insolvency statistics give the local picture.
An unfair preference is a payment that gives an unsecured creditor more than it would receive in a winding up (Corporations Act 2001 (Cth) s 588FA). It can be recovered if made while the company was insolvent, in the six months before the relation-back day (ss 588FC, 588FE(2)).
Running accounts: no more peak indebtedness
Under s 588FA(3), transactions forming part of a continuing business relationship, such as a running account, are treated as one. In broad terms, only the net reduction in the debt is recoverable.
Liquidators had long been allowed to start the account at the point of peak debt, which maximised the claim. In Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, a unanimous High Court rejected this “peak indebtedness rule”.
The start point is now fixed by the facts, not chosen by the liquidator. It is the latest of the start of the six-month period, the date of insolvency and the start of the relationship. In Badenoch, the debt owed to the supplier rose over the relationship, so the running account produced no unfair preference.
Is a payment part of the running account?
This is an objective question about the payment’s “business character”. What the parties intended is relevant but not decisive. A payment made to secure further supply is usually part of the account. A payment that looks backwards, to clear old debt, usually is not.
In Badenoch, the supplier offered to stop supplying in return for a payment plan, which the company accepted on 2 August 2012. Payments under the plan fell outside the running account, because the relationship had ended.
The Supreme Court of Victoria took the same approach in Re Corio Bay Dairy Group Pty Ltd (in liq) [2025] VSC 466. There, the supplier’s extra work was already required by its engineering, procurement and construction management contract. Payments for it were not connected with future supply, so there was no running account. Judgment was entered for $555,640.70 plus interest.
No set-off against the claim
Suppliers often answer a demand by pointing to what the company still owes them. The High Court dealt with this in Metal Manufactures Pty Ltd v Morton [2023] HCA 1. Statutory set-off under s 553C is not available against an unfair preference claim. The claim arises only on the winding up, so it lacks mutuality with the supplier’s debt.
The supplier instead proves for its debt with other unsecured creditors. If it repays a preference, it may also prove for the debt that payment discharged (s 588FI). See our 2023 note on the Morton decision.
The good faith defence turns on evidence
A supplier has a defence if it proves good faith, no reasonable grounds to suspect insolvency, and that it gave value (s 588FG(2)). A reasonable person in its position must also have had no such grounds.
In Corio Bay, the defence failed. The court drew inferences against the supplier because it did not call key staff who had dealt with the company. A general release in an earlier settlement, made to resolve a dispute over a lien, did not cover the liquidator’s later preference claims.
Other limits to check
- Time. Proceedings must start within three years after the relation-back day, or 12 months after the first liquidator’s appointment, if later. The court can extend this on an application made in time (s 588FF(3)).
- Simplified liquidations. Payments to unrelated creditors more than three months before the relation-back day cannot be recovered. Later payments totalling $30,000 or less are also protected (Corporations Regulations 2001 (Cth) reg 5.5.04).
What creditors should do now
- Do not pay on receipt of a demand, but diarise the response date.
- Ask for the liquidator’s evidence of insolvency and the start date used.
- Rebuild the account yourself from the correct start date.
- Gather documents showing why each payment was made: to keep supply flowing, or to clear old debt.
- Identify the staff who dealt with the customer. Their evidence may decide the good faith defence.
- Lodge a proof of debt for what you are owed, rather than deducting it from the claim.
- When settling any dispute with an administrator or liquidator, state whether preference claims are released.
What to watch
- Reform. A parliamentary committee recommended that any comprehensive insolvency review treat unfair preferences as a core issue. On 6 August 2026 the Government supported this in principle. It noted that the Productivity Commission may consider them. The Commission’s interim report is due in November 2026. See Insolvency reform on hold.
- The courts. Watch for appeal decisions applying Badenoch to construction contracts and payment plans.
To discuss how these developments affect you, contact us on +61 7 3229 9800 or send us an enquiry online.
This article is general information only and is not legal advice.
Sources: ASIC — Insolvency statistics, Series 1; Corporations Act 2001 (Cth), ss 553C, 588FA, 588FC, 588FE, 588FF, 588FG, 588FI; Corporations Regulations 2001 (Cth), reg 5.5.04; Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2; Metal Manufactures Pty Ltd v Morton [2023] HCA 1; Re Corio Bay Dairy Group Pty Ltd (in liq) [2025] VSC 466; Treasury — Government response to the Parliamentary Joint Committee report on corporate insolvency (6 August 2026), recommendation 27; Productivity Commission — Reducing barriers to business dynamism.