The "running account" defence to an unfair preference claim is a fragile flower. In a recent decision, the Queensland Court of Appeal has reminded solvent counterparties that suspension of a customer's trading account will probably break the "running account", exposing a solvent counterparty to greater unfair preference risk.
Need to know
A cessation of supply or suspension to a trading account for a distressed company probably "breaks" the running account. This is so even if there is limited continued supply to the company. This raises a real tension between responsible credit management and loss of the "running account" defence.
For solvent counterparties (i.e. suppliers):
- Before suspending a customer's trading account, first consider the full suite of options when dealing with a customer in default. Consider:
- provision of third-party security (e.g. a guarantee or documentary credit from a bank),
- solvency certificates from the customer's directors, and
- a pre-payment arrangement for future supplies.
For insolvency practitioners:
- This recent decision underscores the value to the estate of a close review of fluctuations in an insolvent company's trading accounts with suppliers - continued trade does not necessarily mean that a running account will be available to the solvent supplier.
- While beyond the scope of this alert, the decision includes a considered discussion of the principles relevant to assessing solvency generally. This includes discussion of inclusion in an insolvency assessment debts falling due in the "immediate future" and just what "future" means in that context.
Some greater detail on the decision follows.
A little more detail
In Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No. 1) (in liq))  QCA 235 (20 November 2015), the Queensland Court of Appeal dealt with an unfair preference claim by a Liquidator against Rexel Electrical Supplies Pty Ltd ("Rexel").
Trading account - payment plan
Rexel provided a trading account to the insolvent company. The company incurred credit with Rexel, and then failed to pay in accordance with the agreed trading terms. There was a payment plan in place for the "core" debt that was outside of the agreed terms, which involved the company making a series of payments to Rexel over a three month period.
Rexel did continue some limited supply to the company, on credit terms. The core debt, however, was materially greater than the value of the limited continuing supplies.
Eventually, the company defaulted on the payment plan and Rexel served a creditor's statutory demand. The company proceeded into liquidation.
Liquidator commences proceedings
The Liquidator commenced proceedings against Rexel, seeking to recover the payments made by the company under the payment plan agreed with Rexel. Rexel ran a number of defences to the proceeding, including that the company was not insolvent at the relevant time and that, in any event, the running account defence was available in respect of the payments.
Disposing of the running account defence
The Court of Appeal determined that the running account was not available. In doing so, it endorsed the trial judge's conclusion that the further supplies by Rexel on credit were isolated extensions of credit, ancillary to Rexel’s primary objective of being paid the main debt and to assist Management to make payment, rather than being transactions which evidenced a continuing business relationship.
That was because, the Court of Appeal held, the trial judge properly found that the limited future supply was subordinated to a predominant purpose of recovering past indebtedness. Accordingly, there was no running account and Rexel's defence failed.
Discussion of assessment of insolvency
While beyond the scope of this alert, the Court of Appeal sets out a detailed analysis of the principles relevant to assessing solvency generally. That analysis does not break any new ground, but the Court of Appeal's endorsement of the existing jurisprudence on relevance of "future" debts in an insolvency analysis is a worthwhile read for insolvency professionals.