Running account defence (in the context of unfair preference claims)

A running account defence can be used as a defence (although not a complete one) to an unfair preference claim, where there are multiple transactions (an active account) between the debtor and creditor over a relevant 6 month period (s 588FA(3) of the Corporations Act). The court can then assess the amount of the preference.

For a running account defence to be available to a creditor facing an unfair preference claw back claim, the payments must have been made as part of a continuing business relationship. Where effective, a running balance account defence can limit recovery by a liquidator to the difference between a company’s peak indebtedness to the creditor during the relation back period and its closing indebtedness on the relation back date. If during the course of the business relationship, the level of indebtedness oscillates via a series of transactions, then all transactions will be dealt with as one transaction for the purposes of establishing unfair preference. Where a creditor continues to provide goods and/or services during the period of payments made, any claim for unfair preference may be reduced if the value of the goods and/or services is greater than the value of the payments made during that period.

A running account defence can, in some cases, significantly reduce the amount of a liquidator’s claim for unfair preference.

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