Running Account Defence to Preference Claims

How the Running Account Rule Works

The running account rule combines payments with the supply that forms part of the same continuing business relationship. Debt must rise and fall through the dealings. An account labelled “running account” does not establish the commercial relationship by itself.

In Airservices Australia v Ferrier (1996) 185 CLR 483, the Court examined payments alongside continuing services. Its focus was “the ultimate and not the immediate effect of each payment on the relationship”. Bryant reproduces this passage at paragraph 82, citing Airservices at pages 507 to 508.

Consider this hypothetical supplier account. Every entry falls within the qualifying relationship and calculation period.

The supplier receives $90,000 and supplies another $70,000. Debt falls from $80,000 to $60,000, giving a net reduction of $20,000. That is the potential preference amount for the combined transaction, subject to the other unfair preference requirements.

If closing debt instead exceeds opening debt, the combined transaction produces no net reduction. Payments outside the continuing relationship require their own assessment.

Where the Calculation Starts After Bryant

Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 rejects the peak indebtedness rule. A liquidator cannot select the highest balance inside the relevant period to maximise the claim.

Paragraph 13 identifies the first qualifying transaction after the latest applicable starting boundary. Compare the beginning of the prescribed recovery period with the point of insolvency. If the continuing relationship begins later, its beginning controls. The relation-back day helps establish the recovery period.

In the example, selecting the $105,000 peak would produce a $45,000 reduction to the $60,000 closing balance. Using the proper $80,000 opening balance produces $20,000. The choice changes the claim by $25,000.

The relationship’s end also matters. Bryant requires an objective assessment of the whole business relationship. Debt collection pressure alone does not decide whether a payment belongs to it. Continuing to provide some services does not automatically keep every later payment inside it. The High Court’s reasons explain both boundaries.

The Good Faith Defence Alongside It

Section 588FG(2) protects a supplier who proves good faith, the absence of reasonable grounds to suspect insolvency and the required consideration or reliance. It can apply alongside the running account calculation.

The supplier must prove that it had no reasonable grounds for suspicion when it became a party to the transaction. A reasonable person in the supplier’s circumstances must also have lacked those grounds. The test includes insolvency caused by the transaction. Providing valuable consideration or changing position in reliance on the transaction is a further requirement. Section 588FG(2) sets out these conditions.

Build the evidence around what the supplier knew at the relevant time. Preserve credit terms and account histories, along with communications explaining missed payments. Identify the person who dealt with the customer and retain their contemporaneous notes. Continued supply can support the running account argument while the same correspondence reveals grounds to suspect insolvency.

Compare a customer’s isolated administrative delay with repeated broken payment promises and admissions that debts cannot be paid. These circumstances require different explanations. A supplier’s statement that it did not know about insolvency leaves the objective limb unanswered.

Rebuilding the Account From Bank Records

Rebuild the daily supplier balance by matching bank payments to invoices and actual supply records. Bank statements establish cash movement. Invoices and delivery records establish the supply side of the account.

1. Establish the opening debt immediately before the first qualifying transaction. Reconcile it to the supplier’s account and the company’s records.
2. Identify every payment to the creditor across the supplied bank accounts. Match amounts and references to receipts, including instalments and combined payments.
3. Add each qualifying supply entry when the debt arises. Resolve credit notes and returns so they do not inflate supply.
4. Calculate the balance after each entry. Separate transactions outside the qualifying relationship and document why each boundary applies.

Give each payment one consistent creditor tag. Preserve the bank account and source statement reference beside it. The filtered ledger then shows the complete payment total for that creditor, even when payment descriptions differ. Bank statement reconciliation helps resolve unmatched entries before they change the calculation.

Keep the invoice register beside the cash ledger. A payment made before the chosen boundary can settle an older invoice, so invoice allocation alone does not decide whether the payment enters the calculation. The legal period and commercial relationship determine that question.

Establishing When the Relationship Ends

Compare the supply history with credit holds, revised payment terms and correspondence about future work. Identify any termination notice and whether supply actually resumes. Record why each payment belongs inside or outside the continuing relationship. Collection pressure or changed terms alone do not settle that question.

Bryant at [79]-[81] requires an objective assessment of the actual dealings. At [101]-[102], a later invoice remains inside the calculation because it concerns supply before the relationship ended. Match invoice dates to the underlying work before fixing the closing balance.

This separate fictional schedule assumes the evidence establishes that later debt recovery falls outside the qualifying relationship.

The combined transaction reduces debt by $20,000, from $50,000 to $30,000. The later $10,000 payment needs its own assessment. Combining everything would wrongly label $30,000 as the relationship’s net reduction. Preserve the evidence for the boundary beside both parts of the schedule.

FinTrace saves hours of statement conversion and review by consolidating supplied PDFs into a searchable Excel ledger and a readable findings report. Each finding identifies its source PDF filename and page. Lawyers and forensic accountants can use those records alongside the invoice register to reconstruct the creditor account, with the statement evidence already at hand.

For the response to a preference demand, present the opening balance and closing balance beside the qualifying supply and payment totals. Attach the evidence supporting the relationship’s boundaries. Keep the good faith evidence separate so the calculation and defence can each be assessed on their own facts.