'Peak Indebtedness' Theory: An Abuse of the 'Running Account' Defence?

Abstract

The peak indebtedness doctrine is often invoked by liquidators and their lawyers when trying to maximise recovery for unsecured creditor (and themselves) against creditors paid in the ordinary course of business during the six months before insolvency. Under this doctrine, it is alleged that the liquidator can choose any point during the six-month relation back period to calculate whether a trade creditor has received a payment that constitutes a voidable preference. But the ultimate effect interpretation of the running account defence suggests that liquidators are gilding the lily most of the time when they invoke peak indebtedness theory. A careful consideration of all the relevant case law in Australia suggests that the doctrine only applies in bank overdraft cases. But clarification of this practical conflict may require legislative intervention since small creditors seldom have the money to fight intimidating liquidators in the courts.