In Australian law, a ‘continuing business relationship’ refers to an ongoing commercial association between two or more parties.
It generally involves a series of transactions, agreements, or interactions that extend beyond a single isolated transaction.
The concept of a continuing business relationship doesn’t have a specific, standalone legal definition. Instead, its interpretation and application may vary depending on the context and the particular area of law in question.
Let’s take a look.
THE VARIOUS LEGAL CONEXTS OF CONTINUING BUSINESS RELATIONSHIPS
The concept of a continuing business relationship may be relevant in various legal contexts, such as contract law, trade practices, and commercial disputes.
The interpretation and understanding of the term can be derived from the relevant legislation, case law, and legal principles specific to each area of law.
In contract law, a continuing business relationship often arises when parties engage in a series of contracts or agreements over an extended period. This relationship is characterised by a pattern of repeated interactions and a mutual expectation of ongoing business dealings.
For example, if two companies regularly enter into contracts for the supply of goods or services, they may be considered to have a continuing business relationship.
In trade practices, a continuous business relationship can have implications for competition law and the regulation of anti-competitive conduct.
Under the Competition and Consumer Act 2010 (Cth) certain behaviours, such as exclusive dealing, tied selling, and misuse of market power, may be prohibited when they substantially lessen competition in a market.
The existence of a continuing business relationship between parties can be a relevant factor in determining whether such conduct has occurred.
A continuing business relationship may also be significant in the context of commercial disputes, particularly when resolving issues related to a breach of contract or the termination of a business relationship.
Courts may consider the history and nature of the parties' relationship, including any established patterns of dealing and expectations, when interpreting contractual terms or assessing the reasonableness of a party's actions.
It is important to note that the specific legal implications and consequences of a continuing business relationship can vary depending on the particular circumstances, the relevant legislation, and the nature of the parties' interactions.
Therefore, consulting a qualified legal professional for advice tailored to your situation is what we advise.
CONTINUING BUSINESS RELATIONSHIP AND INSOLVENCY LAW
Continuing business relationships carry particular significance in the context of insolvency proceedings and the treatment of ongoing contracts.
Insolvency laws provide for the treatment of ongoing contracts entered into by an insolvent company. These laws aim to strike a balance between protecting the interests of the insolvent company's creditors and preserving value for all stakeholders involved.
Critical and non-critical contracts
Ongoing contracts are often categorised as critical and non-critical based on their importance for the continuation of the insolvent company’s business. Examples of critical contracts include:
- Essential supply agreements
- Key customer contracts
- Contracts necessary for restructuring or sale of business
In some insolvency proceedings, such as administration or receivership, the appointed administrator or receiver may have the authority to decide whether to terminate contracts on behalf of the insolvent company.
Insolvency laws restrict the termination or exercise of contractual rights solely based on a party's insolvency or financial distress.
These restrictions aim to protect the insolvent company during the insolvency process and maintain ongoing relationships.
This restriction is set out under Sections 440B and 451E of the Corporations Act.
Directors and officers of an insolvent company have a duty to act in the best interests of the company and its creditors.
In the context of continuing business relationships, they are required to make decisions that maximise value, consider the impact on stakeholders, and avoid actions that may unfairly favour certain counterparties over others.
Example: Ongoing relationships and unfair preference claims
Where a business is insolvent, a ‘continuing business relationship’ can be used as a form of defence against an unfair preference claim by a liquidator.
Any creditor wanting to rely on the continuing business relationship defence must ensure the transactions in question did, in fact, form part of a continuing business relationship.
Payments are likely to form part of a continuing business relationship if their purpose to a creditor is the further supply of goods. If this was not the purpose, the defence is not available.
Unfair preference claims are set out under S588FA (3) of the Corporations Act 2001.
It works like this:
- A debtor company (that later becomes insolvent) makes a payment or transfers an asset to an unsecured creditor, putting that creditor in a more favourable position than other creditors.
- The liquidator can determine whether this qualifies as an unfair preference based on certain criteria. Importantly, the rules around determining this have recently changed with the peak indebtedness rule abolished.
- The debtor company can meet this claim with a defence of having an ongoing or pre-existing business relationship with that client. Essentially, the defence is that payment would have been made regardless as part of a continuing relationship. It constitutes a running account and a single transaction.
Exploring this in a little more detail, let’s look at the following example:
At the beginning of July, a debtor company (A) owed a creditor (C) $15,000. During the six (6) months to the end of December, they purchased $50,000 of stock on credit and made payments of $30,000 for ongoing supply.
The $30,000 in payments made by A to C are not preferential as A’s overall level of indebtedness did not reduce. In fact, it increased.
However, if they purchased stock on credit only to the value of $20,000 and made payments of $30,000, the liquidator would claim that $10,000 of the $30,000 is recoverable because the component was unfairly preferential, as the net indebtedness to C was reduced.
A lifeline concept in law
While the concept of continuing business relationships doesn’t have a standalone definition, its interpretation and application may vary depending on the context and specific area of law.
In insolvency law, it emerges as a vital lifeline, safeguarding ongoing contracts, preserving stakeholder value, and guiding directors to act in the company's and its creditors' best interests.
Is your company struggling financially and/or facing insolvency?
Contact our experts at Shaw Gidley today on (02) 4908 4444 or (02) 6580 0400 for free initial advice.
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