Re MC Bacon Ltd [1990] BCC 78

The case that decides most claw-back claims before they start. Millett J held that granting security for an existing debt does not deplete the company’s assets, so it is not an undervalue, and that a preference requires a subjective desire to prefer, not merely a deliberate act with a foreseeable effect. That second holding is why most preference claims fail.

Why This Case Governs Claw-Back Claims

MC Bacon was one of the first cases to construe the new claw-back provisions introduced by the Insolvency Act 1986, and Millett J’s analysis has never been displaced. It decides two things that determine the outcome of most claw-back claims arising from an HMRC-driven insolvency:

• Granting security for an existing debt is not a transaction at an undervalue, because it does not deplete the company’s assets.
• A preference requires a subjective desire to prefer, not merely a deliberate act with a foreseeable preferential effect.

The second is the reason most preference claims fail, and the reason the defence to one is almost always evidential rather than legal.

The Facts

MC Bacon Ltd was a bacon importer. In 1986 it lost its principal customer, which accounted for the bulk of its trade. The company continued to trade, but its position deteriorated and it eventually became insolvent.

In May 1987, while the company was in difficulty, it granted a debenture to National Westminster Bank securing its existing overdraft. No new money was advanced in consideration for the debenture; the bank simply obtained security for lending it had already made. The company went into insolvent liquidation shortly afterwards.

The liquidator challenged the debenture on two alternative grounds: that it was a transaction at an undervalue under s238 IA 1986, and that it was a preference under s239.

The Undervalue Claim: Why It Failed

Section 238 catches a gift, a transaction for no consideration, or a transaction on terms providing for consideration significantly less in value than the consideration provided by the company.

Millett J held that granting security is not within the section at all. The reasoning turns on what the section is designed to protect:

• The company’s assets are not depleted. When a company grants a charge over its property, it does not part with anything of value. The property remains within the estate; what changes is the priority in which creditors will be paid out of it.
• The rights created cannot be valued as consideration in the relevant sense. A security interest is not a form of consideration in money or money’s worth flowing out of the company for the purposes of the comparison the section requires.

The practical effect is that a challenge to security granted for existing indebtedness must be brought as a preference, not as an undervalue, which means the claimant must satisfy the desire requirement.

The Preference Claim: the Desire Test

Section 239 applies where a company does anything, or suffers anything to be done, which puts a creditor, surety or guarantor into a better position in an insolvent liquidation than they would otherwise have been in. But s239(5) adds a decisive condition: the court may only make an order if the company was influenced by a desire to produce that effect.

What Millett J decided

Millett J drew a sharp distinction between intention and desire. A person may intend to do something without desiring its consequences: a company that pays a creditor because it must, in order to keep supplies flowing, intends the payment but does not desire the preference. Its motive is commercial survival.

The change from the old law

Under s44 of the Bankruptcy Act 1914 the test had been whether the company acted with a dominant intention to prefer. The 1986 Act replaced that with the “influenced by a desire” formulation. The change made the test easier for a claimant in one respect, the desire need not dominate, but Millett J held that it remains a genuinely subjective enquiry and not a test of effect or foreseeability.

The result on the facts

The directors granted the debenture because the bank demanded it and because they wanted the company to continue trading. Their desire was to keep the business alive, not to improve the bank’s position on a liquidation. The claim failed.

Obiter Dicta

• The commercial pressure analysis. Millett J’s observations about the effect of genuine commercial pressure, that a company acting under it is pursuing survival rather than preference, are strictly explanatory of his finding on the facts. They have nonetheless become the standard defence to a preference claim and are cited as though they were the test.
• Comments on the relationship between s238 and s239. The judge’s remarks about how the two sections are designed to catch different mischiefs are analytical commentary, but they are the reason practitioners plead them as genuine alternatives rather than in the hope that one will stick.
• Costs of the office-holder’s claim. The related decision on whether the costs of proceedings under these sections are payable as an expense of the liquidation generated a separate line of authority that has since been overtaken by statutory change.

The HMRC Context

Since 1 December 2020 HMRC has been a secondary preferential creditor for PAYE, employee National Insurance, VAT and CIS deductions. That has materially increased the value of claw-back claims to office-holders, because recoveries now feed a larger preferential class.

The fact patterns that recur where an HMRC liability is behind the insolvency are well established:

• Repayment of a director’s loan account in the run-up to insolvency. The director is a connected person, so the relevant time is two years rather than six months and the desire to prefer is presumed: reversing the burden that defeated the claim in MC Bacon.
• Repayment of borrowing personally guaranteed by a director, which releases the director’s own exposure. A classic preference, and again the connected person presumptions apply.
• Granting security to a connected lender, where s245 may be the better claim if the charge is floating.
• Dividends and asset transfers, which are more naturally attacked under s238 or s423. See our guide to antecedent transactions and our analysis of BTI v Sequana.

Practitioner Application

Defending a preference claim

• Establish the commercial pressure. Supplier ultimatums, bank correspondence, threatened forfeiture, a stop on deliveries, a refusal to release goods. Contemporaneous documents are worth far more than a witness statement made years later.
• Evidence the belief in survival. Board minutes, forecasts, refinancing discussions and turnaround plans all support the case that the motive was continuation, not preference.
• Rebut the presumption where the client is connected. This is the hardest task in the area. The evidence has to show a genuine commercial reason for the payment that is independent of the connection.
• Test the insolvency condition. The company must have been unable to pay its debts within s123 at the time, or have become so in consequence. For unconnected respondents that must be proved, and management accounts reconstructed with hindsight are vulnerable.
• Check the relevant time. Six months for unconnected creditors, two years for connected persons, measured back from the onset of insolvency.
• Consider limitation. Frequently overlooked in long-running estates.

Bringing one

• Do not plead s238 against the grant of security for existing debt. MC Bacon forecloses it, and doing so damages credibility on the rest of the claim.
• Where a floating charge is involved, consider s245 first, no state of mind need be proved.
• Where assets have simply left the company, consider s423, which requires no insolvency and has no lookback window.

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