Re MC Bacon Ltd (No 1)
The granting of the security was a response to the commercial pressure, and not an intention to prefer one creditor above others.Here the directors did not want to improve the bank's position, but simply wished to continue trading.The creation of the security in favour of the bank was not a transaction at an undervalue within the meaning of section 238 because it did not deplete or diminish the value of the assets of the company.These last mentioned allegations were rightly abandoned by the applicant after six days of oral evidence.Section 44(1) and its predecessors had been construed by the courts as requiring the person seeking to avoid the payment or other transaction to establish that it had been made “with the dominant intention to prefer” the creditor.Every single word of significance, whether in the form of statutory definition or in its judicial exposition, has been jettisoned.These are replaced by “influenced”, “desire”, and “to produce in relation to that person the effect mentioned in subsec.It will no longer enquire whether there was “a dominant intention to prefer” the creditor, but whether the company's decision was “influenced by a desire to produce … the effect mentioned in subsec.This second change is made necessary by the first, for without it, it would be virtually impossible to uphold the validity of a security taken in exchange for the injection of fresh funds into a company in financial difficulties.The need to establish that such intention was dominant was essential under the old law to prevent perfectly proper transactions from being struck down.It is not, however, sufficient to establish a desire to make the payment or grant the security which it is sought to avoid.There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor's position in the event of an insolvent liquidation.He then proceeded to section 238, read the text and continued...] The granting of the debenture was not a gift, nor was it without consideration.The consideration consisted of the bank's forbearance from calling in the overdraft and its honouring of cheques and making of fresh advances to the company during the continuance of the facility.In my judgment, the applicant's claim to characterise the granting of the bank's debenture as a transaction at an undervalue is misconceived.In the present case the company did not suffer that loss by reason of the grant of the debenture.In a subsequent case, Re MC Bacon Ltd (No 2)[4] Millett J went on to further important clarifications as the context and effect of the provisions and how to deal with the proceeds of anything recovered under s 214 (for the purposes of whether the costs were an expense of the liquidation under rule 4.218(1)(a)).