Section 239 Unlawful Preference and Decision Date for Desire to Prefer

Author: Simon Hill
In: Article Published: Sunday 29 September 2019

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Where a company in liquidation or administration has given an antecedent voidable preference (‘voidable preference’) to any person at a relevant time[1], section 239 of the Insolvency Act 1986 empowers the company’s office-holder[2]to apply to court for an suitable order under s.241(1) of the Insolvency Act 1986. One condition for a voidable preference is that the company, when it decided to give the preference, must have been influenced by a desire to produce a better position/outcome for the perference recipient in the company’s insolvency, than that recipient would otherwise have obtained in the insolvency (s.239(5) and s.239(4)(b))[3]. This article will consider the relevant point in time that the law assesses whether this condition existed.  

Conditions for Voidable Preference 

The conditions which need to be satisfied for a finding of voidable preference under s.239 of the Insolvency Act 1986 in a liquidation case, were succinctly summarized by HHJ Davis-White QC (sitting as a Judge of the High Court) in Re Flexi Containers Ltd (also known as Breese v Hiley) [2018] EWHC 12 (Ch). At paragraph 47, HHJ Davis-White QC said the conditions for a voidable preference were a transaction:

‘1. entered into by a company which subsequently goes into liquidation (ss239(1), 238(1));

2. by which a creditor is preferred, that is put in a better position on liquidation that he or she would otherwise have been ( ss239(2), (4));

3. which takes place in circumstances where the company was influenced in entering into the transaction by a desire to prefer the person (s239(4)), such influence being presumed in the case of a person connected with the company (s239(5)). The time for judging whether there was the requisite desire is the time that the relevant decision is made to make the preference, not the date of the transaction effecting the preference. In the case where it is asserted that the decision was made prior to being given effect to a careful analysis of the facts is required: (Re Stealth Construction Limited [2011] EWHC 1305 (Ch); [2012] 1 BCLC 297 at [56] to [65] applying re M C Bacon Limited [1990] BCLC 324 at 366 and considering subsequent cases). As David Richards J (as he then was) said in Stealth at [63]:

"[63] In my judgment, the question of when the decision is made is a question of fact to be determined in the particular circumstances of each case. An existing contractual obligation is neither necessary nor of itself sufficient…."

4. which takes place at a time within 6 months of the onset of insolvency of the company or, if the person is connected with the company, within 2 years of that date (s239(1), 240(1)). The onset of insolvency is the commencement of liquidation (s240(3)). That is, for these purposes, the date of the presentation of the winding up petition on which the winding up order was made (see s129(2));

5. at the time of the transaction the Company is or, as a result of the transaction, becomes insolvent, on either a cash flow basis or a net asset basis (ss240(2), 123);

Relevant time is the Date of the Decision to Give the Preference 

As illuminated by point 3 above, the relevant time for assessing whether or not there existed the requisite influencing desire, is when the decision was made to give the preferential transaction, not the date of the transaction effecting the preference. It is also not the (usually earlier) date an obligation to pay is taken on [4]. In Re Stealth Construction Limited [2011] EWHC 1305 (Ch), [2012] 1 BCLC 297 (‘Stealth’), David Richard J stated, at paragraph 56:

‘…it is the decision to give a preference, rather than the giving of the preference pursuant to that decision, which must be influenced by the desire to produce the effect set out in s.239(4)(b). For these purposes, therefore, the relevant time is the date of the decision, not the date of giving the preference.'

Registrar Jones (now ICC Judge Jones) in Green v El Tai [2015] BPIR 24 explained it this way, at paragraph 92:

‘The decisions of Mr Justice Lloyd (as he then was) in [Wills v Corfe Joinery Ltd [1997] BCC 511] and Mr Justice David Richards in [Stealth] make plain that the relevant date is the date the decision to actually repay the loan is made. That is because the test of preference is concerned with whether one or more creditors should be repaid ahead of others at the time of repayment when the company concerned is insolvent. It is therefore necessary to distinguish the date when the liability to repay arose from the date when it was decided to fulfil that liability. The question is not asked at the time the debts became due and owing but when the Company decided to pay them.’

This matters of course where: (a) the date of decision to give the preference; and (b) the date of the transaction effecting the preference, are different. Careful factual analysis is required in such circumstances, to identify when (a) occured, that is, exactly when the decision to give the preference was made. 

MC Bacon and the cases considered in Stealth

Stealth is the leading case in this area. In Stealth, David Richard J carefully considered the case law, from Re M C Bacon Limited [1990] BCLC 324, [1990] BCC 78 (‘MC Bacon’) onwards. 

Commencing his review of the law with Millet J’s judgment in MC Bacon, David Richard J in Stealth said, at paragraph 57:

'In MC Bacon, the company reached the limit of its overdraft facility on 14 April 1987. It was loss-making and had lost a major customer, and the directors were planning to retire. The bank was insisting that a debenture be granted if it was to continue to provide facilities to the company. Discussions took place during the second half of April and the first half of May. The company executed a debenture towards the end of May. In considering the time at which the company must be influenced by the desire to put the other party in a better position, Millet J said at p.88:

“It was also submitted that the relevant time was the time when the debenture was created. That cannot be right. The relevant time was the time when the decision to grant it was made. In the present case that is not known with certainty. It was probably some time between 15 April and 20 May, although as early as 3 April Mr Glover and Mr Creal had resigned themselves to its inevitability. But it does not matter. If the requisite desire was operating at all, it was operating throughout.”'

David Richard J in Stealth then turned, at paragraph 58, to Mummery J in Re Fairway Magazines Ltd [1992] BCC 924, [1993] B.C.L.C. 643 (‘Fairway’):

'In [Fairway], a director agreed to provide funding to the company under the terms of a written loan agreement dated 21 August 1990, which provided for the grant of a debenture to secure the loans. Advances were made under the agreement and on 27 September 1990 the debenture was executed. It was signed by the lender on the same date as the loan agreement and the only reason for the delay in execution by the company was that the director who was to sign on behalf of the company was slow in doing so and returning it to the company's solicitors. Mummery J referred to Re MC Bacon Ltd as relevant for a number of purposes, including:

“Finally, the relevant time to consider is the time when the decision is made to grant the debenture, not the date of the execution of the debenture itself. In this case the relevant date is the date of the agreement on 21 August 1990.”'

In Wills v Corfe Joinery Ltd [1997] BCC 511 (‘Wills v Corfe’), there was a significant time gap between the company incurring the obligation, and the decision to perform the obligation (to pay money), Wills v Corfe is conveniently summarized, in Stealth, at paragraph 59: 

'By contrast, in Wills v Corfe…, where two directors lent sums to a company in January 1994 on terms that they would not be called in for a year and were repaid by the company in February 1995, Lloyd J held that the decision to repay was made not when the loans were made on the agreed terms as to the date of repayment, but when the cheques for repayment were signed in February 1995. He said at p.513:

“However, I do not accept that January 1994 was the date by reference to which it is appropriate to consider whether, in giving the preference that undoubtedly was given, the company was influenced by the relevant desire. It seems to me that all that happened in January 1994 at most was that the loans became repayable in January 1995. A lot of debts were payable by the company in January 1995 and a lot of them were not paid. The fact that the directors' loan accounts were repayable in January 1995 does not lead to the conclusion that there was not a relevant decision to give the preference by actually paying those debts. It seems to me that the relevant decision to make the payments was and could only have been made at the time, or immediately before the time, when the cheques were drawn, that is to say, on 2 February and 6 February 1995. Even if, as I am prepared to accept for present purposes, what passed in January 1994 meant that there was an obligation on the company to pay the debt in January 1995, it was necessary for the board to review at that time whether to honour that obligation. If the board had known that the company was insolvent or would be made insolvent by honouring that obligation, it could not have made the payment.”’ 

A company can grant a voidable preference to a person through payment of an existing debt, but also by conveying to an existing creditor, a security over the company’s property[5]. David Richard J in Stealth stated, at paragraph 61:

'It might be argued that there is a distinction between the payment of debts on the one hand and other obligations, such as an obligation to grant a security, on the other. I do not see why in principle that should be so. Even if there had been an enforceable obligation incurred in October 2007 to grant a charge, there would in ordinary circumstances after a delay of 12 or so months be a further decision to comply with the obligation, just as in the case of a debt there would be a further decision to comply with the obligation to pay the debt. Precisely the same considerations would apply in the former case as Lloyd J said would apply in the latter:

“it was necessary for the board to review at the time whether to honour that obligation. If the company had known that the company was insolvent or would be made insolvent by honouring that obligation, it could not have made the payment.”'

Summarizing how the material date is determined, David Richard J said, at paragraph 63:

'In my judgment, the question of when the decision is made is a question of fact to be determined in the particular circumstance of each case.'

Initial Decision and Subsequent Decision to Proceed

As will be apparent, it is possible for there to be an initial decision, to grant the voidable preference, with then a short delay before that decision is put into effect. During the short delay, the initial decision persists, and the transaction effecting the preference leads directly from the initial decision. This was the postion in MC Bacon and Fairway

On the other hand, it is conceivable that an initial decision is made to grant the preference, but then a substantial period of time passes, before the transaction effecting the preference occurs. In such circumstances, the question will arise whether or not the initial decision persisted, or whether there was a subsequent decision made, a decision to proceed, after the initial decision and close in time of the transaction - and whether it is the decision to proceed which must be assessed for the purposes of s.239. This possibility was touched on in Stealth. After distinguishing between date the company takes on an enforceable obligation and the date the company decides to honour the obligation and perform it, David Richard J said at paragraph 62:

‘The position is, of course, all the stronger in a case such as the present where the company was not subject to any enforceable obligation to grant the charge. It would be a voluntary act and, after an interval of 12 months or more, would necessarily involve a decision to proceed with the grant of the charge.'

In the above situation, there was no enforceable obligation. There was an initial decision to voluntarily grant a preference, then 12 months passed, before the company made the ‘decision to proceed with the grant of the charge’ decision (a subsequent reviewing/renewing decision). In such a situation, seemingly, the Court’s task will be to consider whether, when this ‘decision to proceed' decision was taken, was that decision influenced by the requisite desire to prefer? 

On the facts in Stealth, the recipient of the preference/respondent to the liquidator’s voidable preference claim, resisted the claim on the basis, amongst other things, that the material decision for s.239 of the Insolvency Act 1986 was the company’s decision to grant her security in October 2007, not any decision in October to December 2008 (the transaction granting the charge occurring in December 2008). This was rejected by the court, which found that the material decision had occurred in about November 2008 when director(s) ‘...decided that the company should proceed to grant the charge’ (paragraph 64). David Richard J in Stealth said, at paragraph 65:

‘The time for judging whether the company was influenced by a desire to improve the position of [the recipient/respondent] is therefore about November 2008.’[6]

Conclusion

The material time for evaluating whether there was or was not the requisite influencing desire to prefer, for the purposes of s239 of the Insolvency Act 1986, is when the decision was made by the company to grant the preference. It is not when the transaction effecting the preference was made. Further, where there is an initial decision to grant the preference, and then a delay before the transaction effecting the preference is executed, the Court may determine that there was a subsequent decision, a decision to proceed, close to the transaction's execution. In such circumstances, the material decision will be the 'decision to proceed'. The question for the Court in such circumstances will therefore be, was the decision to proceed influenced by a desire to prefer. 

SIMON HILL © 2019

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

[1] relevant time’ is defined by section 240 of the Insolvency Act 1986.
 
[2] The office-holder will be the liquidator (where the company is in liquidation) or administrator (where the company is in administration). Officer holder does not refer to directors. 
 

[3] Section 239(5) of the Insolvency Act 1986 reads:

‘The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b)’

Section 239 (4)(b) reads (with the start to the section):

‘For the purposes of this section and section 241, a company gives a preference to a person if –

...

(b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.

[4] Making this point, David Richard J in Re Stealth Construction Limited [2011] EWHC 1305 (Ch); [2012] 1 BCLC 297 stated, at paragraph 60:

‘Most preferences involve the payment of some debts in preference to others. All debts stem from an enforceable obligation to make the payment. If the decision to incur the debt, rather than the later decision to pay it, was the relevant time at which the company's desire was to be judged, the payment of debts would rarely constitute a preference under s.239.'
 
Later, at paragraph 63, David Richard J said:
 
'An existing contractual obligation is neither necessary nor of itself sufficient. There was no prior obligation to grant a debenture in [M C Bacon] but on the facts of the case Millett J found that the decision to do so had been made at some time in the period of negotiations up to 20 May 1987. In [Fairway], where the delay in execution of the debenture was simply because the director had been slow to sign for the company, the company's decision was found to have been when the loan agreement was made, and the lender signed the debenture, a few weeks earlier. By contrast, on the very different facts of [Wills v Corfe], the decision to repay the loans was made long after the loans were made and the obligation to repay them was incurred.'
 
[5] For example, see Mistral Finance Ltd [2001] BCCC 27, where the giving of a security to secure an existing debt was struck down as an unlawful preference. 
 
[6] The full analysis was given by David Richards in Re Stealth Construction Limited [2011] EWHC 1305 (Ch); [2012] 1 BCLC 297, at paragraphs 64 to 65. Readers should note that: (a) Mrs Ireland was the recipient of the preference/respondent to the liquidator’s claim; (b) Miss Gillis and Mr Costa were (paragraph 6) the company’s two directors; and (c) Mr Saunders (paragraph 4) was a solicitor at the company’s firm of solicitors:
 
‘Because Miss Gillis and Mr Costa did not give evidence, I do not know what discussions or decisions in fact took place in October to December 2008, except that the instructions to prepare the charge were given to Mr Saunders in that period. That itself is some evidence that the decision was then taken to grant the charge. In circumstances where there has been a delay of over a year and where the company was under no obligation to grant the charge, and where even then the charge was granted only because Mrs Ireland raised the issue, the reasonable inference is that Miss Gillis, whether on her own or with Mr Costa, decided that the company should proceed to grant the charge to Mrs Ireland.
 
The time for judging whether the company was influenced by a desire to improve the position of Mrs Ireland is therefore about November 2008. This is entirely an issue of the thought processes of the directors of the company. They knew that the company was unable to pay its debts, including the debt to Mrs Ireland, as they fell due. Objectively it would seem likely that Miss Gillis wished to improve the position of her sister but in any event, without calling Miss Gillis and/or Mr Costa to give evidence, Mrs Ireland is unable to rebut the presumption created by s.239(6).’ [bold added]