Company directors may need to significantly change their liability insurances after former BhS directors were ordered to pay £110m for breaching their corporate duties.
FRP Advisory, the liquidator of the chain brought the claim against Dominic Chappell, the former BhS chief executive and former director Lennart Henningson eight years after the retailer collapsed into administration owing creditors, including its pension fund, more than £1bn.
FPR had previously successfully taken legal action for wrongful trading as the directors kep the chain open rather than opting for an insolvency process, so failing to promote the good of the business.
This time they claimed for misfeasance.
‘Liquidators have obtained a much larger judgment against the directors of BhS by using the novel claim of trading misfeasance than they did from their wrongful trading claim. This opens up a whole new avenue for recovering assets from directors of insolvent companies and trading misfeasance is an area of potential liability which company directors now need to be aware of,’ Robin Henry, the head of dispute resolution services at lawyers Collyer Bristow, told The Guardian.
Cowgill Holloway LLP says there are a number of ways that directors can act inappropriately in terms of business and finances, and will consequently be accused of misfeasance. These include:
Incorrect Preference in Payments: Incorrect preference payments are where an insolvent company pays specific creditors and shows a deliberate ‘preference’ in paying those owed. This is typically discovered when directors firstly, or only, pay creditors who they have a personal guarantee with.
Undervalue Transaction: A transaction at undervalue is where a business asset sells for less than its true value and, if the company later becomes insolvent, it can be viewed as though directors are purposefully diverting assets away from their creditors.
Concealing (or Removing) Assets: This refers to when a company director attempts to purposefully conceal or remove assets from the business to prevent them being sold in insolvency or liquidation.
Taking a High Salary: If a director is taking a salary that is too high for the company to effectively handle, this can also be classed as misfeasance.
Failure to Monitor Financial Situation: If a director fails to effectively monitor and attempt to manage financial problems within their company, this oversight can be viewed as a form of misfeasance.
In June Chappell was ordered to pay £21.5m and Henningson jointly liable for £13m for wrong trading.