Insolvency case study: Misfeasance

Temple was approached directly by an Insolvency Practitioner (IP) to provide After the Event Insurance in a case where the IP was investigating a former director for misfeasance.

Case background

X was a de jure director of a Company between January 2015 January 2017. It was claimed that when X was not a de jure director he was a de facto director. Y was a de jure director from August 2014 to August 2015.

The business operated by the Company was to supply building merchandise to local builders. The investigatory work of the IP found that from 2017 to 2019 monies were paid to X and Y to which they have no obvious entitlement. X and Y were repeatedly asked for explanations for these payments, including during a s.236 Insolvency Act 1986 interview. Unfortunately, no explanation was provided.

The payments under investigation in this case were made to:

• X in the period of 2017 to 2019 – £50,000 these are all challenged as misfeasant and preferential.
• Y in the 2017 to 2019 – £45.000; and a further £25.000 payment the entire sum is challenged as preferential, and misfeasant.

As a de jure director, both X and Y owed various duties to the Company.  More specifically they both owed statutory duties to the Company under chapter 2 of Part 10 of the Companies Act 2006 (“CA 2006”) including:

• A duty to act in accordance with the Company’s constitution and only to exercise powers for which they were conferred (s. 171 CA 2006);
• A duty to act in the way you consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole (s.173 CA 2006);
• A duty to exercise independent judgment (s. 173 CA 2006); and
• A duty to exercise reasonable care, skill and diligence (s.174 CA 2006).

At all material times X and Y owed a fiduciary duty to the Company not to put themselves in a position where their duties to the Company conflict or might have conflict with their own interest or duties owed to others.

What happened?

The IP approached Temple Legal Protection when the case against X and Y was very much in its infancy. Temple was able to work closely with the IP to design a staged premium, taking into account that investigations may take time.

As the IP’s investigations matured, it came to be identified that X and Y had invested in property using the payments they took from the Company, thus increasing the valuation of the overall claim.

The Temple Perspective

Temple was able to underwrite a bespoke policy whereby the premiums due based upon the quantum of the claim, offering fully deferred and contingent premiums only payable in the event of a successful outcome.