The CEO shall compensate the company for any damage
By: Pontus Sörlin
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The CEO shall compensate the company for any damage
Certification, business model and services
The company Indevex AB (Indevex) had as part of its business model to fill certain services by hiring consultants.
For a period, M.G. was hired as external CEO through Swedish Consumer Direct AB (SCD) and the company Origo Invest AB (Origo) was hired to provide management, marketing and project development services.
M.G. had a strong personal connection to SCD as the company’s owner, CEO and Chairman of the Board.
A routine was therefore developed at Indevex where invoices issued by SCD were not handled by M.G. but instead certified and paid by board member P.H.
Indevex had financial problems for a long period and therefore agreed with SCD and Origo that their respective fees should be reduced.
Dismissal with immediate effect – damages
Some time after the agreement, M.G. certified and paid invoices of substantial amounts to SCD and Origo on behalf of Indevex regarding retroactive compensation for reduced fees.
However, Indevex did not consider that the consultancy companies had claims corresponding to the invoice amounts, in addition, M.G. was not allowed to pay invoices to SCD.
M.G. was therefore dismissed by Indevex with immediate effect, after which he certified and paid an additional invoice to SCD regarding prepayment for his services as CEO.
The dispute led Indevex to bring an action against M.G. seeking that he reimburse the company for all those invoices by means of damages.
However, M.G. considered that the retroactive payments to the consultancy companies were justified.
He also claimed that P.H. stopped certifying invoices and responding to requests for certification for a period, which led to the company returning to previously accepted practice that the CEO handled all invoices regardless of the exhibitor.
M.G. was therefore of the opinion that his dismissal was unfounded and that he was therefore entitled to notice.
He also claimed that he continued to work for Indevex during the notice period and that SCD was therefore also entitled to the advance payment.
Liability – ground for company law
Initially, the District Court (TR) finds that it is up to Indevex to prove that M.G. acted in a way that makes him liable for damages.
The court starts by referring to the Swedish Companies Act (ABL) where the CEO’s power and liability towards companies are regulated.
The CEO’s responsibilities (Chapter 8, 29 and Section 36 of the ABL) include ongoing management of the company in accordance with the Board’s guidelines and instructions.
The CEO may also always represent the company and sign its firm regarding tasks that are part of day-to-day management.
What constitutes day-to-day management is not specified in law but is determined by the Board of Directors through direct instructions or procedures that develop over time.
In addition to directives from the Board of Directors, the court states that there are certain general guidelines regarding which measures fall within the competence of the CEO.
Agreements that appear unusual for the company in terms of time or scope may not generally be concluded by the CEO.
A CEO who, in the performance of his duties, causes damage to the company shall also compensate for that damage (Chapter 29, Section 1 of the ABL).
CEO’s power – decision-making power
In the present case, the contested measures concern the certification and payment of invoices, which is generally a task within the competence of the CEO.
However, it should be noted that these are invoices of considerable amounts, especially in view of the fact that Indevex was experiencing financial difficulties in making the payments.
The court also considers M.G. to be disqualified from payments to STATISTICSD (Chapter 8, Section 34 ABL).
In conclusion, the Court’s assessment is that the certifications and payments of the invoices were outside M.G.’s decision-making power as CEO.
It is not considered relevant in this context that M.G. has on any occasion certified and paid invoices to SCD for not doing so.
The decision or approval of the Management Board had therefore been required for M.G. to take the measures in question.
Payment obligation – retroactive refund
Furthermore, the court examines whether the payment receipts had debts corresponding to the invoices to the consulting companies.
After all, if Indevex was liable for payment, M.G. has not caused the company any financial damage, which means no liability for damages.
Regarding the invoices for reduced fees, Indevex argues that the consulting companies have agreed to an unconditional fee reduction, which means that no retroactive payment would be paid.
Instead, M.G. claims that Indevex promised participation in an option and incentive program as compensation.
When that did not happen, it was instead agreed on retroactive refund.
It is up to M.G. to substantiate its claim.
As he has not provided sufficient evidence, TR considers that the consultancy companies were not entitled to the payments.
In view of the advance payment for M.G.’s services as CEO, the Court’s assessment is that his immediate dismissal was justified because he has gone beyond his powers as CEO and has also acted in a conflict of interest in the handling of the first invoice to the SCD.
M.G. has therefore not been entitled to notice, which means that the prepayment was also unfounded.
In conclusion, therefore, all the invoices at issue have caused financial damage to Indevex.
Damages Act and ABL
Chapter 4, Section 1 of the Damages Act (SkL) obliges employers to compensate for the damage caused by workers.
M.G. therefore claims that Indevex – as an employer – is liable for the damage he caused them.
However, TR notes that the provision on the CEO’s liability in ABL takes precedence over the statute on employers’ liability in SkL in cases where the act of liability is committed by an employee acting as CEO.
The court’s assessment in the case is that M.G. paid the invoices as a CEO rather than an ordinary employee and he is therefore liable for damages himself.
In view of the foregoing, the Court’s overall assessment is that Indevex’s action should be upheld in its entirety.
Prepayment – option and incentive programs
In the court of appeal (HovR), M.G. has accepted that he has incurred liability to Indevex as a result of the advance payment of his own services.
However, he contests claims for damages for the payments on the grounds of reduced fees, arguing that they were based on actual claims.
The basis of his claim is that the consultancy companies were verbally guaranteed retroactive remuneration when it became clear that participation in the option and incentive programme would not take place.
Indevex still denies that the consultancy companies were entitled to retroactive payment.
The Court examines, first of all, whether the reductions in fees were made unconditionally or by agreement on remuneration, and states that M.G. bears the burden of proof for its claim that the agreement exists.
The evidence in the case consists, among other things, of interviews with M.G. as well as persons within Indevex and email correspondence between M.G. and Indevex.
In terms of available evidence, the Court concludes that the reduction in consultants’ fees was conditional on the promise of the possibility of participating in an option and incentive programme.
HovR further sees it as clear that Indevex has not fulfilled its obligation to provide that option and incentive program, which means that they have committed a breach of contract.
On the other hand, it is not considered that this means that M.G. has been entitled to pay compensation in the form of money instead.
M.G. has also not claimed damages for breach of contract, relying solely on the alleged oral agreement.
Neither testimony nor relied upon email correspondence between M.G. and P.H. speaks, according to the court, that an agreement with the content alleged by M.G. exists.
In addition, the fees waivers have not been included as liabilities in Indevex’s accounts.
In view of the evidence available, the Court’s assessment is therefore that M.G. has failed to demonstrate the existence of a retroactive payment agreement.
In addition to the damages awarded in TR, M.G. is thus also liable for damages for the invoices paid to the consulting companies for reduced fees.