MG Rover set to pursue Phoenix Four for £40m

The Phoenix Four directors are set to face legal challenges that could force them to pay back large parts of the £40m they received in the five years they were running MG Rover.

The Phoenix Four directors are set to face legal challenges that could force them to pay back large parts of the £40m they received in the five years they were running MG Rover.

Legal experts are advising administrators PricewaterhouseCoopers that it may have at least two different courses of action to recoup substantial parts of the money.

Meanwhile, the trustees of the MG Rover pension funds will press the four directors to make contributions to help cover a pensions shortfall at the collapsed car maker that could be as high as £400m. If they do not pay up, the trustees could force the company they control, Phoenix Venture Holdings, into administration and then press the Pensions Regulator to force the four directors to pay up.

The directors are also facing possible action by the Department of Trade and Industry, which this week receives a report into the collapse of MG Rover prepared by Sir Bryan Nicholson, chairman of the Financial Reporting Council. The DTI is likely to use this report, and information it is expecting to receive from PwC, to launch legal actions to have the four disqualified as directors.

John Towers, Peter Beale, John Edwards and Nick Stephenson jointly bought MG Rover for £10 in 2000 from BMW, which also lent the group £427m in an interest-free loan.

The four created Phoenix Venture Holdings as the parent company and parked the cash from BMW in a subsidiary, with MG Rover's operating companies in other subsidiaries.

Over the five years between the BMW deal and MG Rover going into administration last month, the four directors received around £40m in salaries, interest payments and contributions to their pension funds. In 2002 and 2003 alone, these totalled £20.87m, of which £4.79m went to just one director.

In those two years PVH made a total loss of £139.1m. At the end of 2003 it had a £224.5m deficit in its shareholders' funds.

PwC is being advised that it could pursue the Phoenix Four by claiming PVH could not afford to make the payments to the directors. A legal precedent was set in a 1989 case, Aveling Barford vs Perion, that money paid to directors could be reclaimed as an "illegal distribution" if the company could not afford it. There is also a possible action for malfeasance, alleging wrongful trading.

PwC has yet to take any action against the directors but a senior source said it was "aware of the remedies".

The trustees of the MG Rover pension fund have threatened to force PVH into administration because the fact that it is still trading is preventing the MG Rover scheme from being able to benefit from the Government's Pension Protection Fund.

As PVH owned more than 33 per cent of MG Rover's shares and had directors in common, it can be held liable for the deficit in the MG Rover scheme. As such, the Government's Pensions Regulator can go after PVH and the four directors to make up the shortfall, issuing a contribution notice.

A spokesman for the Phoenix Four declined to comment on potential legal actions.