If you’re a director or shareholder of a UK limited company facing insolvency or liquidation, understanding “misfeasance” is crucial.
It refers to the improper performance of a lawful duty, which can lead to personal liability or disqualification.
Misfeasance arises when directors breach their fiduciary duties, especially during liquidation. To protect yourself, ensure you act in the best interests of creditors and seek professional advice early.
By grasping these aspects, you can confidently navigate this challenging period.
What Is Misfeasance Under the Insolvency Act 1986?
Misfeasance in UK insolvency refers to company directors’ improper conduct or breach of duty. It involves mishandling lawful duties in a way that harms the company or its creditors, rather than committing illegal acts. Under the Insolvency Act 1986, misfeasance is a breach of fiduciary duty, where directors fail to act in the company’s and its creditors’ best interests during financial distress.
The Insolvency Act 1986 provides a framework for addressing misfeasance, allowing liquidators to bring claims against directors who misuse their position. This can include neglecting statutory obligations or misapplying company assets. Directors are expected to uphold a high standard of care, and any deviation from this can lead to serious consequences, including personal liability and potential disqualification from holding directorships in the future.
Understanding misfeasance is crucial for directors as it underscores their responsibilities and the importance of acting prudently, especially when insolvency looms. The Act serves as a reminder that directors must prioritise creditors’ interests once insolvency is likely, ensuring they do not inadvertently breach their duties.
Common Examples of Director Misconduct
Misfeasance claims often arise from director misconduct, especially during insolvency. Here are some common examples:
Misuse of Company Assets
Directors can be accused of misfeasance if they use company assets for personal gain. This includes using company funds for personal expenses or selling assets at undervalued prices to connected parties, such as family members, without proper authorisation.
Preferential Payments
Misfeasance can also occur when directors make preferential payments to certain creditors. This happens when a director favours one creditor over others, particularly if the creditor has a personal interest, like a personal guarantee on a loan.
Failure to Keep Proper Records
Another example is neglecting to maintain accurate and up-to-date financial records. This failure breaches statutory duties under the Companies Act 2006 and can hinder liquidation, harming creditors’ interests.
How Liquidators Bring Misfeasance Claims
Liquidators investigate and pursue misfeasance claims to recover funds for creditors during liquidation. They act in the best interests of creditors by addressing director misconduct. The process involves several steps.
Liquidators gather evidence from the company’s financial records, transactions, and the director’s conduct leading up to insolvency. They scrutinise bank statements, accounting records, and correspondence to identify breaches of duty or misuse of company assets. Once evidence is collected, specific violations of fiduciary duty or instances of misfeasance, such as preferential payments or misuse of company funds, are identified.
The liquidator then files a claim under Section 212 of the Insolvency Act 1986, seeking compensation from directors for losses incurred due to misconduct. A formal “Letter of Claim” detailing the alleged misconduct and seeking restitution may be issued to the director.
During an investigation, directors can expect:
A thorough review of company records and transactions.
Interviews or requests for information from directors and other key personnel.
A formal notice outlining any identified breaches and potential claims.
Understanding this process is vital for directors, as maintaining accurate records and acting in creditors’ best interests once insolvency is likely is crucial. Failure to do so can lead to personal liability and significant financial consequences.
Consequences for Directors: Liability and Disqualification
If a misfeasance claim against a director is successful, the consequences can be severe, impacting both personal finances and future professional opportunities. Directors found guilty of misfeasance may be held personally liable for the financial losses incurred by the company. They could be required to repay or restore any misapplied funds or assets to the company’s estate, effectively stripping away limited liability protection.
Additionally, directors may face disqualification under the Company Directors Disqualification Act 1986. Depending on the gravity of their misconduct, they could be banned from serving as a director for a period ranging from 2 to 15 years. The court assesses the severity of the breach and considers factors such as the director’s state of mind and whether their actions were negligent or reckless.
In particularly egregious cases, further legal actions may ensue. If there is evidence of fraudulent behaviour or dishonesty, authorities such as the Serious Fraud Office or Financial Conduct Authority could bring criminal charges against the director. This highlights the importance of directors acting in creditors’ best interests once insolvency is likely, as failing to do so can lead to significant personal and legal repercussions.
Protecting Yourself as a Director
Directors can minimise the risk of misfeasance by adopting proactive measures that safeguard their position and the company’s interests. Here are key steps to consider:
Seek Early Professional Advice: Engage with a licensed insolvency practitioner at the first sign of financial distress to clarify your legal obligations and potential strategies to mitigate risks.
Monitor Financial Health: Regularly review the company’s financial status, including cash flow, liabilities, and any signs of insolvency. Early detection of financial issues allows for timely intervention.
Maintain Accurate Records: Keep comprehensive and up-to-date records. This demonstrates responsible management and is vital evidence in defending against misfeasance claims.
Act in Creditors’ Best Interests: Once insolvency is likely, your duty shifts from shareholders to creditors. Avoid preferential payments and ensure all actions are transparent and justifiable.
Regular Board Meetings: Conduct frequent meetings to discuss financial matters and document decisions. This practice ensures collective responsibility and provides a clear audit trail.
By implementing these practices, directors can significantly reduce their exposure to misfeasance claims and protect their professional reputation.
How to Respond If Accused of Misfeasance
If you’re accused of misfeasance, act swiftly to protect your interests. First, seek legal advice from a solicitor experienced in insolvency law to understand the claim’s complexities. Then, cooperate fully with liquidators by promptly providing all requested documents and information. This transparency can positively influence proceedings.
Next, review all relevant company records and communications to understand the specifics of the allegations and build a robust defence with your legal team. Keep detailed records of interactions with liquidators and legal advisors, as this documentation can be invaluable if disputes arise.
Finally, avoid delays in responding to official requests, as ignoring them can worsen your situation and lead to harsher penalties or assumptions of guilt.
If you’re concerned about possible misfeasance claims, our licensed insolvency practitioners and business rescue specialists can advise on your responsibilities and help you understand the options available. Call us free on 0800 074 6757 for expert guidance.
Misfeasance FAQs
Can misfeasance claims be brought even if the company does not enter formal liquidation?
Misfeasance claims can be pursued even if a company does not enter formal liquidation. Directors can face allegations of misfeasance if their actions have harmed the company or its creditors, even during administration or other insolvency proceedings where a liquidator or administrator identifies breaches of duty.
Is misfeasance classed as a criminal offence?
Misfeasance is not a criminal offence but a civil matter under the Insolvency Act 1986. It involves breaches of fiduciary duty or improper conduct by directors. However, if the actions involve fraudulent intent or criminal activity, separate criminal charges could be pursued alongside misfeasance claims.
How long do liquidators have to bring a misfeasance claim?
Liquidators typically have up to six years from the date of the alleged misconduct to bring a misfeasance claim. This time frame allows them to thoroughly investigate and gather evidence before pursuing legal action against directors for breaches of duty.
Can a director settle a misfeasance claim out of court?
Yes, directors can settle misfeasance claims out of court. Settlements are often negotiated to avoid lengthy and costly court proceedings. Directors should seek legal advice early to explore settlement options and potentially mitigate financial liabilities.
Does a director’s resignation before insolvency protect against misfeasance claims?
Resigning as a director before insolvency does not protect against misfeasance claims. Directors remain accountable for their actions in office, and their conduct leading up to insolvency can still be scrutinised. Resignation does not absolve them from potential liability for past decisions.
Are there any defences to misfeasance?
Directors may have several defences against misfeasance claims, such as demonstrating they acted honestly and reasonably. Under Section 1157 of the Companies Act 2006, the statutory defence allows courts to relieve directors from liability if they meet these criteria. Additionally, reliance on professional advice or shareholder ratification (in solvent companies) may serve as defences.
Can shareholders bring a misfeasance claim themselves?
Shareholders can bring a misfeasance claim in certain circumstances, particularly if they believe directors have breached their duties, harming the company. However, such actions are typically complex and may require court approval or be pursued through derivative actions, where shareholders act on behalf of the company.
