For a UK company director facing financial distress or insolvency, concerns about personal liability are often front of mind. One of the most serious risks is misfeasance, which can arise where a director or other company officer has misapplied company property or breached their duties in relation to the company. Understanding how misfeasance operates under UK insolvency law is essential to avoiding avoidable liability and complying with your legal obligations during winding up.
In insolvency scenarios, directors’ conduct is subject to close scrutiny. Decisions taken before and during insolvency can later be examined by the court. Knowing where the legal boundaries lie can help you act responsibly and protect your position.
Misfeasance under UK insolvency law is primarily governed by section 212 of the Insolvency Act 1986. This provision allows the court, during a company’s winding up, to examine the conduct of certain individuals connected with the company.
Section 212 applies where a person has:
Misapplied or retained company money or property, or
Been guilty of misfeasance or breach of fiduciary or other duty in relation to the company.
Those potentially caught by section 212 include current or former directors, shadow directors, company officers, liquidators, and administrative receivers.
Unlike criminal offences such as theft or fraud, misfeasance does not require dishonest intent. A director may be liable even where they believed they were acting reasonably, if their actions amounted to a breach of duty or involved improper use of company assets.
Where misfeasance is established, the court may order the person to:
Repay or restore money or property to the company,
Account for any misapplied assets, or
Contribute a sum to the company’s assets by way of compensation.
When Misfeasance Arises and Why It Matters
Misfeasance claims arise during winding up, when the court is asked to review how the company has been managed. Conduct that occurred before liquidation can still be examined if it relates to the company’s affairs.
As insolvency approaches, directors must act with increasing care. Certain actions that may be lawful while a company is solvent can become problematic once the company is unable to pay its debts. If company money or property is improperly used, or directors fail to comply with their legal duties, the risk of a misfeasance claim increases.
The consequences can be serious. Directors may be ordered to repay money personally or compensate the company’s estate. These liabilities are civil in nature but can have lasting financial and professional consequences.
Director Duties and the Insolvency Context
Directors’ general duties are set out in sections 171–177 of the Companies Act 2006. These include duties to act within powers, promote the success of the company, exercise independent judgment, and act with reasonable care, skill and diligence.
Section 172 of the Companies Act 2006 expressly states that the duty to promote the success of the company is subject to any enactment or rule of law requiring directors to consider the interests of creditors. As a company becomes financially distressed, directors must be mindful that creditor interests become increasingly relevant.
Failing to comply with these statutory duties can expose directors to claims under section 212 of the Insolvency Act 1986 where the company enters winding up.
Common Situations Leading to Misfeasance Allegations
Misfeasance claims are fact-specific, but commonly arise where directors have:
Misapplied company funds, including unauthorised payments or personal use of company money
Failed to safeguard company assets, resulting in loss to the company
Breached statutory or fiduciary duties, including failures under the Companies Act 2006
Left director loan accounts overdrawn at the time of insolvency
Other insolvency challenges, such as preferences or transactions at an undervalue, are governed by separate statutory provisions. While the same conduct may be scrutinised across different claims, misfeasance under section 212 remains a distinct mechanism focused on breaches of duty and misuse of company property.
Continuing to trade when insolvency was unavoidable
Fraudulent trading
Insolvency Act 1986 s213
Business carried on with intent to defraud
Each claim addresses different misconduct and may be pursued separately where the legal tests are met.
Who Can Bring a Misfeasance Claim and When
Under section 212(3) of the Insolvency Act 1986, an application may be made by:
The liquidator
The Official Receiver
Any creditor
Any contributory (with the court’s permission)
Misfeasance claims under section 212 apply in winding up. In administration, similar powers exist under paragraph 75 of Schedule B1 to the Insolvency Act 1986, allowing an administrator to apply to court in respect of misfeasance.
Potential Consequences for Directors
If misfeasance is established, the court may order repayment or compensation to the company’s assets. Failure to comply with such an order may result in enforcement action, including insolvency proceedings against the individual.
Misfeasance findings may also be relevant to director disqualification proceedings under the Company Directors Disqualification Act 1986. Disqualification periods can range from two to fifteen years, depending on the circumstances.
Financial Judgments and Personal Insolvency
Where a director cannot satisfy a court-ordered payment, they may face personal insolvency proceedings. This can involve the realisation of personal assets and restrictions on future financial and business activities.
Defences, Relief, and How to Respond
Section 1157 of the Companies Act 2006 allows the court to grant relief where a director has acted honestly and reasonably and ought fairly to be excused. Whether relief is granted depends on the facts of each case.
Limitation periods for misfeasance claims are not set out in section 212 itself. Time limits depend on the nature of the claim and the applicable provisions of the Limitation Act 1980. Certain claims involving trust property may fall outside standard limitation periods.
Directors facing potential claims should:
Preserve company records
Engage constructively with the liquidator
Seek professional advice promptly
Practical Steps to Reduce Misfeasance Risk
To minimise exposure to misfeasance claims, directors should:
Maintain accurate financial records
Monitor solvency carefully
Avoid unauthorised use of company assets
Ensure decisions are properly documented
Seek professional advice at early signs of financial difficulty
Early action can reduce risk and demonstrate responsible conduct.
FAQs
1) Can professional advice protect me from misfeasance liability?
Professional advice may be relevant to whether you acted reasonably, but it does not remove personal responsibility.
2) Can misfeasance be alleged before liquidation?
Section 212 claims are brought during winding up, but earlier conduct may be examined.
3) What if I paid money out believing the company was solvent?
Liability depends on whether the payment amounted to misapplication of company property or breach of duty.
4) Do misfeasance rules apply to shadow directors?
Yes. Section 212 applies to anyone who has been concerned in the management of the company.
5) Can late filing of accounts alone amount to misfeasance?
Late filing is a separate compliance issue and does not, by itself, constitute misfeasance under section 212.
6) Are director loans automatically misfeasance?
No. Issues arise if loans are improperly taken or remain outstanding at insolvency.
7) Can an honest mistake still lead to liability?
Yes. Misfeasance does not require dishonesty, though honesty may be relevant to relief.
8) Are the rules different in Northern Ireland?
Northern Ireland insolvency is governed by the Insolvency (Northern Ireland) Order 1989, which closely mirrors the Great Britain framework.
9) How is misfeasance different from wrongful trading?
Misfeasance focuses on misuse of assets or breach of duty; wrongful trading focuses on continued trading when insolvency was unavoidable.
10) Can multiple insolvency claims be brought together?
Yes. A misfeasance claim does not prevent other statutory claims being pursued.
11) Can misfeasance be time-barred?
Yes. Limitation depends on the nature of the claim and the Limitation Act 1980.
12) Does repaying money automatically end the risk?
Repayment may reduce exposure but does not automatically prevent a claim.
Your Next Step If You Are Concerned
If you believe your company may be insolvent or at risk of a misfeasance claim, early professional advice is critical. Understanding your obligations under the Insolvency Act 1986 and the Companies Act 2006 can help you act lawfully and minimise personal risk.
Acting promptly, transparently, and responsibly is the best way to protect both the company’s position and your own.
