In company law, misfeasance refers to the improper performance of duties by company directors, officers, or other fiduciaries (individuals trusted to act in the company’s best interests).
While misfeasance can involve intentional wrongdoing, it doesn’t necessarily imply fraudulent intent, unlike more severe offences like fraudulent trading.
It typically involves a director or officer improperly performing their lawful duties to the company and its shareholders, either through negligence or intentional misconduct.
The classic example of insolvency-related misfeasance is when a company becomes insolvent, and the director acts in his or her own best interests rather than the interests of creditors.
Who Can Bring a Claim of Misfeasance?
Misfeasance claims can be brought by the company itself, shareholders (in certain circumstances), liquidators, administrators, regulatory bodies, creditors, and the Official Receiver.
In the past, only the Office Holder (insolvency practitioner) could bring charges of misfeasance against directors. This changed with the Small Business, Enterprise and Employment Act of 2015, which introduced the power for misfeasance claims to be brought by third parties, such as creditors.
Creditors now have a more direct route to pursue claims against directors for improper performance of duties, especially in situations where they believe their interests have been harmed[1]Trusted Source – GOV.UK – Recoveries from directors and other company officers.
What is Directors’ Misfeasance in Insolvency?
Directors’ misfeasance in insolvency refers to the improper performance of your duties when your company is insolvent or nearing insolvency.
This might include:
Wrongful trading (continuing to trade when there’s no reasonable prospect of avoiding insolvency)
Making preferential payments to certain creditors
Misusing company assets
Failing to act in creditors’ interests when insolvency is imminent
In the UK, misfeasance claims are often pursued under Section 212 of the Insolvency Act 1986, which states that the court may compel the individual ‘to contribute such sum to the company’s assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.’
Misfeasance by company directors is not a criminal offence in the UK. However, it’s a serious civil matter with significant consequences.
Examples of Misfeasance
Here are key examples of misfeasance that you, as a director, should be aware of:
Wrongful Trading
Continuing to trade when you know (or should know) that there’s no reasonable prospect of avoiding insolvency. This puts creditors at further risk.
Preferential Payments
Paying certain creditors over others when the company is insolvent, potentially to the detriment of other creditors.
Misuse of Company Assets
Using company property or funds for personal benefit, rather than for the benefit of the company and its creditors.
Breach of Fiduciary Duty
Failing to act in the best interests of the company, such as pursuing personal interests that conflict with company interests.
Failure to Keep Proper Accounting Records
Neglecting to maintain accurate and up-to-date financial records, which can hinder proper company management and transparency.
Fraudulent Trading
Knowingly carrying on business with intent to defraud creditors or for any fraudulent purpose.
Failure to File Statutory Returns
Not submitting required documents to Companies House, such as annual accounts or confirmation statements.
What are the Consequences of Misfeasance for Directors?
If you’re found guilty of misfeasance as a director, you could face serious repercussions. These consequences are designed to protect creditors and maintain the integrity of UK businesses.
Key consequences include:
(1) Compensation Orders: Under Section 212 of the Insolvency Act 1986, the court may order you to:
Repay or restore money or property to the company
Contribute to the company’s assets as compensation for losses
Be held personally liable for some or all of the company’s debts
(2) Director Disqualification: Following a report to the Secretary of State, you could be disqualified from acting as a director for 2 to 15 years under the Company Directors Disqualification Act 1986.
Defending Allegations of Misfeasance
As a director facing a misfeasance claim from a liquidator, you have several potential defences at your disposal. It’s crucial to understand these options to protect your interests and reputation effectively.
Statutory defences are specific to certain allegations, such as preferential payments or transactions at undervalue. For example, a director might argue that a questioned transaction was made in the ordinary course of business.
Reasonable conduct defences can also be relevant. These include acting based on advice from qualified professionals or demonstrating honest and reasonable actions. The ‘business judgment rule’ may apply if decisions were made in good faith for the benefit of the company.
Procedural defences should not be overlooked. Claims typically must be brought within six years of the alleged misfeasance. If a claim is outside this period, it may be time-barred.
Challenging the liquidator’s evidence is often a key part of the defence. This involves countering their claims with appropriate documentation and explanations. Demonstrating a lack of personal benefit from the alleged misfeasance can also be a mitigating factor.
Remember, each case is unique, and the strength of these defences depends on your specific circumstances. We strongly recommend seeking expert legal advice promptly to develop a robust defence strategy tailored to your situation.
How Can We Help?
If you are a worried director, we are a confidential sounding board and may be able to help you navigate your way out of a very difficult situation with the fewest possible legal problems. This is always the best option. Please do speak to us using the live chat, call us, or use the contact form.
FAQs
What is the Difference Between Malfeasance and Misfeasance?
Misfeasance is an unintentional action that is incorrect or inappropriate. It may also apply to giving the wrong advice.
Malfeasance is considered a more serious wrongdoing and is a failure to act when there was a clear duty to do so. Or where a wilful action actually injures a particular party.
What is the Difference Between Misfeasance and Nonfeasance?
Misfeasance: Improper performance of a duty. Nonfeasance: Complete failure to perform a duty.
The key difference is that misfeasance involves an attempt to perform the duty (albeit poorly), while nonfeasance involves no attempt at all.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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