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 you breach your 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?
Under UK law, particularly the Insolvency Act 1986, “misfeasance” refers to a director’s improper performance (or breach) of lawful duties owed to the company — often becoming relevant when insolvency or liquidation occurs. Misfeasance typically involves misapplication or misuse of company assets, failure to maintain proper records, or other failures of care or good faith, which materially harm the company or its creditors.
While misfeasance ordinarily denotes a civil wrong rather than a criminal offence, serious misconduct may in some cases also give rise to separate criminal or regulatory action (though this depends on specific facts).
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. You 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 as it underscores their responsibilities and the importance of acting prudently, especially when insolvency looms. The Act serves as a reminder that you must prioritise creditors’ interests once insolvency is likely, ensuring you 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
You can be accused of misfeasance if you 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 you make preferential payments to certain creditors. This happens when a you favour 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 your 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, 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 court upholds a misfeasance claim against you, the court may order personal liability — requiring the you to repay, restore, or account for misapplied company funds or assets (often with interest), or otherwise compensate the company or its creditors.
In addition, depending on the severity of the breach, you may be disqualified from acting as a company director under the Company Directors Disqualification Act 1986.
If the conduct also involves dishonesty or fraud, separate criminal or regulatory action may be possible — though that is not automatic and depends on the evidence and applicable law.
Protecting Yourself as a Director
You can minimise the risk of misfeasance by adopting proactive measures that safeguard your 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, you can significantly reduce your exposure to misfeasance claims and protect your 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?
In practice, claims for misfeasance under section 212 of the Insolvency Act 1986 are most commonly made once a company has entered liquidation and a liquidator has been appointed. While insolvency or administration may prompt an investigation, misfeasance claims are not usually available simply because a company is in administration — separate legal actions (such as director-duty claims under the Companies Act 2006) may instead be considered.
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 you for breaches of duty.
Can a director settle a misfeasance claim out of court?
Yes, you can settle misfeasance claims out of court. Settlements are often negotiated to avoid lengthy and costly court proceedings. You 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. You remain accountable for your actions in office, and your conduct leading up to insolvency can still be scrutinised. Resignation does not absolve you from potential liability for past decisions.
Are there any defences to misfeasance?
You 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 you from liability if you 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 you 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.
