What is Misfeasance?

Misfeasance is a serious claim against company directors, often arising in cases of wrongful trading. It arises when the duties and obligations of limited company directors laid out in Sections 170 – 177 of the Companies Act 2006 are not understood and adhered to.

We’ll explore this topic in detail below.

What is Misfeasance?

Misfeasance is an incorrect or inappropriate action that was carried out ‘wilfully’ or knowingly by a company director or directors, and which is unlawful.

Misfeasance rests upon claims of a breach of fiduciary duty, which occurs when a director fails to carry out responsibilities to protect shareholders and act lawfully towards others in his or her capacity as a director.

The classic example of insolvency-related misfeasance s is when a company becomes insolvent, and the director acts either in his or her own best interests or those of the shareholders, as opposed to the interests of creditors, which must occur when a business becomes insolvent.

Who can bring a claim of misfeasance?

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, 2015 which gave the power for misfeasance claims to be brought by third parties (such as creditors).

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.

Directors’ Misfeasance in Insolvency

When a company becomes insolvent, the acting Insolvency Practitioner is legally bound to investigate the actions of directors in the period running up to insolvency.

The key thing IP’s will be looking for is whether the director(s) understood their legal rights to put creditors first once they became aware of the state of insolvency.

Failure to do this, especially where it can be proven that directors ‘knowingly’ acted to the detriment of creditors, could result in charges of wrongful trading.

Is Misfeasance a Criminal Offence?

While misfeasance in public office is a criminal offence, it is not for directors. It is, nevertheless, serious and comes with a range of penalties, including making directors personal liability for some or all of the debts, in addition to director’s disqualification.

What actions count as misfeasance for a company director?

Misfeasance for a company director generally involves a breach of duty or trust in the management of the company’s affairs, often resulting in financial loss or damage. It can include actions that are legal but are carried out irresponsibly or in a manner that breaches the director’s fiduciary duties.

Examples of Misfeasance

• Negligence in Performance: Failure to perform duties with the required level of care and skill, leading to financial loss for the company.
• Misuse of Company Funds: Improperly using company funds for personal gain or non-approved activities.
• Breach of Fiduciary Duty: Acting in a way that conflicts with the company’s interests or failing to act in the best interests of the company.
• Unauthorised Decisions: Making significant decisions without the necessary approval from the board or shareholders.
• Failure to Comply with Legal Obligations: Not adhering to statutory requirements, such as filing accounts or paying taxes on time.
• Disclosure of Confidential Information: Improperly sharing sensitive company information that could harm the company’s interests.
• Fraudulent Activities: Deliberate actions intended to deceive, such as falsifying company records or misrepresenting the company’s financial status.

Consequences for Directors

When the insolvency practitioner finds evidence of misfeasance, they have a range of options depending on the severity of the finding.

• Apply to the Court for the restoration of assets, or repayment of money back to the limited company.
• The Insolvency Practitioner submits a report to the Secretary of State on the director’s conduct, which could result in the director’s disqualification for 2 to 15 years.
• Directors could be held personally liable for some or all of company debts. In some cases this leads to personal bankruptcy.

Defending Allegations of Misfeasance

To defend against allegations of misfeasance as a company director, consider the following steps:

• Get Legal Advice: Immediately consult with a lawyer who specialises in corporate law.
• Collect Evidence: Gather all documents that show you’ve done your job properly, such as meeting records, financial reports, and emails.
• Explain Your Actions: Clearly explain why you made certain decisions, showing they were in the company’s best interest.
• Prove Careful Decision-Making: Provide evidence that you made decisions carefully and thoughtfully.
• Handle Conflicts of Interest Properly: If there were any conflicts of interest, show that you disclosed and managed them correctly.
• Follow Laws and Rules: Demonstrate that you complied with all legal and company rules.
• Consider Witness Support: Get statements from others who can support your side of the story.
• Think About Settling: Sometimes, settling out of court can be better to save time and money.
• Prepare for Court: If you have to go to court, work closely with your lawyer to build a strong defence.

It’s important to address these allegations seriously and act quickly. Each case is different, so tailor your defence to your specific 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.