Misfeasance is a serious claim against company directors, arising especially 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.
In this article we’ll explore what it means, and what are the implications if you’re charged with it.
What is Misfeasance?
Misfeasance means essentially an incorrect or inappropriate action that was carried out ‘wilfully’ or knowingly.
So when a limited company director behaves contrary to his duties, this may be a charge which arises.
Misfeasance rests upon claims of a breach of fiduciary duty – which means an individual fails to carry out a responsibility to act in the best interests of another party.
The classic example of this is when a company becomes insolvent and the director acts either in his own best interests, or those of his shareholders, as opposed to the interests of creditors.
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 which is incorrect, or an unintentional action which is inappropriate. This 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.
What is an Example of Misfeasance?
While the below list is not exhaustive, here are some of the common misfeasance claims brought against directors.
- Concealing or removing company assets – This is when a director tries to conceal particular assets from the impending liquidation.
- Preferential Payments – Here a director might transfer money to one creditor in particular, perhaps one to whom there is an existing personal guarantee.
- Transactions at Undervalue – Here a director sells at an asset for less than it is worth, perhaps to a family member or friend, again to keep it out of the scope of the liquidator.
Can an Administrator Bring a Misfeasance Claim?
Any insolvency practitioner, including one managing a company administration, has the right to bring a claim of misfeasance.
Claims may also be bought by a creditor, an Official Receiver, or a contributor to company capital.
A Directors’s Responsibility to Understand Financial Obligations
Many directors assume their positions with scant knowledge or information about the legal obligations which come with the role. This is one of the reasons why, at the point of insolvency, so many act without proper attention for what the law requires.
The key point here is that directors have a clear obligation to be aware of their financial obligations at all times. With this in mind, using a plea of ignorance, in the face of a misfeasance accusation, is simply not going to wash.
Similarly, non-executive directors, or part time directors, should be aware that the differing nature of these roles does not offer any further defence.
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.
Consequences for Directors
Where the insolvency practitioner finds evidence of misfeasance, they have a range of options at their disposal, depending on the severity of what they find.
- Apply to the Court for the restoration of assets, or repayment of money back to the limited company.
- Insolvency Practitioner submits a report to the Secretary of State on the director’s conduct, which could lead to director’s disqualification for between 2 of 15 years.
- Directors could be held personally liable for some or all of company debts.In some cases this leads to personal bankruptcy.