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 guide on what what misfeasance means when a company is insolvent, how to avoid it, the implications if you may have been misfeasant in the insolvency and how we can help.
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 where 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 olccur when a business becomes insolvent.
Who can take Action for 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 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.
Examples of Insolvency related 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.
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.