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Understanding director misfeasance and defending claims of misfeasance

Misfeasance by a company director means knowingly neglecting your duties as a company director to the detriment of creditors which could contribute to company insolvency. If misfeasance contributes to the company becoming insolvent, the liquidator will lodge a misfeasance claim against the director as part of the insolvency investigation.

What actions count as misfeasance for a company director?

Limited company directors accept various statutory duties and obligations when taking on office, and must adhere to the rules and regulations laid out in the Companies Act. Failing to carry out these duties can result in allegations of wrongdoing, including misfeasance.

So what is misfeasance, and what are the potential consequences for directors?

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What does misfeasance mean?

Misfeasance is a general term that covers wilfully incorrect or inappropriate actions as a director. It’s an accusation that might be made when a company is liquidated - part of the liquidator’s role is to carry out investigations into why the company failed.

They look into the actions of directors leading up to the liquidation for signs that they have knowingly worsened the position of creditors, or taken deliberate action that compromises their responsibilities as directors.

Who can bring a claim of misfeasance?

Misfeasance claims are often by a liquidator after their investigations have completed. This is usually followed by legal action against the director to recover property, reverse a transaction, or compensate the company in some way so that creditors don’t lose out.

In practice, the office-holder, which could be a liquidator or administrator, typically brings a claim against one or more directors or company officers on the company’s behalf, but creditors can also make a claim, as can the Official Receiver.

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What are some common examples of misfeasance?

Common examples of misfeasance include but are not limited to:

Preferential payments

A preferential payment occurs when a director repays a specific creditor when other creditors exist. A good example is if they’ve provided a personal guarantee for company borrowing, and decide to pay off the loan in preference to other debts to avoid the having to honour the personal guarantee.

Other types of preferential payment also exist, however, such as repaying a member of the family ahead of other creditors. Preferential payments are difficult to conceal, and liquidators have the power to look back several years in their investigations.

Transactions at undervalue

Another form of misfeasance is when a director sells one or more of the company’s assets at below a fair market value. This is known as a Transaction at Undervalue. This might be to a member of the family or a friend, and the aim is to avoid the asset being included in the liquidation process.

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Taking a high salary that the company cannot support

If a director takes an excessive salary when they know, or should be aware, that the company is in financial difficulty, this is likely to be seen as misfeasance as they’ve contributed to the downfall of the business.

Hiding assets

Trying to hide assets from the liquidator is another common example of misfeasance, and this is typically done with a view to selling the asset for personal gain. This has the effect of reducing creditor returns, and along with other forms of misfeasance, can have serious repercussions for directors.

So what are the possible consequences of misfeasance?

Repercussions of misfeasance

  • Restoration to the company of property that was hidden or sold
  • Reversal of transactions made at undervalue
  • Repayment of money by directors to the company
  • Disqualification from the office of director for up to 15 years
  • Personal liability for some or all of the company’s debts

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Defending allegations of misfeasance

If a director can prove they acted honestly, and that others may consider their actions reasonable under the circumstances, it could be possible to defend an allegation of misfeasance.

The court will look at the degree to which the director benefited from their actions, if at all, and the background to each case. Perhaps shareholder approval was sought and obtained, for example, in which case the court may look more favourably on the director, but to defend this type of accusation professional assistance is vital.

Real Business Rescue are insolvency specialists, and can provide professional advice on misfeasance and its consequences for directors. We’ll explain your rights and duties in this situation, and ensure you comply with UK insolvency laws. Please contact one of our team to arrange a same-day consultation free-of-charge at one of our network of offices around the UK.

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