Misfeasance 10 FAQs

Here you can download our Misfeasance 10 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

Limited Companies protect owners and decision-makers from the consequence of economic changes or unforeseen circumstances which may cause businesses to fail or become liable for huge claims under a multitude of circumstances. At the same time, they enable a business to exist as a separate legal entity on its own with publicly available information provided on its structure, something which is designed to protect the public interest.

Where a Company fails, by way of insolvency or otherwise, then the decisions made by Directors come under the microscope and may lead to them being personally liable for any losses to the Company by way of Misfeasance.

1. What Is Misfeasance?

In exchange for the protection of a limited liability, company law requires that Directors adhere to their fiduciary duties when directing a Company and do not act in breach of the public interest, do not prejudice a stakeholders’ interests (including employees, Shareholders and Creditors) or in any way devalue or diminish Company assets that would otherwise be available to the Company in circumstances where third parties may have an interest.

A Director’s obligations in the course of trading should be focused on the Company’s success, usually in the form of a profitable enterprise or (as for not-for-profit organisations) by fulfilling its objectives. Such duties are generally referred to as Fiduciary Duties or Non-Fiduciary Duties, the former relating to duties which Directors have in respect of specific parties for whom a specific duty of care and trust already exists, and the latter referring to the general duty of care that Directors have to the public generally.

Our booklet on “Breaches of a Director’s Fiduciary Duties” deals with this subject in more detail.

Where a Company is placed into liquidation, any breaches of such duties may form the basis of a claim by the Company, acting via its appointed Liquidator, against third parties or alternatively the Liquidator may seek a remedy against the Director personally. This is generally referred to as Misfeasance.

2. What Sort Of Transactions Can Be Subject To Misfeasance Claims?

Any misconduct by a Director which leads to a loss to the Company or its Creditors as a whole can form the basis of a claim for Misfeasance against that Director personally. The claim is one which lies with the Company and is brought by its appointed Liquidator.

For example, paying a Creditor off in priority to other Creditors (commonly referred to as a “Preference Claim”) or selling assets to associated parties for less than their market value or even giving them away (commonly referred to as a “Transaction at an Undervalue”) can lead to claims against both the receiving parties under the insolvency Act 1986 and against Directors for Misfeasance.

In addition Directors can be liable for Misfeasance where they conceal or remove company assets or do business on behalf of the Company which causes losses to third parties (e.g. creditors).

3. Who Can Bring A Misfeasance Claim?

Misfeasance claims are generally brought by Liquidators. They are only available where the Company has been placed into liquidation and such a claim does not exist where the Company is placed into Administration (although that does not preclude a claim for breach of fiduciary duties by the Company via its appointed Administrators).

However, Misfeasance claims may also be brought by the Official Receiver (who is an Officer of the Court appointed by the Secretary of State to deal with compulsory liquidations), a creditor or a shareholder.

Misfeasance claims are occasionally brought by the Official Receiver where there may be no assets within a Company to fund any legal proceedings brought by an appointed Liquidator. This is becoming more prevalent by reason of the current emphasis by government of the need for corporate transparency and accountability.

Creditors do occasionally issue such proceedings, as may a shareholder, although these are rare because any award will be made in favour of the Company, and therefore payable to all creditors pari passu via the liquidation proceedings.

However, this may be a solution where there is otherwise no opportunity to penalise a Director and a Creditor or Shareholder is in a position to fund such litigation (the legal costs of which will be repayable to them in the event they are successful).

4. Can Past Directors Be Liable For Misfeasance?

This is a question that is obviously concerning to Directors who retire or depart the Company and fear they may be later penalised personally for matters which have arose out of events or circumstances that preceded their departure.

The simple answer to this question is yes. Accordingly, upon exit, a Director should have a strategy in place to ensure their departure is free of any risk.

Any person who has been a Director, either appointed and registered at Companies House or even a person who has instructed Directors (generally referred to as Shadow Directors) or held themselves out as a Director (De Facto Directors), can be liable personally for Misfeasance where they are shown to have caused loss or damage to the Company through their decisions or actions.

if a Director departing a Company truly wants to be protected from such matters, the easiest way is to seek an indemnity from incoming shareholders or the Company itself (although there are statutory restrictions on such indemnities). ideally, if a Company is solvent, the Director should seek an orderly Winding-Up of the Company so as to put to rest any such risks.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. Who Else Can Be Liable For Misfeasance?

6. What Are The Defences To Misfeasance?

7. Is Honesty A Sufficient Defence?

8. What Can Be The Extent Of My Liability For Misfeasance?

9. Can A Creditor Sue A Liquidator Or An Administrator For Misfeasance?

10. What Strategy Should I Take When Faced With A Misfeasance Claim?

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.