What Is Misfeasance?

A civil offence outlined in the Companies Act 2006, misfeasance occurs when somebody abuses a position of responsibility. As a director of an insolvent company, this applies when you breach your fiduciary duty of care towards your company, creditors, or the general public.

Misfeasance can have serious consequences for directors if they’re found to be liable. You could be potentially left with large debts or even forced into personal bankruptcy.

In this article, we’ll be looking at what qualifies as misfeasance, what consequences it brings, and how you can protect yourself as a director.

What Are the Grounds for Misfeasance?

There are several grounds which can warrant claims of misfeasance against a company director. Generally, they apply to the deliberate or grossly inappropriate mishandling of company assets.

The main grounds for misfeasance are: making preferential payments; making transactions at an undervalue; concealing or removing company assets; or taking a highly unreasonable salary.

Making Preferential Payments

This is where a company director shows a clear preference towards repaying a particular creditor, neglecting their debts with other parties. Typically this is a result of company directors wanting to repay creditors with whom they have a personal guarantee, to avoid taking on any personal debt.

Making Transactions at an Undervalue

Sometimes directors will sell company assets such as equipment or stock at a price significantly below market value. This is done in an attempt to divert value away from the business’s creditors; by selling below market value, the director can avoid creditors selling the assets to recover their losses during a liquidation, before later opening a new business and buying the old assets back.

Concealing or Removing Company Assets

This is where directors don’t declare certain assets in an attempt to avoid their inclusion in a liquidation. Directors who conceal assets are typically seeking to either reuse them in a future venture or sell them for their own gain following the closure of the business.

Taking an Unreasonable Salary

Sometimes directors take out a wage that is disproportionate to the company’s revenue. The court will view this as negligent towards the business and the security of its shareholders.

Who Can Make Claims of Misfeasance?

In the past, only “office-holders” such as Official Receivers, administrators, or liquidators could file claims of misfeasance against company directors. However, this has now changed.

Thanks to the Small Business, Enterprise and Employment Act 2015, third parties can now also file for misfeasance against directors. Generally, these third parties will be the likes of shareholders or creditors.

If any party feels that their interests have not been duly represented throughout the insolvency process, they’re likely to make a claim.

What Are the Consequences of Misfeasance?

The courts have two main penalties they can apply to directors found liable for misfeasance.

The first is to make the director personally responsible for outstanding company debt. Depending on the scale of the debt, this can have huge consequences. If you can’t pay, you might have to declare bankruptcy, which can result in the loss of your personal assets.

The second is to disqualify you as a director. The court can disqualify individuals from assuming directorship from anywhere between 2-15 years. This can be a major blow to those hoping to begin a new business venture post-liquidation.

Speak to an Expert Today

If you think your business may be insolvent, you should contact an insolvency practitioner as soon as possible.

Our expert team will protect your financial and legal interests, guiding you to the right solution for you.

Get in touch to book a free, no-obligation consultation today.