Learning that a trusted colleague has betrayed the trust you placed in them is distressing. It can lead to financial difficulties and reputational damage too. And whilst it’s important to act quickly to maximise the recovery of losses, it’s also important not to expose the company to any claims for a mishandled investigation. In this guide, we discuss how you can identify if there has been a misappropriation of funds in the business and the steps you can take to try and recover your money.
If you’re reading this guide because you’re worried about company funds being misused or you want to tighten up how your business handles financial risks, you’re in the right place. Our business dispute solicitors are experienced in helping clients tackle tricky, high-stakes disputes all the time. We’ll work alongside you as a trusted advisor, advising you on the right approach and ensuring you recover losses where possible.
Contents:
- What is the difference between embezzlement and misappropriation of funds?
- What are the different types of misappropriation?
- How can I identify if there has been a misappropriation of funds?
- Who can be held liable for the misappropriation of funds?
- Can I recover misappropriated funds?
- What remedies are available if my claim is successful?
- What are my enforcement options if the defendant does not pay?
- Summary
What is the difference between embezzlement and misappropriation of funds?
Director charged with embezzlement is a headline you’ll often see in the news. Embezzlement is a form of theft where the person accused has been entrusted to manage company funds.
Misappropriation of funds describes several types of financial conduct of which embezzlement is one example, and whilst both involve the wrongful use of someone else’s funds, misappropriation of funds only covers the misuse of finances, not property.
Examples of embezzlement include:
- creating fake invoices and credit notes.
- paying a salary increase or bonus that hasn’t been authorised.
- running up personal expenses on a company credit card.
- falsifying overtime records.
- paying a salary for an employee that doesn’t exist into a personal bank account.
- pocketing cash instead of paying that money into the company’s bank account.
What are the different types of misappropriation?
In addition to theft and embezzlement, misappropriation of funds also covers fraud, insider trading, money laundering and director self-dealing (e.g. a director using company money to repay a personal loan).
How can I identify if there has been a misappropriation of funds?
Monitor
Employing a dedicated risk manager to monitor company funds is an option. There are software packages that can be used to identify financial anomalies too. If neither of these options are financially viable or appealing, conducting regular audits is another sensible option. Early detection helps to limit damage to the company and increases the possibility of losses being recovered. Those in positions of managing money need to be monitored the most, but anyone with access to company funds should be monitored. Employees and directors should be encouraged to raise any concerns they have (openly or via a confidential reporting method) about colleagues too.
Suspicious activities
Employees and directors have been known to go to extreme lengths to cover up evidence of wrongdoing, and you need to be on the lookout for any behaviour that is suspicious.
Have there been any unexplained withdrawals or discrepancies in your financial records? Is the employee or director living beyond their means? Are they reluctant to take holidays or are they being defensive about their work? Any anomalies such as these need to be thoroughly investigated so you can be confident that funds are not being misappropriated.
Investigate
It is important to act swiftly, as misappropriated funds can be moved quickly between bank accounts and across borders. But it’s also important to act proportionally. Your first instinct upon discovering any wrongdoing is likely to be anger, and a desire to confront and dismiss the wrongdoer with immediate effect. But to avoid any claim for a mishandled investigation (e.g. unfair dismissal, defamation or discrimination) and to maximise your ability to recover losses, you need to focus on carrying out a thorough investigation. In short, you need to follow any paper trail and examine any electronic footprint to establish what has happened.
Our business disputes solicitors can help with your investigation strategy. But you may need the input of a forensic accountant and IT specialist too. A business dispute solicitor can also advise on interim orders to preserve evidence and assets, the strength of your case and enforcement options.
Who can be held liable for the misappropriation of funds?
Anyone who has access to funds has the potential to misappropriate them, but employees and directors are the most common offenders. Directors also owe the company a general duty to act in the best interests of the company, which has clearly been breached if they misappropriate funds. For more information on this topic, read our guide on directors fiduciary duties.
Can I recover misappropriated funds?
The short answer is yes if the funds (in some shape or form) are still available, and the defendant is solvent. If not, there may be little point in pursuing costly court action. That said, money may well be spent on interim orders to preserve assets and/or establish if any assets exist.
Other legal options you can take to resolve your dispute include:
Negotiation
Negotiating with an employee or director who has misappropriated funds is an option.
Mediation
An alternative dispute resolution method, like mediation, is an option too. Mediation involves a mediator seeking to facilitate an agreement that is acceptable to both parties, and the benefits of both negotiation and meditation are time and costs savings, and confidentiality. If the situation can be resolved quickly through negotiation, your overall recovery may be greater.
Court action
Court action is also a possibility, and our business dispute solicitors are well placed to advise on the right interim orders to apply for (commonly known as Injunctions), and a claim for the misappropriation of funds itself. The circumstances of each case will vary, but generally the process involves identifying the misappropriation, carrying out an investigation, applying for any interim orders and issuing a claim.
A freezing order is an example of an interim order that can be sought. This is a court order that prevents someone from selling, transferring or otherwise disposing of assets. The aim being to ensure there are assets available to pay any judgment down the line.
After a claim has been issued, the court sets a timetable and various documents need to be drafted, filed and exchanged before a final court date is set. A Claimant with the benefit of an interim order is under an obligation to get on with the court action and prove the claim at trial.
You also have the option to apply for summary judgment. Summary judgment is an application seeking an early determination of your case. But for this to be granted you need to demonstrate that the defendant has no real prospect of succeeding on their defence.
Applying for judgment in default is also an option. This is where a defendant fails to respond or fails to file a defence within a certain time, and you win your claim by default without a trial.
Overall, you have six years to bring a claim after discovering any misappropriation, but in view of the need to act quickly to maximise the recovery of losses, you don’t want to wait that long.
Especially if you have a strong case, a financially solvent defendant and a reasonable chance of recovery.
For more information read our guide on injunctions and our guide on summary judgements to understand the costs involved and how they are used in practice.
What remedies are available if my claim is successful?
Damages
Recovering misappropriated funds is the goal of any claim, and the purpose of seeking damages is to put the company back in the position it would have been in before the misappropriation occurred, i.e. to repay the amount taken plus interest and possibly any other losses arising out of the misuse of the funds.
Costs
As part of any judgment, the judge will issue an order in relation to your costs. Reasonable costs are recoverable, but generally, as with most civil claims, you are only likely to recover around two-thirds of your costs.
What are my enforcement options if the defendant does not pay?
Faced with a judgment against them, a defendant may choose to pay up or do a deal. If not, you are looking at enforcement and there are several enforcement options to consider. If a freezing order was obtained, the frozen assets (both inside and outside the UK) may cover the claim. If no such order exists and the defendant is now employed elsewhere, you can seek an order compelling their new employer to pay you out of the defendant’s salary. If this isn’t an option, you could apply for an order which stops the defendant from selling an asset (such as a property) without paying you, and/or an order forcing the defendant’s bank to pay you from funds in their account. You also have the option to apply for an order that gives bailiffs or enforcement officers the authority to seize assets from the defendant and sell them.
Summary
It can be very distressing to learn that a trusted employee or director has abused that trust, and there is a need to act swiftly to recover losses whilst not exposing the company to any claims for a mishandled investigation.
Our business dispute solicitors have experience of managing misappropriation claims, and they can advise on your options, the strength of your case, costs and enforcement.
