Once a company gets into financial difficulties and is forced into a formal insolvency event, such as liquidation, a liquidator can look back at the actions of the directors during the lifetime of the company, especially during the period the company was in financial difficulties. They may then take a claim against one or any of the directors personally if they find their behaviour went against any of the many duties of directors to the company and to the creditors of that company.
In this article, our director disqualification solicitors will look at potential claims against directors and others for ‘misfeasance’ and the different options available to directors who are defending a claim.
Jump to:
- What is misfeasance?
- Who can take a misfeasance claim?
- Who is at risk of a claim?
- What does it mean if the court makes a finding of misfeasance?
- Could I be personally liable for any damages awarded?
- What is required in order to bring a successful claim?
- Are there legal defences available to directors facing misfeasance claims?
- What steps should directors take when facing a misfeasance claim?
- What is the limitation period for a misfeasance claim?
- Directors’ disqualification
- What should I do to avoid liability?
- Summary
What is misfeasance?
Misfeasance is a wide catch-all claim in which a director or ‘officer’ can be penalised for general wrongdoing within the company.
A misfeasance claim can be brought when a director 'has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.’
A breach of fiduciary duty to a company covers a wide range of areas, and there are many fiduciary duties set out both in company and insolvency legislation. Essentially it means that as a director or officer of a company you are expected to act in good faith, and in the best interests of the company, and to operate with skill and care as a director.
Sometimes a misfeasance claim will be brought at the same time as another claim, such as a transaction at undervalue claim. However, it may also be a claim in its own right.
Who can take a misfeasance claim?
A liquidator will usually bring a claim, but they can also assign a claim to a third party, such as a creditor. A shareholder could also bring a claim, but only with the permission of the court.
Who is at risk of a claim?
A misfeasance claim will usually be brought against a director of a company. It can be brought against any person who is or has been an ‘officer’ of the company, which in this instance includes a manager or secretary as well as any type of director. It can also be brought against a liquidator or administrator.
What does it mean if the court makes a finding of misfeasance?
A court can order anyone found guilty to repay, restore or account for any money or property misapplied or retained or any part of it, with interest at such rate as the court thinks just, or contribute such sum as the court thinks just to the company's assets by way of compensation.
Could I be personally liable for any damages awarded?
If you are the subject of a claim, as an officer of the company, then you will be personally liable for any damages awarded, not the company. Misfeasance focuses on an individual’s actions, and this moves a director out of the protection of the corporate veil, and subject to personal financial liability.
What is required in order to bring a successful claim?
What is required will depend on the act complained of. For example, if there is a claim for misapplication of company funds, evidence will need to be put forward to show that the funds were removed or misapplied, to the civil standard of ‘balance of probabilities’.
There are also basics that are needed for all claims, such as proving that the person was a director or officer, or in whatever capacity they are being claimed against, at the time of the misconduct.
As well as proving that the misfeasance took place, it will also need to be shown that the company suffered a loss as a result of the misfeasance.
Are there legal defences available to directors facing misfeasance claims?
There is a specific statutory defence to a misfeasance claim under the Companies Act 2006. This is the defence that you acted honestly and reasonably and in all the circumstances. If you can show this, the court might excuse the misfeasance you are accused of even if they believe that the misfeasance did occur.
You may be able to show that you were not a director or a relevant company officer at the time of the misfeasance, if you can prove this you cannot be considered a valid claimant.
You could also put forward evidence to show that even if you did act in a misfeasant manner, that did not actually cause any damage to the company as a result.
The claim against will inevitably rely on facts that may be in dispute, which might lead to a realistic defence to any claim against you.
What steps should directors take when facing a misfeasance claim?
Firstly, don’t ignore a claim. It won’t go away. If you believe you have a good defence to a claim, then gather all the relevant information and see a solicitor who is a specialist in these issues to assess the prospects of success.
If you believe there is merit to the claim, then the sooner you can deal with this, and potentially reach a settlement agreement, the lower the legal costs that will arise.
Either way, it is prudent to seek professional advice if you receive a claim as soon as possible to assess the merits and work out your options.
What is the limitation period for a misfeasance claim?
The limitation period for a misfeasance claim is six years from the date that the company/individual entered an insolvency process.
Directors’ disqualification
Any of the claims brought as misfeasance claims can also be considered as ‘unfit conduct’ for the purposes of directors’ disqualification proceedings. Depending on what other unfitness may be found, a director can be disqualified from being a company director for anywhere between 2 and 15 years.
What should I do to avoid liability?
You should be fully aware of what your duties are to the company, both when the company is doing well and is solvent, and when the company starts to become insolvent. At the point of insolvency, your duties are moved to the creditors of the company, but you must also ensure all the usual duties you have as a director, such as the filing of accounts on time, are also maintained.
Summary
A misfeasance claim can be brought against you as an individual and can cover a wide range of potential actions. If the claim is successful, you can be personally liable financially for losses caused, as well as potentially liable to disqualification as a director. It is possible to defend a claim, but it is essential that if you receive notice of a claim, you seek legal advice as soon as possible to understand your options.
