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, and 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. For more information on& some of these duties in an insolvency situation see: Directors duties: what are they on insolvency, and how can a director avoid personal liability for breach?
It is vital that directors are fully aware of their responsibilities and duties to the company at times of insolvency, and indeed before insolvency, to avoid falling foul of these provisions. The personal financial consequences of breaching their duties can be very severe if found guilty.
Other articles in this series have shown how there are claims that an insolvency practitioner (or others, in some cases) can bring against former directors of a company that has gone into a formal insolvency process, such as liquidation, for conduct undertaken while that person was a director of that company. For more details on these see: Wrongful trading, Preferences payments and Transactions at undervalue.
In this article we will look at potential claims against directors and others for ‘misfeasance’, which we will explain in more detail below.
What is misfeasance?
Misfeasance is a term found under the Insolvency Act 1986 s.212, and 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 permission of the court.
Who is at risk of a claim?
A misfeasance claim will usually be brought against a director of a company. However, it can be brought against any person who is or has been an ‘officer’ of the company, which in this instance includes a manger 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.
What is required in order to bring a successful claim?
What is required will depend to a large extent 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 need for all claims, such as proving that the person against whom the claim is made 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.
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. For more information see: Directors’ duties: being disqualified from acting as a company director, and obtaining leave to act despite disqualification.
What should I do to avoid liability?
Ensure that you are 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.
You can find a lot of information on government websites designed to help, including being a company director guide, there are also many online resources on the subject of directors duties.
If you are in any doubt, take professional advice from an insolvency or corporate recovery solicitor.