Misfeasance

Definition and Legal Requirement

Misfeasance is when a company’s Director or its officers (such as a Company Secretary) misapply, misappropriate, retain or become accountable in relation to a company’s money or property.

In addition, Misfeasance also includes when Director breaches the fiduciary duty owed to a company whilst holding office.

Once a company enters into Administration or Liquidation, the appointed Administrator or Liquidator is required by law to investigate whether Misfeasance occurred. This will be done by collating and analysing the company’s financial statements, books and records and bank statements. Aside from an Administrator or Liquidator, the creditors of the company may also bring a Misfeasance claim.

For a Misfeasance claim to be successful it will have to be shown that the Director or Officeholder committed one or several malfeasant acts or breached their fiduciary duties.

Ramifications

When an Administrator or Liquidator establishes that a preference has been made there are a number of ramifications, the most important being:

  • Details of the preference will form part of the Directors’ conduct report that the Administrator or Liquidator is required to submit to the Insolvency Service. This will have some impact upon the Insolvency Service’s decision to commence disqualification proceedings;
  • Compensation may be sought against the Directors, irrespective as to whether or not they were the direct recipients of the Preference; and
  • Recovery may be sought from party or parties that received the benefit.

Defence

If it can be demonstrated that there was shareholders' assent to the alleged Misfeasance or if the Director or Officeholder acted honestly and reasonably, the claim may be defeated.

Factors that will be taken into account in determining whether or not a Misfeasance claim succeeds include the loss to the company, the personal benefit derived, if sanction was sought from stakeholders, and the degree of blameworthiness.

Frequently Asked Questions

There are various duties that Directors and Officeholders have that if breached would constitute Misfeasance. These are contained in both legislation and common law. These include duties to promote the success of the company, to exercise independent judgement, to avoid conflicts of interest, to exercise reasonable skill, care and diligence, to act within their powers and not to declare or pay illegal dividends.

There are numerous examples of actions that a Director or Officeholder may take that could constitute misfeasance. These would include paying unlawful dividends to shareholders, causing preferential payments to connected parties, misapplying company assets, trading at the expense of HMRC. Other activities could be failing to act in the interests of the company by diverting contacts to other companies that the Director or Officeholder also has an interest in or making a secret profit by taking a personal payment from a contractor as an inducement to use their services.

There are two separate and distinct defences to a Misfeasance claim. These are contained in either common law or in legislation. In common law the defence occurs when it can be shown that the shareholders assented to the action that constitutes the alleged Misfeasance. However, this cannot be relied upon where the company was insolvent at the time that the shareholders ratified the action. The defence in legislation occurs if it can be shown that the Director or Officeholder acted honestly and reasonably, having regard to the circumstances of the case.

There are various measures that could have been put into place to demonstrate that every step was taken to ensure that Directors or Officeholders were not malfeasant. These would include such things as having a shareholders meeting to ratify certain activities that could be construed as breaching of duty and making sure that financial records were maintained to demonstrate solvency at the time, holding Board Meetings to document why certain decisions were made and provide full transparency and obtaining professional or legal advice before undertaking such an activity.