Whenever a business has been declared insolvent and liquidated,an investigation will be conducted into the affairs of the business leading up to the insolvency. Creditors will then get partial payment from the liquidated company – normally by a solicitor (liquidator or administrator) who has been appointed to resolve the affairs of the business.

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However,if the investigation indicates that the directors of the company acted or failed to act in a way that were not in the best interests of paying creditors,they can be held personally liable for the remaining amounts that should be paid to creditors. These are referred to as misfeasance claims. There are many different actions that are considered to fall under the definition of misfeasance.

What Actually Constitutes Misfeasance?

Any deed that is in contravention of a director’s fiduciary duty to care for the company,its clients,creditors and the public in general can be considered to be misfeasance. An example is the misappropriation or misapplication of the funds,assets or property of the company that resulted in insolvency or the inability to meet financial obligations to creditors. The following misapplication of funds constitutes misfeasance:

– Preferential payment where one creditor has been paid or has been promised full payment in preference to other creditors.

– Selling assets at less than their real value.

– Hiding assets or removing assets from the business with the idea of preventing them being used to pay creditors.

– Drawing a higher salary regardless of the failing financial state of the company.

– If the director has actually declared or paid illegal or incorrect dividends.

The breach of duties that are assigned to a director by the Companies Act 2006,can result in a misfeasance claim by one or more parties.

Just What Are Misfeasance Claims?

Any creditor that can prove that a director was not following his fiduciary duties resulting in the non-payment or partial payment of the company debt,can claim for misfeasance. The appointed liquidator or administrator will usually check the insolvency as well as the actions of the directors after insolvency for misfeasance. If misfeasance has been found,a monetary claim in the amount of misfeasance,asset or part compensation (including interest) can be sought against a director in their personal capacity. If the claim is successful,the funds will be paid back to the company from which creditors will be paid.

Possible Defences Against Misfeasance?

There are a variety of defence options that a director can take to protect themselves against a misfeasance claim. A common defence is the Duomatic Principle where a director cannot be held liable as long as they can prove he acted in accordance with a vote by shareholders which make his actions that of the company and liability for the actions the responsibility of the business. A statutory defence is also available where it can be proven that the director was acting in the best interests of the company at the time.

It is vital for directors to understand what are misfeasance claims in order to avoid acting in any way that is breach of their fiduciary duty and get legal advice before acting in a manner that could constitute misfeasance.