Misfeasance

When (why) would a Director need this service?

Directors/company officers are more likely than ever to face a claim for misfeasance in relation to their former company which has since gone into liquidation or administration.

The underlying purpose of a misfeasance claim is for the Liquidator/Administrator to seek to recover sums owed to creditors of the company as well as to attempt to recover their own professional fees. This is usually done by seeking a court order for the director/company officer to repay, restore, or account for any misappropriated money or property, or to compensate the company for breach of fiduciary duty.

What is ''misfeasance''?

Section 212 of the Insolvency Act 1986 (IA 1986) explains the concept of misfeasance which encompasses:

  • The misapplication or retention of money or other property of the company;
  • Becoming accountable for money or other property of the company;
  • Breaching a fiduciary or other duty in relation to the company;
  • Otherwise being “guilty of misfeasance”.

As you can see from the above, misfeasance covers a broad range of aspects in relation to a director’s conduct during his/her tenure. In recent years our lawyers have experienced an increase of claims of this nature due to the wide ambit of misfeasance.

Who can bring a claim for misfeasance?

In most cases it will be the appointed Liquidator who will seek to bring a claim for misfeasance against a director/company officer on behalf of the company. However, there are others who can bring a claim for misfeasance, including:

  • Administrators (normally pursued under paragraph 75 of Schedule B1 of IA 1986 rather than section 212 of IA 1986);
  • A creditor of the company;
  • A contributory to the company’s capital;
  • The Official Receiver.

How does the process work?

 The usual method is for the individual to send a letter of claim to the director/company officer, setting out the details of their proposed claim for misfeasance. If a resolution cannot be reached in respect of the proposed claim the person wishing to bring a claim will normally issue court proceedings in accordance with part 7 of the Civil Procedure Rules.

Can I challenge a claim for misfeasance?

You may be able to challenge a claim for misfeasance against you, however each case is dependent on its own merits.  The challenges to a misfeasance claim can be very technical and therefore a specialist lawyer is required to consider the specific details of the allegations.  However, we have been able to compile a list of possible challenges is set out below:

  • Where it can be shown that shareholder assent renders the alleged misfeasance an act of the company itself thereby precluding action by the company against the director (the “common law” defence);
  • Where the director or company officer acted honestly and reasonably having regard to all the circumstances of the case pursuant to Section 1157 of the Companies Act 2006 (the “statutory” defence);
  • There has not been a genuine loss to the company and the proposed claim would result in the company being overcompensated;
  • The person bringing the claim is time barred from doing so. The time limit for bringing a claim is six years beginning on the date that the misfeasance or breach of duty complained of occurred; and
  • There has been a procedural or technical error in respect of the allegations of misfeasance.

If a director/company officer wishes to consider his/her options in relation to challenging any potential action, legal advice should be sought at an early stage and preferably even as early as when the director is dealing with the Liquidator or Administrator, by completing questionnaires or attending interviews. 

What should people do before calling

If you are contacted by the Liquidator or Administrator, you should explain that you wish to seek legal advice before reverting to them. You should get in touch with us immediately thereafter.

Is it expensive? What are the likely costs?

 We will provide you with an estimate of costs at the outset based on the type of work required.

 Our lawyers have extensive experience in advising clients who are faced with misfeasance claims and have successfully defended clients who were subjected to such proceedings. Our lawyers will be able to provide you with bespoke and cost effective advice tailored to your circumstances.

Meet our Insolvency team 

Bimal Kotecha