Misfeasance: Definition, Types & Consequences
Misfeasance occurs when someone in a position of responsibility (e.g. company directors, officers, or other fiduciaries) carries out their duties in a way that causes harm or loss.
While it can have serious consequences, misfeasance is not a criminal offence. Instead of criminal charges, those affected, or the relevant regulatory bodies, can file a civil claim against the person responsible.
In this helpful guide, we take an in-depth look into misfeasance, its relevance under the Insolvency Act, and the impact of misfeasance claims against directors.
What is misfeasance?
Misfeasance occurs when someone who is supposed to act in the best interests of another person or entity, does so negligently or improperly, causing harm or loss. It’s not about doing something illegal, but doing something wrong or without enough care.
Misfeasance often relates to the conduct of directors, officers, or administrators who, while performing their duties, do so in a way that causes damage to the company or its creditors.
In June 2014, two former directors of collapsed retailer BHS were ordered to pay at least £18 million to creditors over their role in the company’s downfall. A court found the directors liable for wrongful trading, misfeasance trading, and misfeasance.
Section 212 of the Insolvency Act 1986
Section 212 of the Insolvency Act 1986 deals with misfeasance by directors, liquidators, administrative receivers, and other relevant parties.
The liquidator or administrator will look at what the directors did before the company went into insolvency. If they find a director acted improperly, they may start a misfeasance claim against them.
These claims are intended to hold directors accountable for their improper actions and ensure they cannot escape liability simply because the company has gone into insolvency.
Distinguishing misfeasance from malfeasance and nonfeasance
- Malfeasance refers to intentional conduct that is illegal or wrongful—for example, fraud or theft.
- Nonfeasance occurs when an individual fails to perform a duty or obligation. It is an omission or failure to act when action is required.
Misfeasance during trading and insolvency
Malfeasance occurs during normal business operations and when a company is struggling financially.
Both scenarios can cause significant harm to the company and its stakeholders, often resulting in serious legal consequences for those responsible.
- Misfeasance in trading: While these actions may not be intentionally harmful, they demonstrate a failure to fulfil legal and ethical responsibilities, leading to potential harm to the company and its stakeholders.
- Misfeasance in Insolvency: These actions can worsen the financial harm to the company and its creditors, violating the duties that directors owe during the insolvency process.
Misfeasance in trading
- Improper financial management: A director may mismanage the company’s finances by making risky investments without proper due diligence, leading to significant losses. While the decision to invest might be legal, the negligent manner in which it was carried out constitutes misfeasance.
- Failure to act in the company’s best interest: If a director engages in transactions that benefit themselves or others at the expense of the company, this could be misfeasance. For instance, a director might secure a contract that benefits a personal business interest rather than the company they serve.
- Inadequate supervision: If a director fails to adequately supervise the activities of their subordinates, leading to improper trading practices that harm the company, this could be considered misfeasance. For example, where fraudulent transactions occur under their watch due to lax oversight.
Bringing a misfeasance claim during trading
- Identifying the misfeasance: This involves determining whether a duty has been performed improperly or negligently by an individual in a position of responsibility, leading to harm or loss.
- Appointing a solicitor: An insolvency solicitor will help determine whether the case qualifies as misfeasance and advise on the best course of action, potential outcomes and remedies.
- Gathering evidence: This could include financial records, emails, meeting minutes, contracts, or any documentation showing the improper conduct and the resulting harm. Witness statements may also be necessary.
- Pre-action protocol: Before formally filing a claim, you must follow the relevant pre-action protocols. This usually involves sending a letter of claim to the alleged wrongdoer, outlining the details of the misfeasance, the harm caused, and the intended legal action. The letter should give the recipient an opportunity to respond, potentially leading to a settlement without the need for court action.
- Filing a claim for misfeasance: If the matter is not resolved, the next step is to file a formal claim. The claim should detail the nature of the alleged misfeasance, the damages or losses incurred, and the remedies sought.
- Court proceedings: Both parties will present their case, including evidence and witness testimonies. The court will then evaluate whether misfeasance occurred and determine the appropriate remedy.
- Judgement: If the court finds that misfeasance occurred, it may order the defendant to pay damages, restore misapplied funds, or provide other forms of relief.
- Enforcement: The claimant may need to take further steps to enforce the judgement if the defendant does not comply voluntarily. This could involve obtaining a court order to seize assets or garnishing wages.
- Appeal: If either party is dissatisfied with the court’s decision, they may have the option to appeal the judgement.
Misfeasance in insolvency
Misfeasance in insolvency occurs when a company is facing significant financial difficulties or is already insolvent.
The Insolvency Act 1986 governs the process and allows creditors, liquidators, and administrators to hold directors accountable for any misfeasance that has contributed to the company’s financial difficulties.
Examples of misfeasance in insolvency include:
- Misapplication of company assets: If a director improperly transfers company assets to themselves or a third party before insolvency, this could be considered misfeasance. For example, selling company property to a family member at below market value.
- Wrongful trading: When faced with insolvency, directors owe their creditors a duty of care. Misfeasance may occur if a company continues to trade whilst being aware of imminent insolvency, thereby increasing the debts owed to creditors.
- Failure to maintain proper accounts: If a director attempts to keep accurate and up-to-date financial records but does so in a negligent or improper manner and this contributes to the company’s financial downfall, they could be held liable for misfeasance.
- Making preferred payments: Misfeasance can occur if a director prioritises payments to certain creditors when insolvency is imminent, especially if these payments are made to associates, friends, or entities in which the director has a personal interest.
- Failure to monitor the financial situation: If a director fails to adequately assess and respond to the company’s deteriorating economic situation, leading to increased debts and further losses, this failure could be deemed misfeasance.
Bringing a misfeasance claim against a director
- Investigation: The process usually begins with an investigation by the liquidator or administrator into the conduct of the directors. This may involve reviewing financial records, transactions, and decisions made by the directors leading up to the insolvency.
- Filing the claim: If evidence of misfeasance is found, the liquidator or administrator can file a claim against the director in court. The claim will detail the alleged misconduct and the losses incurred.
- Court proceedings: The case will be heard in court, where the director can defend themselves against the allegations. The court will consider the evidence presented and make a determination on whether misfeasance occurred.
- Judgement and penalties: If the court finds the director is guilty of misfeasance, it can order them to repay or restore the misapplied funds or property, compensate the company for any losses, and possibly disqualify them from serving as a director in the future.
Bringing a misfeasance claim against an administrator or liquidator
An administrator/liquidator must act in the best interests of the creditors and the company during insolvency proceedings. If they breach this duty by acting negligently, improperly, or in a way that causes harm to the company or its creditors, they may be liable for misfeasance.
However, the legal threshold for proving misfeasance can be high, especially when challenging the actions of an appointed administrator who typically enjoys some level of legal protection, so consulting with a solicitor experienced in this area is crucial to navigating the process effectively.
Misfeasance claims against directors
Before the Small Business, Enterprise and Employment Act 2015, only insolvency practitioners could bring misfeasance claims against directors. Today, third parties like creditors can also start these claims. However, proving misfeasance can be challenging, so, insolvency practitioners still bring the vast majority of misfeasance actions.
Whether you want to make a claim against a director, or defend yourself against allegations of misfeasance, it’s crucial to understand the legal landscape and seek expert advice to navigate these complex proceedings effectively.
Misfeasance claims against directors usually fall into three main categories:
- Breach of fiduciary duty: Directors owe a fiduciary duty to act in the company’s best interests. If a director prioritises personal interests over those of the company, engages in conflicts of interest, or fails to disclose important information, they may be held liable for misfeasance.
- Negligent decision-making: Directors are expected to make informed and prudent decisions. If a director makes a decision that results in significant financial loss to the company due to negligence, this could be grounds for a misfeasance claim.
- Improper use of company assets: Directors must ensure that company assets are used strictly for the benefit of the company. Misuse or misapplication of company assets without malicious intent, such as diverting funds for personal use or unauthorised purposes, can lead to a misfeasance claim.
Consequences of misfeasance claims for directors
The repercussions can be significant and far-reaching when a director is found guilty of misfeasance. These consequences are designed to hold directors accountable for their improper actions and to protect the interests of the company, its shareholders, and creditors.
The consequences directors may face if a misfeasance claim is upheld against them include:
- Financial liability: The court may order the director to repay the misapplied/misused company funds. The director may also be ordered to compensate the company or its creditors for any financial losses that resulted from their improper conduct.
- Disqualification as a director: The director may face disqualification from holding a directorship in any company for 2 to 15 years (depending on the severity of the misfeasance).
- Reputational damage: A finding of misfeasance can severely damage a director’s professional reputation. This can have long-term consequences, including the loss of future opportunities.
- Personal and professional stress: The legal process can be lengthy, complex, and emotionally taxing, particularly if the case involves significant financial stakes or public scrutiny. Directors may also experience stress due to the potential impact on their livelihood and future career prospects.
- Legal costs: Directors may need to pay for legal representation, court fees, and other associated expenses out of their own pockets.
- Impact on company: The fallout from a misfeasance claim can have broader implications for the company, leading to financial and operational difficulties.
Director defences against misfeasance claims
- Acting in good faith: If the director can prove they acted in good faith and in what they believed to be the company’s best interests, this may serve as a defence against a misfeasance claim.
- Reasonable business judgement: Directors are often afforded some leeway in their decision-making, known as the “business judgement rule.” If the director can show their actions were within the bounds of reasonable business judgement, even if they led to losses, they may avoid liability.
- Statutory protection: Some directors may be protected by statutory provisions that limit their liability, particularly if they were acting on professional advice or under specific legal obligations.
Misfeasance claims - FAQ’s
A misfeasance claim is a legal action brought against a person in a position of responsibility, such as a director or officer of a company, for performing their duties in a negligent, improper, or harmful manner. The claim seeks to hold the individual accountable for their actions.
In cases of insolvency, misfeasance claims are often brought by liquidators or administrators under Section 212 of the Insolvency Act 1986, seeking to recover assets or compensate creditors for losses caused by the director’s wrongful actions.
Misfeasance is not a criminal offence. It’s a civil issue, leading to legal claims for compensation or other remedies instead of criminal prosecution.
However, misfeasance can be linked to criminal conduct if the improper actions also involve illegal activities. In such cases, the individual might face both civil claims for misfeasance and criminal prosecution.
While liquidators and administrators bring most misfeasance claims, especially in insolvency contexts, a misfeasance claim can be made by several parties, depending on the context and circumstances, including:
- Liquidators or administrators
- Creditors
- Shareholders
- The company itself
- Directors
- Regulatory bodies (e.g. the Insolvency Service or the Financial Conduct Authority).
Yes, an administrator can bring a misfeasance claim against directors or other company officers if there is evidence that they have engaged in wrongful conduct that caused harm to the company or its creditors.
Administrators must investigate the conduct of the directors, and if they find evidence of misfeasance, they can initiate legal proceedings under Section 212 of the Insolvency Act 1986.
Yes. An administrator must prioritise the best interests of the creditors and the company during insolvency. If they act carelessly, improperly, or in a way that harms the company or creditors, they could be held responsible for misfeasance.
Contact our insolvency solicitors today
Need expert support with a misfeasance claim? Our specialist insolvency solicitors are here to help. With over 30 years experience, we advise company directors to help eliminate creditor or liquidator pressures.
Alongside misfeasance, we have a proven track record in supporting directors with other claims including wrongful trading, preferential payments, transactions at undervalue and overdrawn directors loan accounts.
For your free consultation, contact our insolvency lawyers today on 020 7467 3980 or complete the enquiry form on this page.