What Is Misfeasance by a Company Director?

December 21, 2021 / News & General

Upon becoming the director of a limited company, individuals take on an array of statutory duties that they must adhere to as outlined by the Companies Act.

Misfeasance is the term that refers to the wrong or inappropriate actions of a company director who has not fulfilled their director’s duties.

In this guide, Clarke Bell takes a closer look at what misfeasance is and the potential consequences for directors found guilty of it.

What are a director’s duties?

When setting up a limited company, the director must adhere to a number of duties.

Director’s duties include:

– Adhering to the company’s constitution: this states that the director must act within their powers as outlined in the company’s constitution. The most integral part of the company’s constitution is the company’s Articles of Association as these are the rules that the director has laid out for the company and board which define your power as a director. Directors must act within the powers outlined and not use their directorship for personal benefit.

– Promoting the success of the company: the director must also operate in a way that promotes the overall success of the company. This means that when making decisions, the director must consider the consequences on the entire business, which includes everyone from shareholders, employees, suppliers, customers to stakeholders.

– Exercise independent judgement: a company director must develop their own informed views on the company’s activities, meaning they are required to exercise independent thought.

– Practicing care, skill and diligence: a director must exercise the care, skill and diligence that any director of a similar company would. If the director has a particular skill set, then they must also meet a higher standard due to this.

– Avoiding conflict of interest: a director must also avoid conflict of interest which could impact their objectivity.

– Refusing third-party benefits: a director must not accept any benefits from external parties because of their role as a director.

– Declaring any interest in a proposed transaction or arrangement: a director must declare the nature of their interest in any proposed transaction or an existing transaction, either direct or indirect interest.

To read more about director’s duties, check out our handy guide.

What does misfeasance mean?

As part of a Creditors’ Voluntary Liquidation (CVL) or a Compulsory Liquidation the assigned Insolvency Practitioner must investigate why the company failed and might make a claim of misfeasance if they discover wrongdoing by the director.

Therefore, it is common that misfeasance is only uncovered during the liquidation process as the result of an investigation by an Insolvency Practitioner into the actions of the directors.

The Insolvency Practitioner is obligated to look into the director’s actions leading up to the liquidation and will look for signs for whether the director knowingly worsened the position of creditors or acted in a way that conflicted with their director’s duties.

Examples of misfeasance

Some typical examples of misfeasance include:

– Hiding assets: if a director tries to hide company assets from the liquidator this is classified as misfeasance. This is usually done when the director wishes to sell the assets for personal gain which would reduce the returns that creditors will receive.

Undervaluing transactions: another example of misfeasance is when the director sells any company assets below their market value. This is usually carried out with the aim of preventing that particular asset from being included in the liquidation procedure.

– Preferential payments: this refers to an instance in which the director repays a certain creditor when there are other creditors that exist and are owed money. This can also refer to repaying family members before other creditors.

– Taking a higher salary: if the company is facing financial difficulties and the director takes a higher salary than the business can afford, then they can be found guilty of misfeasance as they have contributed to the worsening of the situation.

What if I am found guilty of misfeasance?

A director who is found guilty of misfeasance will usually be faced with legal action in order to recover property, undo a transaction or compensate the company to ensure that creditors don’t lose out.

Some of the consequences of misfeasance include:

– Reversing any undervalued transactions that were made

– The director can be disqualified from being a director for up to 15 years

– The director can be made personally liable for all or some of the company debt. Read more about personal liability during liquidation in our handy guide.

– Any company property that was hidden or sold can be restored

– The director can be made to repay money to the company

What if I am accused of misfeasance?

If you have been accused of misfeasance but you can show that you have acted honestly, then you may be able to defend yourself against the allegation.

The courts will look closely at the case and will investigate the extent to which you benefited from the actions taken to help them make an informed decision.

Get help from Clarke Bell

Clarke Bell are leading insolvency experts who can offer directors the best advice on misfeasance and the consequences it can have for you.

We work closely with company directors to outline how the misfeasance process works, as well as your duties throughout the process, to ensure that you comply with insolvency laws throughout.

As well as offering advice on misfeasance, we can also help with the liquidation process. Our team has over 28 years’ worth of experience helping thousands of company directors across the country to find the best solution for their particular circumstances.

To see how we can help you, get in touch with one of our team of experts.