If you’re a director of a limited liability company, you’re undoubtedly well aware of the benefits of this arrangement.

However, if you are proven to have behaved improperly, you may still be held personally accountable for the company’s debt. Under the Companies Act of 2006, you can’t afford to be ignorant about the inner workings of misfeasance.

“Misfeasance” and “wrongful trading” are terms that lawyers use to describe inappropriate acts. Ones that directors take throughout the time leading up to the point of bankruptcy.  But, what is misfeasance, exactly?

Misfeasance isn’t criminal. But, any director who is accountable for the company’s debt becomes personally liable for any court proceedings. To put it another way, their own assets would be in danger.

Keep on reading for our full breakdown of everything you need to know about misfeasance. 

What Is Misfeasance?

As a limited company director, you need to act in the best interests of your firm, its creditors, and its consumers. Because of this, the courts remove the “corporate veil of protection” when there is a violation of this obligation.

It is possible to level misfeasance charges against non-employees. You can see the law under the Small Business, Enterprise, and Employment Act of 2015.

Misfeasance claims are simply accusations that an official has mismanaged the firm’s cash or assets. Creditors may take action against the corporation if repayment is overdue.

In What Situations Does the Term “Misfeasance” Come Into Play?

Companies that are under liquidation or administration are more likely to face a misfeasance lawsuit.

The liquidator may be able to make a claim. If they discover through the process of liquidation or insolvency that a director engaged in acts of misfeasance.

As part of this process, the liquidator will attempt to collect any money due by the company’s directors or other parties. People submit misfeasance claims to collect money due to creditors and to pay off the obligations of the corporation.

Who Has the Authority to File a Claim for Misfeasance?

Typically, a claim for misfeasance against a director or company officer will be brought on behalf of the business by the liquidator who has been appointed to serve as a liquidator.

A lawsuit for misfeasance may also be brought against other government employees, including:

  • Administrators
  • The Official Receiver
  • Creditors of the company

Basically, if you’re running a company, you’ll want to familiarize yourself with the nuances of misfeasance.

Malfeasance vs Misfeasance: The Differences and Similarities

Malfeasance is distinct from misfeasance. It’s an inadvertent violation of the contract. Yet, it must relate to intentional conduct that causes harm to another person.

Consider the situation of a catering company during a wedding celebration once again. Misfeasance, for example, occurs when a firm purposefully fails to fulfill a contractual obligation.

However, that the firm receives a payment from a rival of one of its clients to undercook the meats. Food poisoning may occur as a consequence of this. This is misconduct on the director’s part, since it was done with the intention of inflicting harm.

Damages caused by negligence are recoverable via a civil lawsuit. But, establishing negligence in a court of law is not always easy, especially in complex cases.

When it comes to corporate crime, it may refer to both significant and small crimes perpetrated by the management of a corporation. Such offenses may include doing purposeful activities that cause damage to the company. As well as failing to execute tasks and comply with applicable laws.

Corporations engaging in unethical business practices may cause significant difficulties. They can do so inside their industries and throughout their respective countries’ economies.

As corporate wrongdoing rises, governments enact more laws and implement more preventive measures. This helps reduce the amount of wrongdoing occurring throughout the world.

The Misfeasance Definition and Examples

There’s no better way to understand how misfeasance works, except by exploring the different examples of misfeasance that made it to numerous courts of law.

Let’s take them one at a time.

Unfair Preference

Preferential payments to creditors are referred to as ‘preferred’ payments in this context. A basic definition of this is when one creditor has been purposely paid before (or in preference to) another creditor.

One example is that directors have a tendency to pay payments that they have personally guaranteed with company cash. At the same time, they leave unsecured creditors unpaid in the process.

The transfer of assets is an example of preference. This creditor is in a better financial position than another. And, as a result, this creditor can bring a claim for misfeasance.

Underestimating the Value of Assets

Director’s assets are often transferred to other parties, which is unfortunate since it happens all the time.

When a corporation initiates bankruptcy procedures, they do so in an effort to safeguard its assets. But, it often has the opposite impact.

A common example is the transfer of an asset to a family member or close acquaintance, which we have seen several times.

Disposing of an asset in this manner is misfeasance, for a variety of reasons. Not the least of which being that the director transferred the item for less than its market worth.

Hiding Assets

Among the other methods of hiding firm assets is the moving of assets offshore.

It will be considered misfeasance if assets are deliberately placed out of reach of creditors in any manner. This is because liquidators are required to put creditors’ interests first and foremost in their decision-making process.

Any acts made with the goal of reducing the number of money creditors will get from liquidation will be unfavorable.

Overly-Generous Compensation

If a firm is successful at the time, there is nothing improper with a corporate director receiving a large salary or dividends.

Nevertheless, continuing to do so after the company has lost its profitability is a different story. Again, unauthorized loans or dividends would not be looked upon favorably by anyone.

A Lack of Understanding of Financial Matters

It is your responsibility, as a company’s director, to be aware of your company’s financial status. If your company’s financial situation begins to deteriorate, you should take action as soon as possible to correct the issue.

This inherent director’s duty is the root cause of the vast majority of misfeasance cases. People will attribute creditors’ losses to the director of the bankrupt firm as a result of the director’s actions.

How May a Claim for Misfeasance Affect Me?

After answering the first part of your question, you’ll need to learn about the possible repercussions of a charge of misfeasance.

It is possible for a liquidator or other third party to ask for a court order to take action against a company’s director or management. This becomes critical if a court of law found the misfeasance allegation to be valid.

This implies that the money or assets (assets) must be re-obtained from the persons held accountable. The process will take its course no matter how difficult it may be.

After that, the Secretary of State will receive a report from the office-holder. That might lead to a suspension from directorship for up to 15 years, among other things.

The Statute of Limitations: How Does It Work on Misfeasance Claims?

There is a six-year statute of limitations on claims of misfeasance brought by liquidators of a company.

Liquidators have six years from the date of the alleged misdeed to file a claim against the company. There will be no time restriction on a claim based on a violation of fiduciary responsibility (i.e. a breach of trust).

Regardless, once you know that there’s an active misfeasance claim against you, you’ll want to reach out to a reputable firm that can help you set up your defense, like https://www.ndandp.co.uk/insolvency-claims/misfeasance-claims/. 

Options and Defences to Misfeasance Claims

Whether or not a director has a defense to a misfeasance claim is critical for both the director and the liquidator. As it affects the chances of effectively pursuing/defending a claim, as well as any settlement discussions.

A director’s honesty and reasonableness serve as a defense against allegations of wrongdoing. If a director can demonstrate that they behaved in good faith, the court may grant them an amnesty.

These criteria include, but aren’t limited to, loss of business. Also, the profit gained by misdeed if shareholders approved of the misdeed, and degree of blameworthiness. Courts, on the other hand, tend to be more forgiving to honest directors.

Misfeasance Meaning and Repercussions: Simplified

Regardless of the kind of company you’re currently running, you don’t want to go through your tenure without knowing about the regulations that can affect your livelihood. 

We hope that our guide has shed some light on what is misfeasance, and its intricacies. And, if you liked reading our article, then you’ll love checking out our additional explainers and strategies. All of them (and many more) will be available in our legal and business sections.