If a business is facing insolvency, the officials dealing with the company liquidation or administration have the authority to look at the conduct of directors while they were running the company. Misfeasance is wrongdoing by a company officer and where it occurs, the officer may be penalised. We look at the meaning of misfeasance in UK law and how to defend yourself if you have been accused of misfeasance.
What is Misfeasance in Insolvency?
The Insolvency Act 1986 provides that misfeasance occurs when a company is being wound up and it is found that someone who has been an officer of the company or involved with the promotion, formation or management of the company has:
- Misapplied or retained or become accountable for any money or other property of the company; or
- Is guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company
It is a wide definition that is intended to catch a range of wrongdoing or unlawful activity.
Examples of Misfeasance
Examples of misfeasance by directors in insolvency include:
- Not effectively managing the company’s finances, including failing to take action to deal with financial difficulties.
- Carrying out a transaction at an undervalue, where an asset is sold for less than it is worth, often to a friend or relative. This may occur shortly before insolvency is declared and is a way of preventing assets from being used to pay off creditors.
- Paying unlawful dividends, when dividend payments are made but the company has not made a sufficient profit to support them.
- Unrealistic directors’ salaries, where a director pays themselves more than the company can afford.
- Overdrawn or unpaid director’s loan account, where a director has taken more than they are entitled to or has not met repayments as agreed.
- Making preferential payments, clearing the money owed to certain creditors before that owed to others during the insolvency process, when creditors in each class should be treated equally. For example, a director may try to pay off a creditor to whom they have given a personal guarantee to avoid having to pay the debt from their own assets.
- Not paying VAT that is due, including not reporting that VAT is owed.
- Concealing assets, to prevent them from being sold by the insolvency practitioner with the proceeds used to pay creditors.
- Other misconduct, where this has led to the company or its creditors sustaining a loss.
How Does Misfeasance Differ from Nonfeasance?
Nonfeasance is the failure of an officer to carry out a duty they are legally bound to carry out. This could be failing to file forms at Companies House, failing to keep adequate records or failing to file tax returns.
Misfeasance differs from nonfeasance in that misfeasance involves taking a wrongful action, while nonfeasance is a failure to act.
Misfeasance Investigations
Once a company is placed in the charge of an insolvency practitioner, such as an official receiver, administrator or liquidator, investigations are likely to be carried out into the actions of those involved with the company.
Where misfeasance is suspected, those entitled to make a claim of misfeasance include the official receiver, an administrator, a liquidator, shareholders and the company’s creditors.
The Consequences of Being Found Guilty
Under the terms of the Insolvency Act, those found guilty of misfeasance can be required to:
- Repay, restore or account for money or property or any part of it, with interest; or
- Contribute such sums to the company’s assets by way of compensation in respect of the misfeasance or breach of fiduciary duty or other duty as the court thinks just
Directors are also likely to be disqualified from acting as a company director for 2-15 years.
Defending Misfeasance Claims
The defence to misfeasance allegations depends on the type of misfeasance that is alleged. Generally, directors are expected to have acted reasonably and with the level of skill expected of a company director. While honesty may be a defence in some limited circumstances, it may be difficult to show that well-meaning actions were reasonable.
There are also statutory defences available in respect of certain allegations, and if you ask us to represent you in a misfeasance claim, we will go through the evidence and establish the best way to deal with the situation.
In some cases, we are able to negotiate a settlement, which can avoid lengthy legal action and the associated costs.
Contact Our Insolvency Solicitors
If you are facing an investigation into misfeasance, you are strongly advised to contact insolvency solicitors promptly to protect your position. Our experts can take immediate action to safeguard your interests and work with the investigating authority to resolve matters.
To speak to one of our expert insolvency solicitors, ring us on 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help.
FAQ
What is misfeasance in tort law and public office?
Misfeasance in public office is a tort or civil wrongdoing as well as a common law offence that can result in a prison sentence. It occurs when the holder of a public office acts in bad faith, misusing their power or authority, resulting in loss or harm to someone.
Examples of public office include:
· Police officers
· Members of the armed forces
· Prison officers
· Government officials
· Civil servants
What is the difference between misfeasance and malfeasance?
Malfeasance occurs when a public officer wilfully neglects to perform their duty and/or wilfully misconducts themselves. It is considered more serious than misfeasance and is an abuse of power.
What is nonfeasance?
Nonfeasance is a failure to act when someone has a duty to do so.
