What Does Misfeasance In Insolvency Mean For Directors?

As the director of a limited company, it’s crucial to be aware of your duties and obligations. Directors of limited companies are protected by personal liability under the corporate veil, however this protection is broken if the directors fail to uphold their duties or engage in wrongdoing. One example of this is if they are accused of ‘misfeasance’. 

What Is Misfeasance?

Fiduciary duty refers to the legal obligation of directors to act in the best interests of another party, such as shareholders. If a director fails to uphold this duty then they may be accused of misfeasance. This involves failing to uphold or transgressing from necessary duties as a director, either wilfully or unintentionally. In most cases, misfeasance will be committed unintentionally as a result of directors failing to keep accurate financial records or being misinformed of their duties as a director. That’s why it’s so important to educate yourself as to your duties under company law and wider insolvency law. 

The misapplication of funds or company property are common causes of misfeasance. It is most common for misfeasance to occur when a company becomes insolvent and fails to prioritise the interests of creditors. Examples of this may include:

Preferential Payments: This involves prioritising payment to one particular creditor, such as a lender to whom they have provided a personal guarantee

Transactions At An Undervalue: When an asset is sold for less than its market value this is known as making transactions at undervalue

Concealing Or Removing Company Assets: If a company is facing liquidation then a director may try to conceal assets 

When a company becomes insolvent and begins liquidation proceedings, the conduct of directors will be investigated. Any evidence of misfeasance or wrongful trading will be called out. In most cases it will be the appointed liquidator that will bring a claim of misfeasance, however claims can also be made by administrators, creditors or official receivers. 

What Are The Consequences Of Misfeasance?

Whilst misfeasance is not a criminal offence for directors it can have serious consequences including:

• Being made personally liable for company debts 
• An application being made to the court for the restoration of assets or repayment of money back to the limited company
• In severe cases, directors can be disqualified for 2-15 years

How To Avoid Misfeasance

In order to avoid being accused of misfeasance, it’s essential that directors are aware of their financial and legal obligations, to ensure that they are upholding all necessary duties. If you are concerned that your company is facing insolvency, you should instruct the advice of a licensed insolvency practitioner. They will be able to advise you on the best path forward, ensuring that you are complying with all necessary obligations in order to protect your personal situation, as well as the wider business.

Don’t hesitate to get in touch with our experienced team of licensed insolvency practitioners at My Liquidation for confidential advice.