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What is misfeasance and how could it affect me?

If you are a Ltd company director, you are probably aware that you enjoy limited liability. However, you could still be held personally liable for company debt if you are found to have acted inappropriately.

Inappropriate actions in the period leading up to the point of insolvency can be referred to as ‘misfeasance’ or ‘wrongful trading’. These will be explored at the point of company liquidation under the Companies Act 2006.

‘Misfeasance’ is not classed as illegal, but any director that is found to be liable for company debts become personally vulnerable to any court actions that the creditor(s) choose to take. More to the point, their personal assets would be at risk.

So, I’m sure you are asking ‘what is misfeasance and how could it affect me?’

Misfeasance explained

As a limited company director, you have a duty to act responsibly towards your company, it’s creditors and of course it’s customers. Misfeasance is classed as a breach of this responsibility, and the ‘corporate veil of protection’ (from creditors) is therefore lifted.

Under the Small Business, Enterprise and Employment Act 2015, misfeasance accusations can be directed towards third parties such as managers as well as directors.

Creditors may decide on taking action against the company if a debt is overdue; a misfeasance claim is essentially an accusation that company funds or assets have been used irresponsibly.

Examples of misfeasance

Some typical examples of misfeasance include:

1. Preference

Preferential payments to creditors are deemed as ‘preference’. In simple terms, this is when one creditor has intentionally been paid before (in preference to) another.

One example we have come across often is that directors tend to pay amounts which they have personally guaranteed with company funds, while leaving unsecured creditors unpaid.

The transfer of assets can also be seen as preference; this creditor is in a better financial position than another and this is therefore grounds for a misfeasance claim.

2. Undervaluing assets

Unfortunately, it is not uncommon for assets to be transferred over to third parties by directors.

This is used as an attempt at protecting the assets once the company enters insolvency proceedings, but it often has the opposite effect!

An example we have seen many times is the transfer of an asset to a family member or trusted friend.

Disposing of an asset in this way is classed as misfeasance, not least because it has been transferred at less than market value.

3. Concealing assets

Other ways of concealing company assets includes shipping them overseas.

Intentionally placing assets out of reach of creditors in any way will be seen as misfeasance, because liquidators are bound to place creditor’s interests at the forefront of priorities.

Any actions taken which intentionally reduce any returns creditors will get from a liquidation won’t be seen favourably.

4. High salaries

While there is nothing wrong with a company director taking a high salary or dividends when the company is in a profitable position, continuing to do so once the company has gone downhill or into insolvency will be classed as misfeasance.

Any director should be living within the means of their company; again, unauthorised loans or dividends will not be looked upon sympathetically.

5. Lack of financial awareness

As the director of a company you are responsible for being aware of your company’s financial situation; at the first sign of financial decline, action should be taken as soon as possible to resolve the situation.

This inherent director’s responsibility is the reason for the majority of misfeasance claims – creditors’ losses are seen as the fault of the director of the insolvent company.

How could a misfeasance claim affect me?

We hope that we have now answered the first part of your question, but what are the potential consequences of a misfeasance claim?

If a company is put into liquidation for some reason and a misfeasance claim is proven to be correct, the liquidator or other third party can then apply for a court order to enforce action against the director or manager of the insolvent company.

This means that the cash or property (assets) will need to be restored by any means necessary – from the parties held responsible.

A report will then be submitted by the office-holder to the Secretary of State, which could result in a disqualification from directorship for up to 15 years amongst other consequences.

Next Steps

Personal liability is a common concern for even limited company directors, because the answers aren’t always clear-cut.

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