💥TOPICS FOR OUR LEGAL ENGLISH COURSES
💥What is misfeasance?
Limited company directors enjoy various protections which ensure they are not personally liable for their company’s debts.
For this to work fairly, directors are legally required to adhere to legal and fiduciary duties.
Put simply, directors must act in the best interests of the company (adhering to and understanding Sections 170 – 177 of the Companies Act 2006).
💥Failing to do so could result in a misfeasance claim.
Typical misfeasance claims involve the misuse (e.g. misapplication or retention) of company money or property by a director or ex-director, violating their fiduciary duty.
💥Misfeasance and insolvency
Misfeasance is closely linked to insolvency.
When a company becomes insolvent, a liquidator is appointed. While we know that company insolvency can occur without individual fault or malpractice, the liquidator will closely scrutinise the actions of the directors in the lead up to the company’s failure.
If it is revealed that a director has failed in their fiduciary duties and committed misfeasance, the liquidator will sue the director to recover company debts.
Note: since 2015 the Small Business, Enterprise and Employment Act has given creditors and administrators the right to make misfeasance claims alongside insolvency practitioners.
💥Examples of misfeasance
Although often bundled together (and can take place concurrently), misfeasance generally concerns the misapplication of funds or company property as opposed to the more tax-focused and book-keeping elements of wrongful trading.
Four common examples are:
⚡️Hiding assets – a director might attempt to hide assets from the liquidator to reduce creditor returns and personally gain from selling the assets themselves
⚡️Taking an excessive salary – if a director takes a salary that is evidently unsustainable when a business is in financial difficulty, they may be seen to have contributed to the company’s failings
⚡️Transactions at undervalue – should a director sell company assets for less than their market value, particularly to a friend or family member, it may be deemed that they are attempting to avoid the inclusion of said assets in the liquidation process and lead to a claim of misfeasance
⚡️Preferential payments – misfeasance may also have occurred if a director repays a particular creditor ahead of other creditors (generally as a result of having made a personal guarantee).
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