What Is Misfeasance and How Does It Impact Directors in Insolvency?

If you’re running a company in the UK, the word “insolvency” is probably one you hope to never hear. But for company directors, understanding key risks-including misfeasance-can be the difference between winding down your business smoothly and facing personal liability down the track.

If you’ve been wondering “what is misfeasance?” and how it could impact you as a director if things go wrong, you’re in the right place. In this guide, we’ll break down what misfeasance actually means, how it can arise during insolvency, and most importantly-what you can do to protect yourself and your business. Let’s get started.

What Is Misfeasance?

Put simply, misfeasance is a type of misconduct by a company director or officer. In a business context, it often means the director has behaved in a way that breaches their duties or misuses company funds-especially when the business is failing or in insolvency. It’s a term you might hear a lot if you’re dealing with insolvency professionals or considering what might happen if your company runs into financial trouble.

Legally, misfeasance is covered under Section 212 of the Insolvency Act 1986. It allows a liquidator, administrator, creditor, or shareholder to bring an action against a director (or former director) for:

• Misapplying, retaining, or becoming accountable for any money or property of the company;
• Being guilty of any misfeasance or breach of duty in relation to the company.

Misfeasance isn’t always about deliberate fraud. Sometimes, it’s simply poor judgment or neglect-a decision that leads to a loss for the company or its creditors, especially if made while insolvent or close to insolvency.

Why Does Misfeasance Matter for Directors?

Directors have a legal obligation to act in the best interests of their company-and, if the company faces insolvency, to prioritise the interests of creditors. If you cross the line into misfeasance, the personal consequences can be serious, including:

• Repaying or compensating the company for any loss or misapplied funds;
• Being personally liable for debts owed to creditors;
• The risk of being disqualified as a director for a period of time.

So while winding down an insolvent company is always stressful, following your directors’ duties and avoiding misfeasance is crucial to protecting yourself-both professionally and personally.

What Kinds of Actions Count as Misfeasance?

Not every mistake will be misfeasance. But certain actions (especially once your company is in trouble) are red flags. Examples of director misfeasance include:

• Using company money for personal expenses or benefits;
• Failing to maintain proper accounting records;
• Transferring assets out of the company to avoid paying creditors;
• Continuing to trade or incur debts when you know the company can’t pay its bills;
• Paying some creditors in preference to others (so-called ‘preferential payments’);
• Ignoring your duty to act in creditors’ best interests once insolvency is on the cards.

Simply put, misfeasance covers any act (or failure to act) that breaches your duty as a director, especially if it causes loss to creditors or the company itself. For more on your legal responsibilities as a company director, see our guide to director obligations in the UK.

How Does Misfeasance Relate to Insolvency?

When your company is trading normally, directors are required to act in the best interests of the company and its shareholders. However, when insolvency becomes likely-or actually happens-this focus shifts. Your main duty is now to protect the interests of creditors (the people and businesses your company owes money to).

If you breach this duty (for example, by transferring out company assets to avoid paying creditors, or continuing to rack up debts), you could be found guilty of misfeasance insolvency. The court can then order you to repay the company or make good any loss suffered as a result of your actions.

This is different (but related) to other insolvency offences, such as “wrongful trading” and “fraudulent trading.” Want to know more about what happens if your company can’t pay its debts? Check out our guides on voluntary administration and company winding up.

What Is the Process for a Misfeasance Claim?

If your company enters liquidation or administration, the appointed liquidator or administrator will review the company’s financial records and transactions-sometimes going back years. If they (or any creditor/shareholder) find evidence of misfeasance, they can start a misfeasance claim.

The process usually involves:

1. Investigation: The liquidator examines company accounts, minutes, and correspondence for suspicious activity or breaches of duty.
2. Letter of Claim: If a potential breach is found, you’ll receive a letter setting out the details and inviting you to respond.
3. Court Proceedings: If the issue isn’t resolved, the liquidator (or creditor/shareholder) can apply to court for a misfeasance order under Section 212 of the Insolvency Act 1986.
4. Potential Consequences: The court may order you to repay, restore money or property, or compensate for losses. In serious cases, you could face director disqualification.

Most misfeasance claims are settled before court, but legal proceedings are possible-so getting professional legal advice early is essential.

What’s the Difference Between Misfeasance and Wrongful Trading?

These terms are often mentioned together, but they have some important differences:

• Misfeasance: Focuses on breaches of general director duties-any act of misconduct or misuse of company assets, especially causing loss during insolvency.
• Wrongful Trading: Occurs when a director continues to trade or take on new debts when they know (or ought to know) the company will not avoid insolvency. See our guide on wrongful trading for details.

In practice, a director could face claims for one or both offences depending on the facts. Both carry the risk of personal liability-so it’s vital to get your director duties right when facing insolvency.

How Can Directors Protect Themselves from Misfeasance Risks?

No one sets out to breach their director duties. But if your company ends up in financial trouble, there are important steps you can take to minimise your risk of a misfeasance claim:

• Keep Accurate Records: Maintain detailed and up-to-date accounts, board minutes, and correspondence. This can demonstrate you acted responsibly if your actions are ever questioned.
• Prioritise Creditors’ Interests: The moment insolvency becomes likely, stop trading and focus on protecting creditors. Don’t make selective payments, asset transfers, or loans to directors.
• Seek Professional Advice Early: If you think insolvency is on the horizon, contact a legal advisor or insolvency practitioner. Early advice can help you avoid accidental misfeasance.
• Follow Proper Procedures: When selling assets, making redundancies, or entering agreements during insolvency, ensure you follow proper process and seek necessary approvals.
• Disclose Everything: Don’t be tempted to hide transactions or fail to disclose information to your insolvency professional. Transparency helps prove you acted properly.

Remember, most directors who get into hot water over misfeasance didn’t intend to do the wrong thing-they just didn’t realise what was required. That’s why understanding your obligations is so important.

What Happens If I’m Accused of Misfeasance?

If you’re served with a misfeasance claim, don’t panic. There are steps you can take and defences available:

• Review the claim carefully and gather your records and correspondence (the more detail, the better).
• Respond in writing and seek legal advice immediately-don’t ignore the claim.
• If you acted honestly, reasonably, and in creditors’ best interests, you may have a defence.
• It’s always easier to defend a claim if you have clear, timely evidence of your decisions and actions.

In some cases, the court has discretion to relieve a director from liability if they acted honestly and reasonably. However, this isn’t guaranteed-so consult a lawyer with experience in director duties and insolvency as soon as possible. For support, our team can assist with reviewing your situation and outlining the best next steps.

Related Director Risks to Be Aware Of

Misfeasance isn’t the only risk directors face in insolvency. Other common issues include:

• Breach of directors’ duties-any breach can be pursued by the liquidator or creditors.
• Trading while insolvent-directors may face claims if they continue operations when insolvent.
• Wrongful or fraudulent trading-more serious than misfeasance, can lead to disqualification or criminal prosecution.
• Challenging of transactions-including “transactions at undervalue” where company assets are sold too cheaply before insolvency.

Understanding these wider risks helps directors act confidently during challenging times. Setting up your compliance processes early on, and knowing when to get advice, can make all the difference.

Where Can I Get Help Understanding Director Duties During Insolvency?

If this all feels overwhelming, don’t worry-you’re not alone. Director duties in insolvency are complex, and the risks are real. But with the right foundations, you can navigate tough times with confidence. Here’s what you can do:

• Speak to a legal advisor as soon as you think your company may be insolvent or at risk-don’t delay.
• Use professional services for company accounts, legal documents, and insolvency processes.
• Keep your compliance up to date from day one-good records protect you in the long run.
• Consider tailored advice to ensure your exact situation meets the requirements of current UK company law, including the Insolvency Act 1986.

For a comprehensive overview of director risks and company compliance, see our detailed guides on limited liability companies and corporate governance.

Key Takeaways

• Misfeasance involves a breach of director duties, especially misusing company property or funds-commonly during insolvency.
• Directors can be held personally liable for losses caused by misfeasance, even if it wasn’t deliberate.
• Misfeasance claims arise if a liquidator, administrator, creditor, or shareholder finds evidence of misconduct or loss in the lead-up to or during insolvency.
• To avoid misfeasance risks, keep detailed records, prioritise creditor interests when insolvent, and get professional advice early.
• Always respond to any misfeasance allegations promptly and seek expert guidance to protect yourself.
• Establishing solid legal compliance and records from day one is the best way to minimise risks as a company director.

If you need tailored advice around director duties, insolvency, or misfeasance risks, we’re here to help. You can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat with our friendly team of legal experts. Let Sprintlaw help you stay protected from day one.