What Is Misfeasance? Definition and Examples

“Misfeasance” is one of those legal words that pops up when something has gone wrong in a company - usually involving a director or manager - and someone wants money back or accountability.

If you run a small business, it’s worth understanding what misfeasance actually means, how it differs from other types of wrongdoing, when it can lead to personal liability for directors, and the practical steps you can take to prevent it.

In this guide, we’ll break it down in simple terms and share pragmatic steps you can take to stay protected from day one.

What Does “Misfeasance” Mean Under UK Law?

At its core, misfeasance means doing something you’re allowed to do - but doing it improperly. It’s not about doing something completely outside your powers (that’s often “malfeasance”), and it’s not about failing to act (that’s “nonfeasance”).

In a business context, misfeasance most commonly arises in two places:

• Company law: Where a director or officer misuses company money or breaches their duties to the company (for example, acting in a conflict of interest, or paying unlawful dividends). These claims often appear during insolvency under section 212 of the Insolvency Act 1986.
• Public law: “Misfeasance in public office” is a separate tort that applies to public officials who act in bad faith. That’s a different area and won’t usually affect a private SME.

For small businesses, the key focus is company law misfeasance - typically involving directors’ duties under the Companies Act 2006 (for example, to act within powers, to promote the success of the company, to exercise independent judgment, to exercise reasonable care, skill and diligence, to avoid conflicts and not accept benefits from third parties, and to declare interests in proposed transactions).

Doing something within your role but in a way that breaches those duties can amount to misfeasance. If the company later enters insolvency, a liquidator can pursue a director for repayment, compensation or other remedies if the breach caused loss to the company.

Misfeasance And Company Directors: When Can Claims Arise?

Misfeasance claims often arise when a business is under pressure or becomes insolvent, as transactions get scrutinised with hindsight. But they can also be raised while the company is solvent (for example, by the company itself, or exceptionally by shareholders through limited statutory routes).

Typical Triggers

• Misuse of company funds: Personal spending on company cards without proper authorisation or accounting, or paying above-market fees to a connected party.
• Unlawful dividends: Paying distributions when there are no distributable profits (contrary to Part 23 of the Companies Act 2006).
• Related‑party transactions: Entering deals with directors or their family companies without proper approval or fair terms.
• Conflicts of interest: Failing to declare an interest in a proposed transaction or mismanaging a conflict so the company loses out.
• Transactions at an undervalue or preferences: Particularly relevant in the run-up to insolvency, where assets are transferred too cheaply or certain creditors are unfairly preferred (Insolvency Act 1986).
• Failure to keep adequate records: Poor record‑keeping can make otherwise legitimate decisions look improper and may itself breach statutory obligations.

Who Brings The Claim?

In insolvency, a liquidator commonly brings a misfeasance claim under Insolvency Act 1986, section 212. If successful, the court can order the director to repay or contribute to the company’s assets, account for profits, or pay compensation.

Outside insolvency, the company may take action itself against a director. In limited situations, shareholders might bring a statutory derivative claim on the company’s behalf. The practical realities for SMEs are that these disputes are best avoided through good governance and early legal advice.

How Is Misfeasance Different From Wrongful Trading?

Wrongful trading (Insolvency Act 1986, section 214) is about continuing to trade when a director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation. Misfeasance is broader - it can capture any misapplication of company property or breach of duty. In an insolvency review, both can be alleged depending on the facts.

Practical Examples Small Businesses See Day-To-Day

To make this tangible, here are everyday scenarios that can turn into misfeasance issues if not handled carefully:

• “Borrowing” from the company: A director withdraws cash for personal use without documenting a proper director’s loan and later can’t repay it. These situations are particularly sensitive if the company goes insolvent.
• Paying yourself early or too much: Increasing director remuneration or paying bonuses when the company cannot afford it or without proper authorisation. Keeping clear Board Resolutions helps evidence decisions.
• Side deals with a friend’s company: Awarding a contract to a connected business without disclosing the connection or testing the market. This is a classic conflict of interest scenario that should be managed with a clear Conflict of Interest Policy and recorded approvals.
• Unlawful dividends to shareholders: Distributing cash when there are no distributable profits. Check your accounts, minute the decision, and ensure your Articles of Association are followed.
• Skipping governance: Making big decisions by text message and never documenting them properly. Running structured directors’ meetings and keeping minutes can be your best defence years later.
• Ignoring the constitution: Acting contrary to the company’s Articles (for example, allotting shares or approving transactions without required approvals) can lead to challenges and claims. A strong Shareholders Agreement can also add practical checks and balances.

None of these are unusual in small businesses - they’re everyday decisions. The key is to follow a clean process, record approvals, and treat company money as the company’s, not your own.

How To Prevent Misfeasance Claims In Your Business

You can drastically reduce your risk by setting up clear governance from day one. Think of this as building your legal foundations so you can make confident decisions, scale, and defend your actions if they’re ever challenged.

1) Get Your Constitution And House Rules In Order

• Check your Articles of Association: Make sure they’re tailored to how you actually operate (decision thresholds, director powers, share rights, dividend rules).
• Adopt an owner roadmap: A well-drafted Shareholders Agreement sets expectations about decision‑making, funding, conflicts, and dispute resolution.
• Use formal approvals: Record key decisions with clear Board Resolutions so you can show the who/what/why if challenged later.

2) Manage Conflicts And Related‑Party Deals

• Declare interests early: Directors should disclose any personal interest in proposed transactions and abstain where appropriate.
• Write it down: Put a short paper to the board on pricing and alternatives to evidence the deal is on market terms.
• Adopt a simple policy: A practical Conflict of Interest Policy sets the standard and keeps everyone honest.

3) Document Roles And Authority

• Spell out responsibilities: A robust Directors’ Service Agreement clarifies duties, pay, benefits, and reporting lines, reducing room for misunderstandings about authority and remuneration.
• Minute delegations: If you delegate a power (for example, to a finance lead), minute the scope and any limits - directors retain overall responsibility to supervise.

4) Strengthen Financial Controls

• Segregate duties: Avoid one person initiating, approving and reconciling payments.
• Set spending limits: Require dual authorisation above sensible thresholds.
• Keep clean records: Accurate accounting and timely management accounts help you spot issues early - and prove you acted reasonably.
• Check dividends: Only pay dividends out of distributable profits and record the basis for the decision.

5) Create A Speak‑Up Culture

• Encourage internal reporting: A simple, confidential Whistleblower Policy helps you catch problems early and demonstrates you take governance seriously.
• Train your team: Short refreshers for managers on conflicts, approvals and record‑keeping go a long way.

6) Use Meetings And Minutes As Protection

• Regular cadence: Schedule board meetings and circulate agendas, papers and minutes. Following good practice for directors’ meetings builds a solid audit trail.
• Capture advice: If you relied on professional advice, minute it (who gave it, what they were asked, and the conclusion).

7) Insurance And Advice

• D&O cover: Consider directors’ and officers’ insurance to respond to certain claims and defence costs. Check exclusions and notification requirements.
• Ask early: If you’re unsure whether a payment or transaction is permissible, get legal advice - it’s far easier to structure it correctly upfront than to fix it later.

Investigations, Remedies And Defences

Despite best efforts, disputes do happen. If misfeasance is alleged, either internally or by an insolvency office‑holder, here’s what to expect.

How Investigations Usually Run

• Information requests: Expect requests for bank statements, contracts, board packs and emails.
• Internal review: If you’re solvent, you might appoint an independent director or committee to review the issue and take advice.
• Negotiation or claim: Some matters can be resolved commercially (e.g., repayment of an improperly drawn director’s loan). Others proceed to formal claims.

Potential Remedies

• Repayment or contribution: The court can order repayment of misapplied funds or compensation for losses caused.
• Account of profits: Where a director profited from the breach (e.g., a conflicted deal), they may be ordered to account for that profit.
• Interest and costs: Financial awards can include interest and adverse cost orders.
• Disqualification: Serious cases may also lead to director disqualification under the Company Directors Disqualification Act 1986.

Common Defences And Mitigations

• Acted within powers and duties: Showing you understood the company’s constitution and followed proper approvals will help.
• Business judgment: Courts don’t second‑guess genuine, informed commercial judgments simply because outcomes were poor. Evidence of a rational process matters.
• Reliance on professional advice: Taking and documenting appropriate advice (legal, tax, audit) can be powerful evidence of reasonable care.
• Good records: Clean minutes, Board Resolutions and supporting papers can make or break a case.

There are time limits for claims and important nuances around who can sue and what they can recover. It’s wise to seek tailored advice as early as possible so you can preserve evidence and options.

Step-By-Step If You’re Worried About Misfeasance

If a concern has been raised - or you’ve spotted something that doesn’t look right - take calm, structured steps.

1. Pause the conduct: If the concern relates to ongoing payments or a proposed transaction, pause until it’s reviewed.
2. Collect documents: Secure relevant contracts, emails, bank statements, accounts and prior approvals. Don’t alter anything - preserve the audit trail.
3. Check your constitution: Review your Articles of Association and any Shareholders Agreement to confirm approval requirements.
4. Hold a documented meeting: Convene a board meeting, minute the issue and proposed next steps, and follow good practice for directors’ meetings.
5. Obtain independent advice: Get legal and, where relevant, accounting advice on the risks and remedial options.
6. Consider remediation: Options might include reversing a transaction, repaying a director’s loan, or seeking shareholder/board ratification where legally possible.
7. Strengthen controls: Use the incident to tighten approvals, conflicts management and record‑keeping, and consider adopting or updating a Whistleblower Policy.

Key Takeaways

• Misfeasance is about doing a permitted act improperly - most relevant to SMEs where directors breach duties or misapply company funds.
• Common triggers include unlawful dividends, undocumented director loans, conflicts of interest, and weak records around key decisions.
• Good governance is your best defence: keep tailored Articles of Association, use formal Board Resolutions, and follow structured directors’ meetings.
• Manage conflicts proactively with a clear Conflict of Interest Policy and document related‑party transactions and approvals.
• Clarify roles and remuneration in a Directors’ Service Agreement and set decision‑making rules in a Shareholders Agreement.
• If an issue is flagged, pause, gather records, minute the board’s response, take advice and consider remediation before it escalates.

If you’d like help reviewing your governance documents, recording decisions properly, or assessing a potential misfeasance risk, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no‑obligations chat.