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Misfeasance and insolvency

Directors of private limited companies are given protection which separates the debts and liabilities of the company from their personal liability. In exchange for this, the law requires directors comply with their legal and fiduciary duties. A fiduciary duty is a legal obligation of one party (eg a director) to act in the best interest of another (eg the company). If they don't, they can be held liable for misfeasance. Read this guide for more information on misfeasance.
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Misfeasance is where a director or ex-director misapplies, misappropriates, retains or becomes accountable for any money or other property of the company. This includes company officers such as the company secretary. Misfeasance also covers a director's breach of their fiduciary duty (ie a legal obligation of one party to act in the best interest of another) in relation to the company and their conduct during their tenure.

Directors and company officers are more likely to face a claim for misfeasance if their company has gone into liquidation or administration. When a company goes into liquidation or insolvency and it's found that a director committed acts of misfeasance or breached their duties, then this may form the basis of a claim by the liquidator. This is where the liquidator will seek to sue the directors or third parties and recover any money owed for the company.

The main purpose of misfeasance claims is to recover sums owed to creditors and pay off the company's debts.

In most cases, it will be the appointed liquidator who will bring a claim for misfeasance against a director or company officer on behalf of the company. There may be other officials who can bring a claim of misfeasance, including:

  • administrators
  • creditors of the company
  • the Official Receiver

After a misfeasance claim is brought by a liquidator, the court may explore the conduct of the director and issue a court order to force the director to repay, restore or account to the company for any property or money, or compensate the company for breach of their fiduciary duties.

A court may also find that a director acted against their legal duties and disqualify them from being a company director in the future. For further information, read Disqualification of directors.

If the liquidators are bringing a claim of misfeasance then the claim will be subject to a statutory limitation of 6 years. This means that the liquidator has 6 years from the date of the alleged misfeasance to bring a claim. If they are bringing a claim based on a breach of fiduciary duty (ie a breach of trust) then this will not be subject to any time limitations.

It's important for the director and the liquidator to determine as early as possible whether or not a director has a defence to a misfeasance claim, as it impacts upon the prospects of successfully pursuing/defending a claim and any settlement negotiations.

A defence to misfeasance is that a director acted honestly and reasonably. If a director can successfully claim they acted honestly and reasonably then the court may excuse them. The court can take factors into account such as loss to the company, the personal benefit derived from the misfeasance, whether shareholder approval was provided and the degree of blameworthiness. Courts therefore take a more sympathetic approach to directors who acted honestly.

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