Misfeasance: a catch-all claim against directors (UK)

Author: Morrisons Solicitors
United Kingdom

What exactly is a misfeasance claim? Directors owe certain fiduciary and other duties to their companies in their capacity as an officer. In the context of a company in administration or liquidation, a misfeasance claim is usually a summary way of bringing a claim for breach of fiduciary duty or other duty in relation to the company. For example, it is the duty of a director to have regard to the interests of creditors where the company is insolvent or of doubtful solvency and if the director fails to do so then he may be held in breach. Other examples include paying unlawful dividends to shareholders, taking a high salary when the company is in difficulty and cannot support it, causing preferential payments to be made to connected parties or, more generally, failing to act in the best interest of the company. Such claims often form part of wider claims against directors including wrongful trading and preference claims.

Who can bring a misfeasance claim? A misfeasance claim can be brought by a liquidator (or administrator) or a creditor of the company and less commonly by a contributor to the company’s capital and the official receiver.

What are the possible remedies? If, on examination of conduct by the court, a person is found to have been misfeasant or to have breached a fiduciary or other duty to the company, the court may order the director to repay, restore or account for any misappropriated money with interest or compensate the company by way of a contribution to the company’s assets. In practice, expert evidence may be required from an accountant to determine what loss was actually caused by a breach.

It is also important to note that the liquidator will also submit a report to the Secretary of State regarding any instances of misfeasance. This could lead to director disqualification proceedings which could result in a director being disqualified for 2-15 years.

What are the defences? If a director can show that he acted honestly and reasonably and the circumstances of the case mean that it is fair to excuse him from the liability then he is entitled to seek relief from liability. Even if misfeasance is established the court may exercise its discretion to relieve the director from liability in full or in part.

The so-called Duomatic principle may also be available as a defence to liability. The basis of the principle is that shareholder ratification makes the misfeasance an act of the company and prevents it from taking action.

Key considerations

There are a number of things directors can do to help reduce the risk of claims which include:

1. being aware of the financial position of the company;
2. attending regular board meetings and ensure that decisions are properly taken and minuted; and
3. considering obtaining expert opinions in relation to high-value/high-risk transactions.

If you would like advice or assistance on any of the issues raised in this article please contact Catherine Fisher, Head of Dispute Resolution at Morrisons Solicitors LLP

Information as at: 28/06/2019

This article contains general information only and is not intended to address the circumstances of any particular individual or entity. By means of this article, EuropeFides or the author of the article are not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. EuropeFides or the author of the article shall not be responsible for any loss whatsoever sustained by any person who relies on this article.