Insolvency and misfeasance

Posted on October 13, 2014 by Patrick Wadsted

Some other things not to do if insolvency is looming, or Misfeasance to give it a posh name.

To understand what misfeasance might be you have to consider the core duties of a director of a company.

A director is in a fiduciary position to their company.

These duties include:

  • a duty to act and use their powers in good faith, in the best interests of their company.
  • a duty to exercise their powers only for the purposes for which they were conferred.
  • a duty not to put themselves in a position where the interests of the company conflict with personal interests, or a duty owed to a third party.
  • a duty not to make a personal profit out of their position as director unless permitted by the company to do so.
  • a duty not to contract with others in such a way as to fetter their future discretion.

There are some others but they are not relevant when considering misfeasance. So, what is meant by misfeasance?

The bit of legislation that deals with it, Section 212 of Insolvency Act 1986, states that an action may be brought against someone who “is or has been an officer” of the company, in the event that the company in which they held office is wound up, allowing a liquidator, shareholder or creditor to bring an action if that office-holder has:

‘…misapplied or obtained, or become accountable for, any money or other property of the company or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.’

Such claims may be in respect of overdrawn directors’ loan accounts, or even preferences and transactions at undervalue (described elsewhere)

If in doubt don’t !