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Case Study: Director Misfeasance Claim by Joint Liquidators

NDP Go the Extra Mile for Company Creditors in Misfeasance Claim Case

In late 2019, NDP succeeded at Trial, on a misfeasance claim by its clients, the Joint Liquidators of a construction company.  The claims by the Joint Liquidators were against the construction company’s sole Director, seeking an Order that he repay £220,000 of company funds that he diverted to a third party company prior to liquidation and separately a claim, to recover an overdrawn Directors’ Loan Account from him in the sum of circa £6,000.

This case study details how we succeeded at the trial on behalf of the Joint Liquidators, with the result that the company director had to repay his company over £305,000, plus interest and costs, for his wrongful actions in relation to his company. It demonstrates the penalties that directors can receive for not promoting the success of a company and not acting in the interests of the creditors of a company.

The Facts of this Misfeasance Claim Case

Shortly before the company’s demise, the company entered into a contract to carry out substantial renovation works to a residential property. However, at the instruction and request of the Director, the sums received by the company under the terms of the contract with its unsuspecting customers, were diverted by the Director into the bank account of another company of which he was also a Director and sole Shareholder.

The first company went into liquidation, the building works were never completed (leaving the residents to live on a building site) and the company’s customers were £220,000 out of pocket.

The Allegations Against the Director

Following the liquidation of his company, the Director was invited by our Liquidator clients to personally repay the misappropriated £220,000 to the Joint Liquidators of the company.  He did not however meaningfully engage. The Joint Liquidators argued that the Director owed the following duties to the company:

‘(1)    A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters to):

(a)     the likely consequences of any decision in the long term,

(b)     the interests of the company’s employees,

(c)     the need to foster the company’s business relationships with suppliers, customers and others …

(3)     The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company (emphasis added).’

The Joint Liquidators argued before the High Court that by allowing payments to be made to a connected company, the Director breached that statutory duty.

As a matter of law,  in circumstances where the payments were made to a connected company, the evidential burden shifted to the director, to show that the payments were proper and for legitimate company expenditure, pursuant to Timothy Ball v Hughes EWHC 3228.

The Joint Liquidators also successfully  argued that the Director was a Trustee of the company’s property (i.e. to include the monies he transferred to the connected company), and as such he was under a positive duty to ensure that the trust money was not mixed with his own personal money and/or connected company money.

It was further argued that the onus was on the Director to distinguish and demonstrate what was trust money and what was not. The Director was simply unable to make such a distinction.

The Findings of the Court

Having heard all of the evidence at final hearing, the Judge found that the Director had failed to provide any satisfactory explanations for the diversion of company funds and further that the Director knew he had acted incorrectly in causing the payments to be diverted. Those payments were for his own benefit and not for the benefit of the company or its creditors.

As such, the Judge found that the Director:

  1. Failed to exercise the reasonable care, skill and diligence that should have been exercised by a Director of a small construction company; and
  2. Failed to exercise the reasonable care, skill and diligence of a reasonably diligent person with the Directors general knowledge, skill and experience.
  3. Breached his duties to act in the best interests of the company, and that he failed to avoid a conflict arising between his own personal interests and those of the company.
  4. Failed to show that he acted honestly or reasonably to entitle him to any relief under section 1157 Companies Act 2006.

The Outcome of this Misfeasance Claim

The Director was ordered to repay to the company just over £305,000 plus interest. He was also ordered to pay the legal costs of the Joint Liquidators on the indemnity costs.

Summary

This case serves as a stark reminder to Directors that they should not and cannot treat company assets as their own. They must ensure that the company always keeps adequate records of any and all transactions and be able to demonstrate that any transactions relating to company assets are undertaken in the company’s best interests.

This case also demonstrates the pitfalls of failing to properly particularise and plead a Defence, and the heavy burden of proof that Directors must overcome, if Liquidator claims are to be defeated.

We are grateful to the Joint Liquidators for their instructions, their perseverance and their support throughout the case.

Contact us if you are Facing a Misfeasance Claim

Misfeasance Claims usually involve an allegation that a director has misapplied money or other property of the company and/or breached his/her duties as a director. These claims can be highly stressful.

We are highly experienced in acting for directors and, as in this case, liquidators in misfeasance claim cases, always dealing with the facts of each case in determining the likelihood in succeeding for our client.

Call us on 0121 200 7040 or contact us for free initial discussion of your case.