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Defending Misfeasance Claims – Case Study

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Advising Directors on a Misfeasance Claim for c.£1 Million Regarding Preference Payments

A Misfeasance Claim usually involves an allegation from the liquidator that a director has misapplied money or other property belonging to the company and/or breached his/her duties as a director.  Directors and Insolvency Practitioners instruct us to bring or defend misfeasance claims, an area of insolvency litigation in which we have a great deal of experience.

This recent case study shows the typical approach that the NDP team takes when advising directors on a Misfeasance Claim. In this case the liquidator is alleging the following regarding preference payments:

  1. That the directors/shareholders received a Preference of £650,000.00, by declaring a dividend to themselves for that amount, which they then caused or allowed to be set off against the existing liability of the directors/shareholders, to the company, pursuant to section 239 of the Insolvency Act 1986.
  1. That the directors caused a Preference payment to be made by causing loan repayments to be made of £175,000.00 to companies which were associated with the directors and their spouses.
  1. That the directors received a Preference payment of £135,000.00, because of repayment from the company of short term loans due to them, where the loans were made to the company by them in the months leading up to liquidation, to pay wages and pressing creditors, to allow the company to keep trading whilst attempts at refunding the company continued. Those refunding attempts ultimately failed.

The liquidator alleges that the above transactions involved the directors in breaching their statutory duties owed to the company owed under the Companies Act 2006 (sections 171 – 176 inclusive).  He is bringing these Misfeasance Claims against the directors, therefore, as misfeasant transactions, under section 212 of the Insolvency Act 1986.

What is The Liquidator’s Claim?

The Liquidator’s Misfeasance Claim is that by causing or allowing the company to…..

  1. Declare the dividend,
  2. Effect the dividend set off, and
  3. Make the loan repayments……..

……..the directors breached their fiduciary duties owed to the company.   The liquidator seeks repayment of the £260,000, the £175,000, the £135,000 plus substantial interest, plus legal costs.

NDP’s Approach to Misfeasance Claims

When advising directors who are faced with Misfeasance Claims, our approach always bears in mind the level of risk and the likely expense of defending such claims for the directors (as this case shows, the sums involved in Misfeasance Claims can be very large), not to mention the stress and worry for the director and his family of dealing with such claims.

That is particularly so, where in Insolvency Claims such as this, the liquidator almost inevitably brings the claims against the directors with the benefit of adverse costs insurance, meaning that he is, to all intents and purposes, litigating without costs’ risk to himself.

In other words, if the liquidator loses his Misfeasance Claim against the director(s) and the Court orders that he pays the directors’ legal costs, then the insurance policy kicks in and pays those costs for the liquidator.

What are the Objectives of the Director When Faced With a Misfeasance Claim?

In our experience, the director almost always has choices and options, and the answer to the above question is that it is vital to determine the director’s objectives as quickly as possible, when it comes to deciding how to respond to a Misfeasance Claim, considering amongst other matters:

  • The merits of the proposed misfeasance claim from the liquidator;
  • The availability of documentary evidence and witnesses to support the director’s position;
  • The value and nature of the asset base of the director that is under attack from the liquidator’s claims (it is almost certain that the liquidator will have already considered this issue);
  • The future work and life intentions of the director in the particular circumstances of the case; and
  • The wider financial position of the director – does he/she have assets that are capable of attack if the liquidator’s action proceeds.

Only once the director’s objectives are identifie can we hope to decide and advise on how best to respond to the misfeasance claims. Examples of potential responses include: the making of a settlement offer (whether or not coupled with a full response to the claim), the defence of the misfeasance claim (if already issued) or the sending of a robust response letter to the liquidator (if the claim has not yet been issued).

Misfeasance Claims and Settlement Offers

Often a liquidator may, on the face of it, have a misfeasance claim against the directors that appears likely to succeed.  However, the wider financial circumstances of the director may well determine that, whatever the merits of the liquidator’s case, there is little or no point in the director opposing the liquidator’s claims.

For example, the director may still be dealing with personal guarantee and other financial obligations, arising out of the failure of the company that might mean that personal bankruptcy is a better option for the director.  It is an option to consider, if only to discount it or potentially to use it as a negotiating tool.

In such a situation, a settlement discussion with the liquidator, offering pence in the pounds, may well be the best way forward for the director and may in fact be an acceptable (if not attractive) solution for the liquidator to the liquidator’s claims.

Third Party Claims

The director also needs to consider whether he can seek a financial contribution from others, to contribute financially towards the liquidator’s misfeasance claim(s) made against him.  Such a financial contribution might (for example) be sought against accountants or solicitors (or other professionals) who may have advised the directors or the company.

So, if you are facing a misfeasance claim, is there (for example) another director you can look to for a contribution or indemnity?

Contact us if you are Facing Misfeasance Claims

As this case study demonstrates,the team here at NDP is well used to advising on Misfeasance Claims and negotiating with liquidators and their solicitors on such issues.

If you, or your client, are facing a misfeasance claim, call us on 0121 200 7040 or contact us for an initial free chat. No hole is too deep for us to help, but the earlier you get in touch, the more we can do to help.