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Misfeasance Claims and The Statute of Limitations

Misfeasance Claims – Case Study Where the Liquidator is Seeking Repayment of £575,000. 

In this case study, the NDP team are advising a company’s directors on a Misfeasance Claim where the liquidator alleges against the directors:

  • That repayments totalling £575,000.00 made in January and February 2009, from the company to a related company, pursuant to a long standing loan agreement, in the months leading up to liquidation, constitute a Preference Payment, in breach of section 239 of the Insolvency Act 1986.

The liquidator is seeking repayment of the £575,000 under section 212 of the Insolvency Act 1986, alleging Misfeasance by the directors, where Misfeasance is defined in law as: the taking of willful inappropriate action or the giving of intentional incorrect action or advice.

The particularly interesting thing about this case is whether the Liquidator’s Misfeasance Claim was ‘brought in time’ or is ‘out of time’ as a result of Statute of Limitation Issues, given that the repayments took place over 6 years ago.

Is This Liquidator’s Misfeasance Claim Brought in Time?

This is a real, live issue on the facts of this case.   A section 212 claim must have an underlying cause of action. There is no doubt about that.  In this case, the Applicant Liquidator is relying on alleged breaches of fiduciary duty (as codified in statute at section 171 onwards of the Companies Act 2006) alleging specifically:

  1. Use of powers by the directors for improper purposes;
  1. Failing to promote the company’s success; and
  1. Failing to act in its creditors’ interest etc.

So, is this liquidator’s claim brought in time, that the repayments took place over 6 years ago?  If not, the claim will be susceptible to dismissal by the Court, on application by the director(s).

The decision in Re Eurocruit Ltd [2008] Bus LR 146 confirms that section 212 is a procedural section and a claim under section 212 does not have a limitation period distinct from the company’s underlying claim.  Thus no new cause of action is created when the liquidators are appointed.

The Misfeasance Claim Dates Back to Repayments Made in Early 2009

The repayments of £575,000 attacked in this specific case date back to January and February 2009.  Any proceedings now issued will on the face of it have been issued after the expiry of more than six years from the date of the payments.   The liquidator’s Misfeasance Claim thus seems out of time and if that is correct, cannot be pursued by the liquidator.

The legal position, however, is not straightforward.   The liquidator’s argument is that because he pleads in his claim, fraud and breach of trust by the directors in making payments, he is (on his case) entitled to say that there is no applicable limitation period in relation to his claims.  The directors, on our advice, do not accept that position.

So Where Does This Misfeasance Claim Go From Here?

Specialist advice has been obtained by the directors on the advice we have given them from a specialist insolvency barrister.  In general, there is no ‘black or white’ answer in such cases as the particular facts of a specific case will give the answer to the question above. The directors now have a difficult and potentially expensive decision to make, that is whether to apply to strike out the liquidator’s claim or not.

The stakes are very high.  If the application to strike out the Misfeasance Claim is made by the directors and successfully pursued, then the directors will not have to answer the liquidator’s claims and they are likely to be the beneficiaries of an order that the liquidator pays their costs of pursuing the strike out application.

Conversely, if the application to strike out is made and lost, then the directors will likely be ordered to pay the liquidator’s costs of the unsuccessful application (whilst also remaining liable for their own legal costs) and they will then still have to answer and defend the Misfeasance Claim alleged by the liquidator.

The Way Forward

The directors now have to consider all of their options, based on the specialist advice received, weigh up the costs and risks involved and make tactical decisions as to how best to proceed, and we will report on the conclusion to this case in due course.

As experts in Insolvency Litigation (in this case: Misfeasance Claims), we are instructed regularly by directors and Insolvency Practitioners to defend or prosecute misfeasance claims. The consequences for the director for breaching his/her duties (the cause of a misfeasance claim) can be serious and this case study demonstrates the experience and legal skill that goes into considering what the possible defences are when facing a misfeasance claim.

If you, or your client, are facing misfeasance claims, 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.