Misfeasance Claims

Misfeasance Claims Against Directors and Director Disqualifications are Increasing.

• The number of misfeasance claims against directors and director disqualifications and  is increasing. Click here for more about what the Duties and Obligations of the Professional Adviser are in such cases. These duties, especially for accountants and auditors, are under increasing scrutiny.

Click here to see some examples of cases where misfeasance was alleged.

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.

What Constitutes Misfeasance?

Often, liquidators allege that the specific conduct of a director (see below) constitutes Misfeasance and breach of the (in the main) statutory duties, owed by the director to the company and also to its creditors, under section 212 of the Insolvency Act 1986 (‘IA 1986’).

In corporate contexts, misfeasance often involves mishandling company assets, making imprudent financial decisions, or prioritising personal interests over those of the company. These actions might not constitute outright fraud or theft but nonetheless represent a breach of the duty of care expected from someone in a position of responsibility. Directors owe a number of duties under the Companies Act 2006, including:

• A duty to act within powers.
• A duty to promote the success of the company.
• A duty to exercise independent judgment.
• A duty to exercise reasonable skill, care and diligence.
• A duty to avoid conflicts of interest.
• A duty not to declare or pay illegal dividends – this is a common complaint made by liquidators.

Where directors fail to co‑operate or provide records, Liquidators may need to escalate matters. Our sections 234–237 IA86 enforcement case study shows how compelled compliance can be obtained, including examination under oath and arrest for non‑compliance.

The Duties of Directors

The specific duties of directors are set out in full in sections 170 – 177 of the Companies Act 2006 set out the specific duties of directors. Inevitably the Act is a long and detailed piece of legislation, which as specialists in director disqualification, insolvency claims and misfeasance, sits at the centre of the work we do.

Click here to read some selected decided cases to show how the sections in the act work in real life.

At NDP we can help directors faced with the prospect of disqualification or a Misfeasance Claim. Contact us or call us on 0121 200 7040 for a free initial chat.

Who is a director?

At NDP, we often find there is confusion as to who is a director. More specifically, what is the difference between a de facto director, a shadow director and a de jure director?

These are important distinctions. Outside of insolvency, it seems that breach of statutory duty claims may be brought against all three types of director mentioned above. However, in the area of insolvency, it seems that breach of duty and misfeasance claims can only be brought against de jure and de facto directors but not shadow directors.

Click here for more information on who is a director.

The Consequences for the Director of Breaching His/Her Duties

The Court may, on the application of the liquidator, explore the conduct of a director and may via a misfeasance claim compel the director to repay, restore or account to the company for any property or money (plus interest), or contribute such sum to the company’s assets by way of compensation in respect of the breach of duty as the Court thinks fit (section 212 Insolvency Act 1986).

If  the company is insolvent or financially distressed, an additional duty is imposed on the director to consider or act in the interests of creditors of the company (section 172(6)).

It is settled law that the director’s duty to promote the success of the company extends to taking into account the interests of creditors where the company is insolvent or nearly insolvent. See Yukong Line Ltd of Korea v Rendsburg Investment Corporation of Liberia (No2) [1998] 1WLR 294.  It is equally clear that particular duty is enforced and enforceable by the liquidator.

Possible Defences for the Director to a Misfeasance Claim

It is important for the director and the liquidator to determine as early as possible whether or not a director has a defence to the Misfeasance claim, whether at common law or statute, as it impacts upon the prospects of successfully pursuing/defending a claim and any settlement negotiations.

Common Law Defence to a Misfeasance Claim – The Duomatic Principle

This principle, first established in Re: Duomatic Limited (1969) by Buckley J. applies:

“where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

The core essence of the defence is that shareholder assent renders the alleged Misfeasance an act of the company itself, thereby precluding action by the company against the director(s).

There are however limitations to the parameters of this defence, namely that:

1. It cannot be relied upon where the company was insolvent at the time of alleged ratification.

2. Insolvency is an objective test (and the honest belief of the directors is irrelevant).

3. Those seeking to rely upon Duomatic must prove solvency (although the office holder must as a pre-requisite adduce evidence of insolvency).

The Statutory Defence to a Misfeasance Claim

In cases where an office holder succeeds in establishing Misfeasance or a breach of duty, a director and/or his advisors will seek to invoke section 1157 Companies Act 2006 which is in identical terms to its predecessor, section 727 Companies Act 1986, namely that:

“if in proceedings for negligence, default, breach of duty or breach of trust against… an officer of the company – it appears to the Court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably and that having regard to all the circumstances of the case… he ought fairly to be excused the Court may relieve him, either wholly or in part from his liability on such terms as it thinks fit”

The statutory defence is routinely pleaded as the last line of defence (more in hope than in expectation) but the case of  Bernard Madoff has potentially reinvigorated its usefulness.  Popplewell J held that:

1. It was apparent from the fact that the section is applicable to liability for negligence that ‘reasonably’ is a broad concept.

2. Relief is available even where a director has been in breach of the duty to exercise reasonable care and skill.

3. A Court should take into account factors such as loss to the company, personal benefit, whether shareholder approval has been provided, the degree of blameworthiness and proportionality.

Comment on the Statutory Defence

This suggests that Judges may in future adopt a more sympathetic approach to directors particularly where his/her actions were undertaken honestly.

The Extent of Compensation under a Misfeasance Claim

If common law and statute fails to afford a defence, then Madoff reinforces the principle that only genuine loss to the company is actionable.  A Judge must take into account any benefit that may have accrued to the company from the impugned transaction and the company cannot be ‘overcompensated’.

Recent Developments in Misfeasance Law

Recent court decisions have clarified the standards for establishing misfeasance in various contexts. These rulings have addressed issues such as the extent of directors’ duties during financial distress, the relationship between wrongful trading and misfeasance claims, and the factors courts consider when determining appropriate remedies. These precedents provide valuable guidance for both potential claimants and defendants in misfeasance proceedings.

Legislative reforms have also impacted the misfeasance framework. The Small Business, Enterprise and Employment Act 2015 expanded the range of parties who can bring misfeasance claims, allowing creditors and others to initiate proceedings in certain circumstances. This change has increased the potential for director liability and emphasized the importance of proper corporate governance practices.

Regulatory authorities have shown increased interest in addressing corporate misconduct, including misfeasance by directors and officers. The Insolvency Service, in particular, has adopted more aggressive enforcement strategies, pursuing disqualification proceedings against directors whose conduct falls below acceptable standards. This regulatory focus complements private misfeasance claims and enhances overall accountability in corporate governance.

International developments have also influenced domestic approaches to misfeasance. As businesses operate increasingly across borders, courts and regulators have considered foreign legal principles and practices when addressing misfeasance issues. This cross-fertilization has led to greater convergence in standards of director conduct and liability across different jurisdictions.

Why Choose NDP’s Misfeasance Solicitors to Advise Directors in Misfeasance Claims cases?

At NDP, with over 100 years of combined team experience as insolvency litigation specialists, we are well used to dealing with claims by liquidators against directors and shareholders. We know the legal, commercial and tactical steps to take, to try and resolve claims as quickly and effectively as possible. Take a look at some of our on-going misfeasance cases.

We have good, long established relationships with many firms of Insolvency Practitioners, across London, Birmingham and the wider UK.  Those relationships often allow us a ‘way in’ to try and resolve claims at an earlier point than might otherwise be the case.

We know what the liquidator wants.  We know what his objectives are and we know how to meet them.

We know the wider, tactical routes to follow, to persuade liquidators to settle actions, even where liability and culpability is a real problem for the directors.  No hole is too deep.

Contact us if you are facing a Misfeasance Claim and are in need of help and advice from our experienced team of Insolvency Litigation Specialists.