Misfeasance - insolvency and other potential scenarios

What is misfeasance?

Misfeasance refers to the improper performance of a lawful act or duty. Unlike malfeasance (which involves doing something wholly wrongful and unlawful) or nonfeasance (which involves failing to act when there is a duty to act), misfeasance involves performing a legal duty or exercising legal authority improperly or in a way that causes harm to another party.

In UK law, misfeasance is most commonly addressed in two contexts:

• Misfeasance in public office - a tort concerning the improper exercise of power by a public official

• Misfeasance by company directors - a breach of fiduciary duties owed to a company, especially where the business is or may be insolvent, under the Insolvency Act 1986

Company director misfeasance

Allegations of director misfeasance can have serious legal and financial consequences. If concerns arise over a director’s conduct, it’s important to understand the risks and the steps involved in addressing potential breaches of duty. Types of misfeasance include :-

• Misuse of Company Assets

• Using company property for personal benefit

• Directors making loans to themselves or related parties without proper authorisation

• Selling company assets at undervalue to connected parties

• Improper Financial Decisions such as paying dividends when the company is insolvent, authorising excessive remuneration when the company is struggling or continuing to trade when there is no reasonable prospect of avoiding insolvency

• Conflicts of Interest

• Failing to disclose personal interests in company transactions

• Diverting business opportunities from the company

• Accepting secret profits or commissions

• Poor Corporate Governance

• Failing to maintain proper accounting records

• Making decisions without adequate information or consideration

• Neglecting to hold required meetings or follow proper decision-making procedures

• Preferential Payments

• Paying certain creditors ahead of others when insolvency is imminent

• Settling personal guarantees to relieve directors of personal liability

Misfeasance claims

Under English law, a claim for director misfeasance is typically brought by a liquidator or administrator during insolvency proceedings. However, in certain cases, creditors or shareholders (derivative actions) may also take action —especially if they’ve suffered direct harm due to the director’s misconduct.

The most common remedies include:

• Restitution or compensation for losses caused to the company

• Repayment of misapplied or wrongfully retained funds

• Regulatory proceedings leading to disqualification of the director under the Company Directors Disqualification Act 1986

• In some cases, personal liability for company debts if wrongful or fraudulent trading is proven

These remedies aim to hold directors accountable and recover value for creditors and the company.

Misfeasance in public office

Misfeasance in public office is a serious legal claim made when someone in a position of public power acts unlawfully and causes harm. It’s not about simple mistakes or poor decisions. It’s about misusing power on purpose or with serious disregard for the consequences such as :-

• Exercising discretionary powers for an improper purpose

• Targeted malice against an individual or group

• Acting with knowledge that the action will cause harm

• Procedural Impropriety

• Making decisions without following required procedures

• Failing to consider relevant factors or considering irrelevant factors

• Acting beyond the scope of lawful authority

Consequences of misfeasance

A successful claim can lead to compensation for the victim and serious legal or reputational consequences for the public official or director involved including :-

• Financial Consequences - personal liability to repay, restore, or account for company money or property, compensation for losses resulting from the breach of duty, potential liability for the company's debts (in severe cases)

• Disqualification - directors may be disqualified from acting as directors for 2-15 years

• Criminal Liability - prosecution for fraud, theft, or false accounting in serious cases. Potential imprisonment for up to 10 years under the Fraud Act 2006. Fines that may be unlimited in the Crown Court

• Professional Impact - diminished future employability, particularly at senior levels, possible loss of professional qualifications or memberships

• For the Organisation - depletion of company assets, potential liability for actions of directors/officials, costs of investigation and litigation, damaged relationships with suppliers, customers, and funders

Civil or criminal law?

Civil Proceedings are the norm with misfeasance with the majority of cases being civil claims. Criminal Proceedings are generally reserved for the most serious cases involving fraud, theft, or false accounting and are typically pursued in parallel with civil recovery actions. Criminal cases are usually initiated by the Serious Fraud Office, FCA, or police following referral.

Evidence of misfeasance

Proving misfeasance requires clear evidence of unlawful conduct, bad faith, and resulting harm. Types of evidence needed include :-

• Documentary Evidence - Board minutes and resolutions, financial statements and management accounts, bank statements and transaction records, correspondence and emails, internal memoranda and notes, valuation reports for relevant assets

• Witness Evidence - from other directors or employees with knowledge of relevant decisions, often expert testimony on industry standards or asset values.

• Forensic Evidence - can include forensic accounting, digital forensics for recovered communications.

• Consider urgent interim remedies (freezing orders, etc.) to preserve evidence.

Possible defences

Defences include :-

• Section 1157 Companies Act 2006: Court relief where the director acted honestly and reasonably

• Business judgment rule (though less established in UK than US law)

• Reliance on professional advice

• Ratification by shareholders (for certain breaches)