What exactly is a misfeasance claim? Directors owe certain fiduciary and other duties to their companies in their capacity as an officer. In the context of a company in administration or liquidation, a misfeasance claim is usually a summary way of bringing a claim for breach of fiduciary duty or other duty in relation to the company. For example, it is the duty of a director to have regard to the interests of creditors where the company is insolvent or of doubtful solvency and if the director fails to do so then he may be held in breach. Other examples include paying unlawful dividends to shareholders, taking a high salary when the company is in difficulty and cannot support it, causing preferential payments to be made to connected parties or, more generally, failing to act in the best interest of the company. Such claims often form part of wider claims against directors including wrongful trading and preference claims.
Who can bring a misfeasance claim? A misfeasance claim can be brought by a liquidator (or administrator) or a creditor of the company and less commonly by a contributor to the company’s capital and the official receiver.
What are the possible remedies? If, on examination of conduct by the court, a person is found to have been misfeasant or to have breached a fiduciary or other duty to the company, the court may order the director to repay, restore or account for any misappropriated money with interest or compensate the company by way of a contribution to the company’s assets. In practice, expert evidence may be required from an accountant to determine what loss was actually caused by a breach.
It is also important to note that the liquidator will also submit a report to the Secretary of State regarding any instances of misfeasance. This could lead to director disqualification proceedings which could result in a director being disqualified for 2-15 years.
What are the defences? If a director can show that he acted honestly and reasonably and the circumstances of the case mean that it is fair to excuse him from the liability then he is entitled to seek relief from liability. Even if misfeasance is established the court may exercise its discretion to relieve the director from liability in full or in part.
The so-called Duomatic principle may also be available as a defence to liability. The basis of the principle is that shareholder ratification makes the misfeasance an act of the company and prevents it from taking action.
There are a number of things directors can do to help reduce the risk of claims which include:
- being aware of the financial position of the company;
- attending regular board meetings and ensure that decisions are properly taken and minuted; and
- considering obtaining expert opinions in relation to high-value/high-risk transactions.
If you would like advice or assistance on any of the issues raised in this blog please contact Catherine Fisher, Head of Dispute Resolution.