When a company has been declared insolvent and liquidated,an investigation will be conducted into the what happened in the business leading up to the insolvency. Creditors may then receive some monies from the liquidated company – normally by a solicitor (liquidator or administrator) who has been appointed to resolve the affairs of the company.

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However,if the investigation finds that the directors of the company did not act in a way that were in the best interests of paying creditors,they can be held liable personally for the remaining amounts that should be paid to creditors. These are called misfeasance claims. There are a number of different actions that are considered to fall under the definition of misfeasance.

What Does Constitutes Misfeasance?

Any deed that is in breach of a director’s fiduciary duty to care for the company,its clients,creditors and the public in general can be considered to be misfeasance. An example is the misappropriation or misapplication of the funds,assets or property of the company that resulted in insolvency or the inability to meet financial obligations to creditors. The following misapplication of funds constitutes misfeasance:

– Preferential payment where one creditor has been paid or has been promised full payment in preference to other creditors.

– Selling assets at less than their actual value.

– Concealing assets or removing assets from the company with the intent to prevent them being used to pay creditors.

– Drawing a higher salary regardless of the failing financial state of the company.

– If the director has actually declared or paid illegal or incorrect dividends.

The breach of duties that are given to a director by the Companies Act 2006,can result in a misfeasance claim by one or more parties.

What Are Misfeasance Claims?

Anyone owed money that can prove that a director was not following his fiduciary duties which results in the non-payment or partial payment of the company debt,can claim for misfeasance. The appointed liquidator or administrator will normally investigate the insolvency as well as the actions of the directors after insolvency for misfeasance. If misfeasance is then been found,a monetary claim in the amount of misfeasance,asset or partial compensation (plus interest) can be sought against a director in their personal capacity. If the claim is upheld,the funds will be paid back to the company from which creditors will be paid.

Is There Any Defence Against Misfeasance?

There are a number of defence options that a director can take to protect themselves against a misfeasance claim. A common defence is the Duomatic Principle where a director cannot be held liable if he acted in accordance with a vote by shareholders making his actions that of the company and liability for the actions the responsibility of the company. A statutory defence is also available where it can be proven that the director was acting in the best interests of the company at the time.

It is important for directors to understand what are misfeasance claims in order to avoid acting in any way that does not meet their fiduciary duty and get legal advice before acting in a manner that may constitute misfeasance.