What is misfeasance and what happens if I am found guilty?

Under the Companies Act, 2006, directors can be held personally liable for losses caused to creditors where ’misfeasance’ has occurred. If the company has to be liquidated, the office-holder will investigate directors’ actions leading up to the time of insolvency.

Although actions classed as ‘misfeasance’ are not illegal, you could be held personally liable for any losses incurred by the company or its creditors as a result, and suffer the severe penalties which can be applied by the courts.

So what exactly constitutes misfeasance, and what are the ramifications for you as a limited company director?

What is misfeasance?

In exchange for the protection that limited liability offers company directors, you have a duty of care to your company, its creditors, and to the general public. A breach of fiduciary duty in this respect can result in a claim for misfeasance being made against you.

Furthermore, the Small Business, Enterprise and Employment Act, 2015, enabled claims such as these to be assigned to third parties, whereas previously only the office-holder could bring such claims against a director.

One or more creditors, or a shareholder in the company, may decide to take action against you if they have suffered a material financial loss, so what actions might a misfeasance claim be based upon?

In general terms, it is the misapplication of funds or company property - here are a few examples:

• Preferential payments: Paying a lender to whom you have provided a personal guarantee, in preference to other creditors, is one instance where a ‘preference’ is created. Payments can include the transfer of assets as well as cash, and places the recipient in a better financial position than other creditors.
• Transactions at an undervalue: Disposing of an asset at less than its true market value. In some instances, no money changes hands. An example includes transferring ownership of company property to a family member, for little or no consideration.
• Concealing or removing company assets with a view to putting them out of reach of creditors, so their returns from the liquidation are diminished.
• Taking a high salary when the company is in difficulty and cannot support it, the improper payment of dividends, or unauthorised loans to directors.

Financial awareness as a director

It is incumbent on limited company directors to be aware of the financial position of their company at all times. If the company experiences financial problems, correct action can be taken to prevent further decline.

This means that being unaware of your company’s situation, or the implications of your actions, is not a defence against a misfeasance claim, nor is being a non-executive or part-time director.

What are the potential consequences of misfeasance?

If the liquidator or other third party bringing a claim is able to prove misfeasance, they can apply for a court order that enforces the restoration of property/assets, or the repayment of cash to the company.

The office-holder will also submit a report to the Secretary of State regarding the instances of misfeasance, which could result in your disqualification as a limited company director for 2-15 years.

Any form of personal liability for company debts is clearly a concern for directors, and can lead to the loss of all personal assets through bankruptcy. If you need additional guidance on your potential liability as a company director, Begbies Traynor can help.

Our licensed insolvency practitioners will provide invaluable advice on your own situation and that of your company, and identify any likely repercussions. We work from nationwide offices around the country, and offer free same-day consultations.