What Is Misfeasance in Company Management?

Misfeasance in company management is a legal concept used in UK insolvency law to hold directors and company officers accountable for breaches of duty, misuse of company funds, or improper conduct in managing company affairs. It most commonly arises when a company is in liquidation and a liquidator brings proceedings against former directors to recover losses caused by misconduct or mismanagement.

The legal framework is primarily found in section 212 of the Insolvency Act 1986, which allows the court to examine whether directors have misapplied company money, breached fiduciary duties, or acted improperly in relation to the company's assets.

Misfeasance claims are a key tool in protecting creditors and ensuring accountability where a company has become insolvent.

Legal Basis of Misfeasance

Misfeasance proceedings are governed by:

• Insolvency Act 1986, section 212

This provision allows the court, on application by a liquidator, creditor, or contributory, to investigate whether a director or officer has:

• Misapplied company money or property
• Breached fiduciary duties or statutory duties
• Been guilty of misfeasance or breach of trust in relation to the company

If misconduct is proven, the court can order repayment, compensation, or restoration of assets.

What Counts as Misfeasance?

Misfeasance is a broad legal term covering improper conduct in the management of a company. It does not require dishonesty in every case, although it often involves serious misconduct.

Common examples include:

1. Misuse of company funds

• Paying personal expenses from company accounts
• Transferring company money to directors without proper authorisation
• Using company assets for personal benefit

2. Breach of fiduciary duty

• Acting in conflict of interest
• Diverting business opportunities away from the company
• Failing to act in the company's best interests

3. Improper transactions

• Entering into undervalued asset sales
• Preferential payments to selected creditors
• Unauthorised loans to directors or connected persons

4. Negligent or improper management

• Poor financial control leading to avoidable losses
• Failure to maintain proper accounting records
• Ignoring statutory obligations affecting company solvency

Who Can Be Held Liable?

Misfeasance claims are typically brought against:

• Company directors (executive or non-executive)
• Shadow directors (those who control directors' decisions)
• De facto directors (acting as directors without formal appointment)
• Company officers, including senior managers in some cases

Liability is not limited to formally appointed directors. Anyone exercising control over company management may be subject to proceedings.

Who Can Bring a Misfeasance Claim?

Under section 212 of the Insolvency Act 1986, applications may be made by:

• A liquidator
• A creditor of the company
• A contributory (shareholder in certain cases)

In practice, most claims are brought by liquidators during insolvency proceedings, often after investigating the company's financial collapse.

The Legal Test for Misfeasance

To succeed in a misfeasance claim, the claimant must generally show:

1. The defendant was a director or officer of the company
2. They were entrusted with company assets or responsibilities
3. They breached a legal duty or misapplied company property
4. The company suffered loss as a result

The court has broad discretion in assessing misconduct and determining appropriate remedies.

Key Case Law

Re Lo-Line Electric Motors Ltd [1988]

This case confirmed that directors may be ordered to repay funds where they have acted improperly or failed in their duties, even where no fraud is proven.

Re D'Jan of London Ltd [1994]

A director negligently signed an insurance form incorrectly, resulting in loss. The court held that directors owe an objective duty of care and can be liable for negligent mismanagement.

Bairstow v Queens Moat Houses plc [2001]

Reinforced that directors may be personally liable for losses caused by breaches of duty, including negligent approval of improper financial transactions.

Remedies Available to the Court

If misfeasance is proven, the court may order:

1. Repayment or compensation

Directors may be required to repay misapplied funds or compensate the company for losses.

2. Restoration of property

Where company assets have been wrongly transferred, the court may order their return.

3. Interest payments

The court may award interest on sums improperly taken or withheld.

4. Equitable remedies

The court can tailor remedies based on fairness and the extent of misconduct.

These remedies are designed to restore the company's financial position as far as possible.

Misfeasance vs Other Director Liability Claims

Misfeasance is often confused with other insolvency-related claims:

Misfeasance (s.212 Insolvency Act 1986)

• Focuses on breach of duty or improper conduct
• Does not require insolvency intent
• Broad and flexible remedy

Wrongful trading (s.214 Insolvency Act 1986)

• Requires trading while insolvency is unavoidable
• Focuses on creditor loss during continued trading

Fraudulent trading

• Requires intent to defraud creditors
• Can involve criminal liability

Misfeasance is therefore one of the most commonly used and flexible claims in insolvency litigation.

Defences to Misfeasance Claims

Directors may defend a claim by showing:

• They acted in good faith and in the company's interests
• Transactions were properly authorised by the board or shareholders
• Full disclosure was made where required
• No loss was caused by their actions
• Decisions fell within reasonable business judgment

However, courts apply close scrutiny where company funds or fiduciary duties are involved.

Time Limits for Claims

Misfeasance claims are subject to general limitation principles:

• Typically six years from the date of the misconduct
• Longer periods may apply in cases involving fraud or concealment

In insolvency, limitation periods may be assessed differently depending on when the liquidator discovers the misconduct.

How Misfeasance Claims Are Handled in Practice

In liquidation, the process typically involves:

1. Appointment of a liquidator
2. Investigation of company records and transactions
3. Identification of potential breaches by directors
4. Pre-action correspondence or settlement attempts
5. Court proceedings in the High Court or Insolvency Court
6. Judgment and enforcement of remedies

Many claims are settled before trial due to evidential complexity and cost considerations.

Practical Implications for Directors

Directors are expected to:

• Maintain accurate and complete financial records
• Ensure company funds are used only for legitimate business purposes
• Avoid conflicts of interest
• Document board decisions properly
• Seek professional advice where financial distress arises
• Ensure all transactions with directors are properly approved

Failure to follow these standards significantly increases legal exposure in insolvency scenarios.

Common Misunderstandings

“Only fraudulent conduct counts”

Incorrect. Misfeasance includes negligence and breach of duty, not just dishonesty.

“The company must still be trading”

Misfeasance claims are most commonly brought after liquidation, but misconduct may have occurred while trading or during insolvency.

“Small errors are not actionable”

Even relatively small breaches can result in liability if they involve misuse of funds or breach of duty.

Key Takeaways

Misfeasance in company management is a legal remedy under section 212 of the Insolvency Act 1986 that allows courts to hold directors and officers accountable for breaches of duty, misuse of company assets, or improper conduct. It is most often used in liquidation proceedings to recover losses for creditors. The courts can order repayment, compensation, or restoration of assets where misconduct is proven. The standard is broad, covering both intentional wrongdoing and negligent mismanagement, making it a significant mechanism in UK insolvency and corporate accountability law.