If a company director has acted improperly and caused loss to a company, a claim for misfeasance may arise. These claims form an important part of the insolvency process, providing a mechanism to recover money, property or value for the benefit of creditors where directors have failed to meet their legal obligations.
In many cases, misfeasance claims focus on breaches of duty, including a breach of fiduciary duty, misuse of company funds, or decisions that were not made in the interests of the company. Even where a director believed they were acting appropriately, their conduct may still give rise to potential liability if it resulted in financial loss.
At South Bank Legal, we regularly advise on claims against directors, acting for insolvency practitioners, creditors and directors themselves. We understand that these situations often arise in complex and time-sensitive circumstances, particularly where a business is facing serious financial difficulties or has already entered formal insolvency.
Whether a claim is brought by a liquidator or administrator, or a director is responding to allegations, obtaining early legal advice is essential. Timely support can help protect your position, assess whether a misfeasance claim can be brought, and ensure that the right steps are taken from the outset.
What are Director Misfeasance Claims?
Director misfeasance claims are legal actions brought where a company director has failed to comply with their duties and, as a result, caused financial loss to the company. These claims are designed to hold directors accountable for their conduct and to restore funds or assets that should properly have remained within the business.
Most commonly, a claim for misfeasance is brought by a liquidator or administrator under the Insolvency Act 1986, usually as part of the wider insolvency process. Once appointed, insolvency practitioners have a duty to investigate the affairs of the company and consider whether any claims against directors should be pursued.
The aim is to recover money, property, or value that should have been retained for the benefit of creditors, particularly where the actions of a director have reduced or misapplied the company’s assets.
A misfeasance claim can be brought in a wide range of situations, including where a director has:
- Committed breaches of duty, including a breach of fiduciary duty
- Misapplied, retained or failed to properly account for company funds
- Failed to act in the interests of the company, particularly during periods of financial difficulties
- Breached statutory duties under the Companies Act 2006
- Entered into improper, risky or disadvantageous transactions that resulted in loss
- In many cases, these claims arise from a pattern of conduct rather than a single decision. Even where a director may argue that they acted honestly, the court will assess whether their actions were reasonable, properly informed, and consistent with their legal obligations.
Director Misfeasance Claims and the Law
Director misfeasance claims are governed by both statute and common law.
Insolvency Act 1986
The Insolvency Act 1986 provides the legal basis for pursuing a claim once a company enters liquidation or administration. It allows the court to examine director conduct and order repayment or compensation.
Companies Act 2006
The Companies Act 2006 sets out key directors duties, including:
- Acting in good faith
- Promoting the success of the company
- Avoiding conflicts of interest
- Exercising reasonable care and skill
A breach of fiduciary duty or other breaches of duty under this Act may form the basis of a misfeasance claim.
When Can a Misfeasance Claim Be Brought?
A misfeasance claim can be brought where a director has failed to meet their duties and caused loss.
These claims are usually identified during the insolvency process, when insolvency practitioners review the company’s affairs.
Common examples include:
- Excessive director remuneration
- Transfers of assets at undervalue
- Improper payments to connected parties
- Failure to properly account for company funds
- Continuing to trade during financial difficulties without proper justification.
The Role of Insolvency Practitioners
Insolvency practitioners are responsible for investigating the conduct of directors once a company enters insolvency.
They will:
- Review financial records and transactions
- Assess whether directors complied with their duties
- Identify any potential liability
- Decide whether bringing a claim is appropriate
If a claim is viable, they may instruct solicitors to pursue a claim for misfeasance.
Who Can Bring a Claim for Misfeasance?
In most cases, a claim for misfeasance is brought by a liquidator or administrator on behalf of the company. These insolvency practitioners are appointed during the insolvency process and have a duty to review the company’s affairs, investigate the conduct of directors, and identify any potential claims against directors.
Their role is to act in the interests of creditors as a whole. Pursuing a misfeasance claim can allow creditors to recover funds or assets that have been lost as a result of breaches of duty, ensuring that any recovery is distributed fairly among creditors in accordance with insolvency rules.
Although creditors do not usually bring claims directly, they can still play an important role. Creditors may:
- Provide information or evidence to insolvency practitioners
- Raise concerns about director conduct
- Request that certain transactions or decisions are investigated
- Support the decision to proceed with bringing a claim
In some cases, particularly where there are limited funds available to pursue litigation, creditors may also assist with funding or encouraging action. This can be important where there is clear evidence that a director’s conduct has caused loss and that a misfeasance claim can be brought.
Where appropriate, early legal advice can help both insolvency practitioners and creditors assess whether a claim is viable and how best to proceed.
Breaches of Duty and Fiduciary Obligations
To succeed in a claim, it must be shown that there have been breaches of duty.
Directors owe fiduciary duties to the company. A breach of fiduciary duty may include:
- Using company assets for personal benefit
- Failing to declare conflicts of interest
- Diverting business opportunities
- Acting for improper purposes
Even where a director acted honestly, they may still be liable if their actions were not reasonable or did not align with the interests of the company.
Director Conduct During Financial Difficulties
When a company is facing financial difficulties, directors must act with increased care.
At this stage, their duties shift towards protecting creditors. Directors must avoid actions that worsen the position of creditors or reduce the value of company assets.
Directors should:
- Seek professional advice at an early stage
- Avoid incurring further debt unnecessarily
- Maintain accurate records
- Act in the best interests of creditors
Failure to do so can lead to claims against directors, including misfeasance and wrongful trading claims.
Misfeasance vs Wrongful Trading Claims
Misfeasance claims are often considered alongside wrongful trading claims.
Misfeasance Claims
- Focus on breaches of duty
- Cover misuse of company funds or assets
- Can arise from specific transactions
Wrongful Trading Claims
- Arise where directors continue trading when insolvency is unavoidable
- Focus on losses to creditors
- Also governed by the Insolvency Act 1986
Both types of claims may be pursued together as part of wider claims against directors.
What Must Be Proven?
To succeed in a claim for misfeasance, it must be shown that:
- The director owed duties to the company
- There was a breach of fiduciary duty or other breaches of duty
- The company suffered loss
- The director’s actions contributed to the company’s assets being reduced or misapplied
The court will consider whether the director acted reasonably and in good faith.
Defences Available to Directors
Directors may defend a claim by showing that:
- They acted honestly
- They took reasonable steps to minimise losses
- They relied on appropriate professional advice
- Their actions were in the interests of the company
Each case will depend on its specific facts.
Potential Liability and Consequences
If a claim is successful, the court may order the director to:
- Repay money to the company
- Restore assets
- Compensate for losses
This can result in significant potential liability, especially in complex cases.
In addition, directors may face:
- Further claims against directors
- Disqualification proceedings
- Reputational damage
Evidence and Investigation
Strong evidence is essential when bringing a claim.
This may include:
- Financial records
- Bank statements
- Company accounts
- Correspondence and board minutes
Insolvency practitioners will often carry out detailed investigations before deciding whether a misfeasance claim can be brought.
Settlement and Negotiation
Not all claims proceed to court. In many cases, disputes can be resolved through negotiation.
Settlement may:
- Reduce legal costs
- Provide faster recovery
- Avoid lengthy proceedings
We advise clients on settlement strategy as part of the overall approach to bringing a claim.
How South Bank Legal Can Help with Director Misfeasance Claims
At South Bank Legal, we have extensive experience advising on claims against directors, including misfeasance and wrongful trading claims.
We can:
- Assess whether a misfeasance claim can be brought
- Advise insolvency practitioners and creditors
- Support directors facing allegations
- Assist with bringing a claim
- Provide clear and practical legal advice
Our approach is focused on achieving the best commercial outcome.
Why Early Legal Advice Matters
Taking early legal advice can significantly improve outcomes.
It allows:
- Better preparation of claims
- Stronger evidence gathering
- Reduced risks
- Greater control over the process
Whether pursuing or defending a claim, early action is key.
Frequently Asked Questions
What is a misfeasance claim?
A claim for misfeasance is a legal action against a company director for breaches of duty, such as misuse of company funds or failure to act in the interests of the company. These claims are usually brought by a liquidator or administrator under the Insolvency Act 1986 as part of the insolvency process, with the aim of recovering money or assets for creditors.
Who can bring misfeasance claims?
Most claims are brought by a liquidator or administrator, who are appointed as insolvency practitioners. Their role includes investigating director conduct, identifying potential liability, and deciding whether bringing a claim is appropriate. Creditors may also play a role by providing information or encouraging further investigation.
Can a director be liable even if they acted honestly?
Yes. Even if a director acted honestly, they may still be liable if their actions resulted in breaches of duty or were not in the interests of the company. The court will consider whether the director acted reasonably and whether appropriate professional advice was obtained.
How is misfeasance different from wrongful trading?
Misfeasance focuses on specific breaches of duty, such as misuse of company assets. In contrast, wrongful trading claims arise where directors continue trading during insolvency and increase losses to creditors. Both types of claims may arise during the insolvency process.
Do I need legal advice?
Yes. Whether you are pursuing or defending claims against directors, specialist legal advice is essential. It helps you understand your position, assess risks, and take the right steps when bringing a claim or responding to one.
Speak to a Specialist Today
If you are dealing with potential claims against directors or are concerned about your position as a company director, contact South Bank Legal today.
Our experienced team can guide you through every stage, from initial assessment to bringing a claim or defending allegations, with clear and practical advice.