A Misfeasance claim against a director can often come as a complete and very unwelcome surprise. A huge amount of the directors we speak to who have one made against them had no idea they even existed. Let us lift the lid on what a Misfeasance claim is, some examples and what action can be taken against you.
Limited means Limited right? Wrong. If you are found to have acted inappropriately in the run-up to the point of insolvency, you could be held personally liable for company debt and your personal assets will be at risk. This will be investigated by the insolvency practitioner, and you could find yourself facing a claim.
What is Misfeasance?
As a limited company director, you have duties to fulfil, and one of these is to act responsibly towards your company and creditors. Misfeasance comes into play when there is a breach of this responsibility and then the protection a director has enjoyed by way of limited liability is lifted.
The most common misfeasance claim we come across is preference. This is when a director has intentionally favoured one creditor over another.
We often see directors have chosen to repay a creditor who happens to be a family member or friend before others. In other cases, directors will pay off debts which they have personally guaranteed to avoid personal liability only for this to come back to haunt them in the form of a misfeasance claim.
This claim is brought when a director has sold assets of the company for less than their true value. This is to the detriment of creditors as had the assets been sold at their full market value then the creditor would have seen a higher return.
Often a director will transfer or undersell the asset to a close friend or family member so they can protect it from being taken however they will end up personally liable when the transaction comes to light during liquidation.
High Salary Payments
As a company director, you may have enjoyed a justifiably high salary or taken dividends when the company was doing well. In the run-up to liquidation, however, continuing to take a high salary when the company can’t handle it is a clear case of misfeasance.
This can be extremely difficult personally as quite often your personal monthly liabilities do not decrease just because your company is not doing well. This will unfortunately be seen as a deliberate attempt to deprive your creditors and a claim would see you held personally liable to repay what you’ve had.
Deliberately hiding or concealing company assets in the attempt to deprive your creditors is a big no and a very dim view will be taken of this when it comes to light during liquidation.
Failure to Manage/Monitor Financial Performance
As mentioned above a company director has clear duties to the company and creditors and one of these is to be aware of the financial situation the company is in and to act as soon as possible should the company find itself in distress to resolve the situation to the benefit of the creditors. This is a fundamental company director duty and if you are found to have not carried out this duty then the creditor’s losses are seen as the fault of the director and you may find yourself personally liable.
What Will Happen If a Misfeasence Claim is Made Against Me?
If the claim is proved to be valid by the Insolvency Practitioner then they or possibly a creditor will apply for a court order to personally enforce action. This will mean that you will have to restore the losses for the creditors. This will be by any means necessary from personal assets which will include your family home if you do not have other means to settle the claim.
In serious cases you will also be struck off as a company director for up to 15 years which could be disastrous if you are trying to start up again and restore your financial position.
How can Personal Guarantees Help Me With This?
If you are facing a misfeasance claim, then you probably weren’t expecting it. Many company directors fall foul of their duties in the run-up to insolvency however ignorance is no defence. Prompt professional engagement on your behalf will get you the best possible result. Please get in touch for a free initial consultation at 0333 8801791 / firstname.lastname@example.org or submit an enquiry through our website.