Misfeasance is far worse than maladministration because it means a director has been dishonest and engaged in bad behavior, wrongdoing, or some misconduct that's brought financial loss to creditors. This type of claim can be stressful, and cost between £30,000 and £60,000, or even more to defend.
Misfeasance takes place when a director or ex-director has misapplied, misappropriated, retained or become accountable for any of the company's money or property.
Although the director and company are recognised as separate legal entities; in many instances the director is also a company employee. Just like any other employee; directors are supposed to put the company's interest above their own.
Moreover, directors must always act with honesty and integrity, and in a way that adds value to the company's assets.
The government's Insolvency Service, an insolvency practitioner, creditors, and shareholders can all take action for Misfeasance against the director of a liquidated company.
In the vast majority of cases, it's the insolvency practitioner (liquidator) who brings a Misfeasance action against the director.
This usually happens because the liquidator has seen an opportunity to enrich themselves and the lawyers they work with, and hopefully secure a recovery for creditors.
As a result, the court may limit the amount insolvency practitioners and lawyers can receive from a particular case to ensure creditors benefit from the proceeds.
A creditor who's considering legal action against a director should remember that Misfeasance is a class remedy, so any action will be brought on behalf of all creditors.
Equal payments to creditors
As a result, any monies the court orders the director to pay must be shared equally among all the people and organisations the company owes.
Shareholders who bring successful actions without the aid or knowledge of an insolvency practitioner can ask the court to ringfence a specific amount for unsecured creditors.
But if the action is successful and the liquidation is ongoing, an unscrupulous liquidator can easily take over the proceedings and gobble up the income.
Alternatively, a creditor looking to get back all, rather than a percentage, of their money should wait until the company has been dissolved and the liquidator released from office before advancing their Misfeasance action.
Above all, never cave in to threats of Misfeasance proceedings in written correspondence from a liquidator, creditor, shareholder, or their lawyers.
Misfeasance claims are costly
Only take these warnings seriously after court documents have been served; because that's when things can get costly. Misfeasance claims can be stressful and cost between £30,000 and £60,000, or even more to defend.
Misfeasance claims can be stressful and cost between £30,000 and £60,000, or even more to defend.
In contrast and for a much smaller amount, I&L supports and advises company directors on how to protect themselves against adverse proceedings.
A competent insolvency practitioner will chronicle the company's bank statements, and try to identify a pattern of preferential payments to connected suppliers and lenders who the director is friendly with.
Similarly, although the company would've collected National Insurance, VAT, and PAYE tax revenue in the months prior to insolvency; HM Revenue & Customs probably never received any of that money.
As a result, any other creditor that received payments from the company during the same period would be deemed to have received preferential treatment, which is a Misfeasance.
If a company director owes £200,000 but decides to only acknowledge £50,000 of debt, the insolvency practitioner (liquidator) can:
- Accept the payment
- Negotiate for more money
- Go to court.
An insolvency practitioner who decides to litigate will have access to plenty of law firms, but hardly any resources to fund the court action.
Nevertheless, insolvency practitioners work closely with lawyers, so it's easy for them to get one to send a Letter Before Action to the director.
In the vast majority of case, unless creditors and shareholders pursue the director independently, the outcome is more or less the same.
The liquidator and their associates consume most of the proceeds; and unsecured creditors are left with little or nothing at all.
In some case, the court orders a director to pay creditors but the liquidator has already been released from office. When this happens, the court will recall the liquidator to distribute the funds.
Strike a deal
Rather than waiting for the action to advance and the court to find judgment; a clever creditor who's looking to get all of their money back will approach the director and try to strike a deal independently.
The 1st step to launching a Misfeasance claim would be to engage in pre-action protocol by composing and sending to the director a Letter Before Action, which:
- Describes the complaint
- Outlines the amount owed to the creditor
- Details the total sum owed to all creditors
- Must be responded to within 14 days.
I&L can guide you through Misfeasance proceedings against a devious director who's enriched themselves at the expense of creditors.
The procedure involves filing an application to the court and providing a witness statement with supporting documents and exhibits.
After it's approved, the court will issue the application and provide as many sealed copies as necessary to be served on the company’s director(s).
No matter how tough and unwavering a director is; they usually start taking the creditor's demands seriously after receiving notification of Misfeasance proceedings, and observing the:
- Application form
- Witness statements
- Court seal
- Case reference number
- Court hearing date.
Now is the perfect time for the creditor who's launched the action to approach the director and negotiate a third-party payment.
In these circumstances, the creditor has greater leverage if the evidence of Misfeasance is compelling, and the director has funds.
Any disbursement that comes directly from the proceeds of the insolvent company is a preferential payment.
Consequently, a creditor that successfully negotiates a payment should immediately go to court to avoid any obstructions from the liquidator.
At court, the creditor should apply to withdraw the Misfeasance action or apply for a Consent Order to confirm they have agreed with the to discontinue the proceedings.
Misfeasance claims are a complex issue and you will need expert guidance and support. I&L helps creditors pursue actions and advices directors how to protect themselves against adverse proceedings. Call 020 7504 1300 now for free and confidential advice…
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Turn knowledge into action
What is Misfeasance?
Who can bring a Misfeasance claim?
Examples of Misfeasance
Deals between the director(s) and liquidator