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Misfeasance Claims: What Constitutes Misfeasance?

View profile for Joanne Brown
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What is misfeasance? Misfeasance can be defined as a ‘wrongful act’. Under the Companies Act 2006 and common law, directors of companies must not breach any duty of trust when dealing with company money or assets. But what exactly constitutes misfeasance? What should you as a director seek to avoid if your company is facing financial issues so that you can avoid such a claim?

Misfeasance claims can be substantial. Read on to learn how to avoid them.

Liquidators will sometimes allege that certain acts of conduct constitute misfeasance because they breach the statutory duties that directors owe to their companies under the Companies Act 2006, and their creditors under Section 212 of the Insolvency Act 1986.

Let’s take a look at those Companies Act statutory duties and how they might be breached.

1. Duty to act within powers

Directors must only act in line with the constitution of the company, i.e. the articles of association and any resolutions and agreements.

If you were to exercise your powers outside of the purposes for which they were given, then you could face allegations of misfeasance.

2. Duty to protect the success of the company

Directors must act in the way they consider, in good faith, would be most likely to result in the success of the company, or benefit the members of the company as a whole. Success generally means increased value, although the members of the company are responsible for deciding the precise details.

Directors who fail to consider the likely long term consequences of any decisions they make; who do not respect the interests of the employees of the company; who do not act in such a way as to nurture the company’s relationships with customers, suppliers and third parties; who neglect to consider the impact of the company’s operations on the environment and the local community; who do not deem as important the need to maintain a reputation for high standards and who do not act fairly, may be accused of misfeasance.

3. Duty to exercise independent judgement

All directors are required to exercise independent judgement and make their own decisions. Of course directors must also act within the bounds of the company’s constitution or any agreement that it has entered into.

4. Duty to exercise reasonable skill, care and diligence

Directors must exercise the same skill, care and diligence that could be reasonably expected of a diligent person when carrying out their duties for the company. The expected standard is measured against subjective and objective parameters. In other words, if it is deemed that someone in a similar position could have exercised greater understanding and ability, then a director may be accused of misfeasance.

5. Duty to avoid conflicts of interest

Directors are required to avoid situations where a personal interest conflicts with a company interest. This means that information, property or opportunity must not be exploited, even if the company could take advantage of it. If the situation has been pre-agreed via authorisation in the articles of association however, or by shareholder resolution or by the agreement of other directors who do not share the same conflict, then the duty will not be considered as infringed.

Typical examples of arrangements that can give rise to conflict situations are multiple directorships where a director sits on the board of a major shareholder, competitor, customer, supplier or pension scheme trustee company; where a director is a major shareholder, competitor, customer or supplier or owns property associated with the company’s property that could be affected by the activities of the company; where the director acts as an advisor to the company or one of its competitors; where directors make personal use of the company’s opportunities or information or where the director is connected to someone who fits into any of these situations.

Where there is a potential conflict of interest, directors can, in order to avoid claims of misfeasance, seek approval from the board; check the articles of association for allowances or regulate behaviour by acting appropriately so that focus is maintained on promoting the company’s success. Providing you act in accordance with the articles of association and any terms and conditions, you should usually be able to avoid claims of misfeasance.

6. Duty to avoid taking illegal dividends

Liquidators will pursue repayment of illegal dividends, and will consider such action as misfeasance. Directors are personally responsible for returning illegally taken dividends to the company. To learn more about this duty, read our article on the dangers of illegal dividends in insolvency.

How to defend a misfeasance claim

If you need to defend a misfeasance claim, you will require the best possible legal advice.

Seth Lovis & Co. is a London based law firm well renowned for its successful strategies and proven track record in defending and reducing director misfeasance claims.

You need to move quickly if you have received a letter of claim, so do not delay in getting in touch. You can call us on 020 3411 6907 or email enquiry@sethlovis.co.uk.

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