Misfeasance: Understanding Differences and Consequences

Misfeasance refers to a lawful act performed in an unlawful or improper manner, often leading to damages or harm. When it comes to company directors, understanding misfeasance is crucial as their actions and decisions can have far-reaching implications on the company and its stakeholders.

Company directors are entrusted with the responsibility of managing a company’s affairs and are expected to act in the best interests of the company. However, there are instances where directors may unknowingly or intentionally commit acts of misfeasance, which can lead to serious legal consequences.

This article aims to shed light on the concept of misfeasance, especially in the context of company directors. We will delve into the differences between misfeasance and malfeasance, explore the consequences of being found guilty of misfeasance, and discuss relevant legislation in England & Wales. Whether you’re a company director, an aspiring entrepreneur, or simply interested in corporate law, this article will provide valuable insights into the complex world of director misfeasance.

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Understanding Misfeasance

Misfeasance is a term which refers to an act that is in itself lawful but performed in an improper manner, leading to the infliction of damage or harm. It is the wrongful execution of a normally lawful act, and it stands in contrast to nonfeasance (failure to act when there’s a duty to act) and malfeasance (committing an act that is outright unlawful or wrong).

In the context of company directors, misfeasance can be seen as a breach of fiduciary duties that a director owes to the company. These duties include acting in good faith, exercising due care and diligence, and not improperly using their position or information to gain an advantage for themselves or someone else or to cause detriment to the company.

For instance, a director might be guilty of misfeasance if they enter into a contract on behalf of the company that they know the company cannot fulfil, leading to financial loss. Similarly, if a director uses confidential company information for personal gain, it can also be classified as misfeasance.

It’s important to note that a claim of misfeasance can be brought against a director by the company itself, its shareholders, or by a liquidator in the event of insolvency. The consequences of such a claim can be severe, including personal liability for company debts and disqualification from acting as a director.

Misfeasance vs Malfeasance

While misfeasance and malfeasance may sound similar, they have distinct meanings in the legal context.

Malfeasance is defined as the commission of an unlawful act. It is a wrongdoing or misconduct by a public official or a director of a company. Unlike misfeasance, which involves the improper performance of a lawful act, malfeasance is about the performance of an act that is outright illegal or wrong.

To illustrate the difference between the two, consider the following examples:

• Misfeasance: A director of a company uses confidential information to make a personal investment. The act of investing is not illegal, but using confidential information for personal gain is improper and can lead to harm to the company or its shareholders.
• Malfeasance: A director of a company intentionally manipulates financial records to show inflated profits and attract more investors. This act is illegal and can lead to severe penalties.

In both cases, the directors have acted inappropriately, but the nature of their actions is different. Misfeasance involves the improper execution of a lawful act, while malfeasance involves the execution of an unlawful act. Both can have serious legal implications and can lead to civil or criminal charges, financial penalties, and damage to reputation.

Consequences of Misfeasance

Being found guilty of misfeasance can have severe implications for a company director. The consequences can be both legal and financial, and they can significantly impact the director’s professional standing and future prospects.

Legal Implications: If a director is found guilty of misfeasance, they can be held personally liable for the losses incurred by the company due to their actions. This can result in a court order requiring the director to contribute to the company’s assets. In severe cases, the court can also disqualify the director from acting as a director of any company for a certain period, which can be up to 15 years.

Financial Implications: The financial implications of misfeasance can be substantial. If a director is held personally liable, they may have to pay a significant sum to compensate for the company’s losses. This can lead to personal financial hardship and can also affect the director’s credit rating.

Role of Insolvency Practitioners: In cases where a company is insolvent, an insolvency practitioner may be appointed to investigate the affairs of the company. If the insolvency practitioner uncovers evidence of misfeasance, they can bring a claim against the director on behalf of the company’s creditors. The aim is to recover funds for the benefit of the creditors.

Impact on the Company and its Creditors: Misfeasance by a director can lead to financial loss for the company and its creditors. It can also damage the company’s reputation and relationships with its stakeholders. In cases of insolvency, any funds recovered through a misfeasance claim can be used to repay the company’s creditors.

In conclusion, misfeasance is a serious matter that can have far-reaching consequences. Directors should always strive to fulfil their duties with care and diligence to avoid any potential claims of misfeasance.

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Case Study: Misfeasance in a Catering Company

Let’s consider a hypothetical scenario involving a catering company, “Delicious Delights Ltd.” The company was well-known in Leeds for its high-quality food and service. However, over time, the company started facing financial difficulties due to increased competition and a downturn in the economy.

The director of the company, Mr. Smith, in an attempt to keep the company afloat, decided to use the company’s collected VAT (Value Added Tax) to pay off other pressing debts instead of remitting it to HM Revenue & Customs (HMRC). This act is a breach of fiduciary duties as the VAT collected is not considered the company’s money but held in trust for HMRC.

When the company eventually became insolvent, an insolvency practitioner from Company Doctor was appointed to review the company’s affairs. During the investigation, the insolvency practitioner discovered that Mr. Smith had used the VAT money to pay off other debts, which is a clear case of misfeasance.

The insolvency practitioner then brought a misfeasance claim against Mr. Smith on behalf of the company’s creditors. The court found Mr. Smith guilty of misfeasance and ordered him to repay the amount of VAT used, plus interest, to the company’s assets.

This repayment significantly increased the pool of funds available for distribution to the creditors. However, the consequences for Mr. Smith were severe. He faced personal financial loss and his professional reputation was damaged. Furthermore, he was disqualified from acting as a director for a period of 5 years.

This case study highlights the serious consequences of misfeasance and the role of insolvency practitioners in bringing misfeasance claims to protect the interests of creditors. It serves as a reminder to all company directors of the importance of fulfilling their duties lawfully and in the best interests of the company and its creditors.

FAQs about Misfeasance

What is misfeasance?

Misfeasance is the improper performance of a lawful act which could potentially cause harm or injury. It is often associated with the actions of company directors and public officers.

What is the difference between misfeasance and malfeasance?

Misfeasance involves the improper execution of a lawful act, while malfeasance involves the execution of an unlawful act. In other words, misfeasance is about doing a legal act in an illegal way, while malfeasance is about doing something that is illegal.

What are the consequences of misfeasance?

Consequences of misfeasance can include legal and financial penalties, damage to professional reputation, and in severe cases, disqualification from acting as a director. The exact consequences can vary depending on the severity of the misfeasance and the specific laws and regulations in place.

What role do insolvency practitioners play in misfeasance claims?

Insolvency practitioners play a crucial role in misfeasance claims. If a company becomes insolvent, an insolvency practitioner will be appointed to review the company’s affairs. If they uncover evidence of misfeasance, they can bring a claim against the director on behalf of the company’s creditors.

Can a director be personally liable for misfeasance?

Yes, a director can be personally liable for misfeasance. If a director is found guilty of misfeasance, they may be required to personally contribute to the company’s assets to compensate for the loss or damage caused.

What is an example of misfeasance?

An example of misfeasance could be a company director using company funds for personal expenses. While the director has the authority to spend company money, using it for personal gain is an improper execution of their duties.

How can a company protect itself from misfeasance?

Companies can protect themselves from misfeasance by implementing strong internal controls, conducting regular audits, and providing training and education for directors about their legal duties and responsibilities. It’s also important to have a clear process for reporting and investigating potential misfeasance.

What can creditors do if they suspect misfeasance?

If creditors suspect misfeasance, they should contact an insolvency practitioner or legal professional for advice. They may be able to bring a misfeasance claim against the director to recover any losses.

What is the difference between misfeasance and nonfeasance?

Misfeasance refers to the improper performance of a lawful act, while nonfeasance refers to the failure to perform a required duty or obligation. In the context of company directors, nonfeasance could involve failing to take necessary action to prevent the company from becoming insolvent.

Can misfeasance claims be made against public officers?

Yes, misfeasance claims can also be made against public officers if they have improperly performed their lawful duties in a way that causes harm or injury. This could include actions taken by police officers, government officials, or other individuals in positions of public authority.

Conclusion

Misfeasance is a complex area of law that can have serious implications for company directors and public officers. It’s crucial to understand the difference between misfeasance and malfeasance, as well as the potential consequences of being found guilty of such actions.

Whether you’re a director seeking to understand your responsibilities, or a creditor concerned about the actions of a company director, gaining a clear understanding of misfeasance is essential. It’s always advisable to seek professional advice if you’re unsure about any aspect of this topic.

If you’re a director facing financial difficulties or if you’re concerned about potential misfeasance claims, don’t hesitate to reach out to us at Company Doctor. As licensed insolvency practitioners based in Leeds, we offer advice and solutions to directors dealing with insolvent companies. We can guide you through the process of a Creditors’ Voluntary Liquidation and help you navigate the complexities of insolvency law.

Don’t struggle alone. Call us today on 0800 169 1536 or leave an enquiry on our website. We’re here to help you find a way forward.

References

The primary sources for this article are listed below.

Being a company director – GOV.UK (www.gov.uk)

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