What is Misfeasance by a Director?

Section 212 applies during the winding up of a company where an officer, former officer, liquidator or certain other specified people appear to have: 

• misapplied or retained company money or property; 
• become accountable for company money or property; 
• committed misfeasance; or 
• breached a fiduciary or other duty owed in relation to the company. 

For directors, the underlying issue will usually be an alleged breach of duty or misuse of company assets that caused loss to the company. 

Our guide to the fiduciary duties of directors explains the general statutory duties in more detail. 

Whether conduct amounts to misfeasance will depend on the facts. Potential examples include: 

• using company money to pay personal expenses without a proper basis; 
• transferring company property to a director or connected person for less than its proper value; 
• taking unauthorised payments from the company; 
• paying dividends where there were insufficient distributable profits; 
• making undisclosed profits from the director’s position; 
• failing to disclose a personal interest in a company transaction; 
• improperly disposing of company assets; 
• paying excessive remuneration that causes loss to the company; 
• failing to exercise reasonable care, skill and diligence; or 
• failing to maintain adequate financial controls where that breach causes a material loss. 

The Insolvency Service lists improper payments, unauthorised transfers, unlawful dividends and failures involving company accounting systems among conduct that may support a recovery claim. However, an allegation still requires evidence of the relevant breach and resulting loss. 

In a company’s winding up, a section 212 application may be made by: 

• the Official Receiver; 
• the liquidator; 
• a creditor; or 
• a contributory, which will usually mean a shareholder or another person liable to contribute to the company’s assets. 

Section 212 is a procedural route for examining and enforcing an existing liability; it does not automatically establish that misconduct occurred. 

A liquidator or administrator may also be able to assign certain insolvency claims to another party. That is different from saying any third party can start a section 212 application in their own right. 

Directors should therefore establish: 

• who is making the allegation; 
• the legal basis of the claim; 
• which duty is said to have been breached; 
• what money or property is involved; 
• how the alleged loss has been calculated; and 
• what evidence supports the claim. 

If a section 212 application succeeds, the court may order the director to: 

• repay company money; 
• restore company property; 
• account for money or property; 
• pay interest; or 
• contribute compensation to the company’s assets. 

The purpose is generally to restore value to the company rather than impose a punishment. 

This does not normally make the director personally responsible for every debt owed by the company. Liability should reflect the money, property, gain or loss connected with the proven breach. 

Our guide to when directors can become personally liable for company debts explains the wider exceptions to limited liability. 

A director facing a claim may be able to dispute: 

• whether the alleged conduct occurred; 
• whether they owed or breached the duty relied upon; 
• whether the decision was properly authorised; 
• whether the company suffered the claimed loss; 
• whether their conduct caused that loss; 
• the valuation of money or property involved; 
• whether another person was responsible; or 
• whether the claim was issued within the applicable limitation period. 

Contemporaneous records can be important. These may include board minutes, accounts, forecasts, contracts, professional advice, bank records and correspondence explaining why a decision was made. 

Acting honestly is relevant, but honesty alone is not a complete answer to every claim. Under section 1157 of the Companies Act 2006, a court has discretion to relieve an officer wholly or partly where the person acted honestly and reasonably and, considering all the circumstances, ought fairly to be excused.

This is a discretionary form of relief, not an automatic defence. 

Directors should normally: 

1. Preserve the company’s books, records and electronic information. 
2. Identify precisely what conduct is being challenged. 
3. Gather the documents supporting the decision. 
4. Avoid altering, deleting or retrospectively creating records. 
5. Provide accurate information about any personal benefit received. 
6. Obtain appropriate insolvency and legal advice. 
7. Respond within any stated deadline. 

Providing an explanation does not require a director to accept that misfeasance occurred. A properly supported response may show that the decision was authorised, reasonable at the time or did not cause the loss being claimed. 

Directors can reduce risk by: 

• keeping reliable accounting records; 
• recording significant decisions and the information considered; 
• separating personal and company expenditure; 
• ensuring dividends are supported by sufficient distributable profits; 
• documenting transactions with directors and connected parties; 
• obtaining appropriate valuations before transferring assets; 
• declaring conflicts and personal interests; 
• reviewing the company’s financial position regularly; and 
• seeking advice when insolvency becomes a realistic concern. 

When a company is approaching insolvency, decisions affecting assets, creditors and continued trading require particular care. Read our guide to director duties when facing insolvency for the practical steps directors should consider.