January 23, 2023
Misfeasance is a legal concept which requires directors of UK companies to act in the best interests of the company and its shareholders. This means that if directors breach their legal duties and cause financial losses to the company and its shareholders, then they can be held liable for misfeasance. In this article, we explore in detail what misfeasance is, what circumstances may result in director liability and how companies can minimise the risk of misfeasance claims.
Misfeasance arises when a company director fails to act in the best interests of the company or its shareholders, or fails to meet their legal obligations
The Main Circumstances In Which Directors Can Be Held Liable For Misfeasance
Failed to use reasonable skill and care in making decisions. An example would be if a director failed to review potentially significant information about an investment that was available to them at the time. Committed a breach of their duty of loyalty. For example, if a director voted in favour of a proposal that was primarily beneficial to themselves rather than the company’s interests. Misused their power as a director by exploiting the authority they have through the company for their own gain. Failed to make decisions in good faith and for proper purpose. For example, deciding to invest a large sum of money in a company that had connections to the director, rather than investing it in a more beneficial business opportunity.
What Can Company Directors Do To Minimise the Risk of A Misfeasance Claim?
In order to mitigate the risk of misfeasance claims, it is important that company directors understand their obligations and duties towards the company and its shareholders, as stipulated by the Companies Act 2006 and other regulations. Firstly, directors should actively seek out information relating to their decisions and ensure that they have taken account of all relevant information before making any decisions or taking any action. This should include ensuring that they are aware of any potential conflicts of interest and managing those risks appropriately. It is also important that directors act honestly and do not take advantage of their position for personal gain. The company should have a clear process for approval of transactions and ensure there is clear internal accountability when it comes to decisions that are being made by directors.
Finally, directors should also be aware of their responsibilities with regards to closing a company or implementing insolvency procedures such as Company Liquidation, Rescue, Exit and Bounce Back Loans which aim to reduce company debt or restructure its operations. It is the responsibility of directors to ensure that they adhere properly to all their legal duties and act in the best interests of the company at all times. Failure to do so could result in them facing personal liability should a misfeasance claim be brought against them.