When directors hear the word misfeasance, they often assume it means fraud, theft, or something plainly dishonest.
Sometimes it does involve serious misconduct. But often it is more ordinary than that … and that is exactly why it catches people out.
A director under pressure starts taking drawings that are never properly dealt with. Personal expenses go through the company. Assets are sold too cheaply, or money moves in ways that are poorly documented. At the time, nobody calls it misfeasance. But once insolvency arrives, the liquidator asks a simpler question:
Has company money or property been misapplied, or have directors breached their duties in a way that caused loss to the company?
That is where misfeasance claims begin.
What is misfeasance?
Misfeasance claims are usually brought under section 212 of the Insolvency Act 1986. In simple terms, that section allows a liquidator to pursue a director or other officer who has:
- misapplied company money or property
- retained company money or property
- breached a fiduciary or other duty owed to the company
The legislation itself is here: https://www.legislation.gov.uk/ukpga/1986/45/section/212
In practice, it is a broad remedy. That is why it matters. It can catch a range of conduct, from sloppy financial discipline through to something much more serious.
Why misfeasance matters
Directors often focus on the better-known insolvency risks such as wrongful trading, preferences, or transactions at an undervalue. Misfeasance often sits alongside those claims, and sometimes becomes the main route for recovery because it is flexible and fact-specific.
From a liquidator’s point of view, the question is not whether you were trying your best in difficult circumstances. The question is whether company money, assets or powers were used properly.
That can include:
- overdrawn directors’ loan accounts
- personal expenses run through the company
- payments to connected parties without clear justification
- undeclared dividends
- asset sales below value
- poor record keeping that makes money difficult to trace
If you want to explore insolvency case law more generally, BAILII could be a good starting point: https://www.bailii.org/
The situations I see most often
In real life, misfeasance claims rarely begin with dramatic wrongdoing. More often, they arise from a pattern of behaviour in the last months or years before insolvency.
1. Directors’ loan accounts drifting out of control
This is probably the most common one. Money is taken out of the company over time and nobody quite keeps on top of how much, why, or whether it was salary, dividends or a loan. Once the company goes into liquidation, the overdrawn balance is an asset that the liquidator is expected to recover.
2. Personal expenditure through the company
Cars, travel, household bills, private subscriptions, family expenses … once a business is under pressure, these things matter. Even where the sums are not huge individually, together they can become significant.
3. Paying connected parties ahead of others
This overlaps with the topics of preferences and undervalue, which we covered in the previous blog. Repaying a relative, another family company, or a director while trade creditors and HMRC go unpaid is always likely to attract scrutiny.
4. Asset disposals with weak evidence
If machinery, vehicles, stock or intellectual property are sold shortly before insolvency, a liquidator will want to know:
- who it was sold to
- what it was worth
- how the price was decided
- where the money went
If the paperwork is poor, suspicion rises very quickly.
What the courts have said
The courts do not treat misfeasance as an abstract concept. They look at real decisions, real payments, and real records. Some claims succeed. Some fail. But the pattern is clear: where directors have taken too much out, moved value improperly, or failed to justify what they did, the court can and does order repayment.
A few examples are worth highlighting.
Re Purpoint Ltd [1991] BCLC 491
This is a useful practical example because it involved both misfeasance and wrongful trading. The director was ordered to repay sums under section 212 for matters including a car not bought for genuine business use, cash withdrawals that could not properly be explained, and profits diverted away from the company. The court also made a separate wrongful trading order.
Bednash v Hearsey [2001] EWCA Civ 787
This case is particularly relevant where directors have paid themselves too much while the company is already in trouble. The liquidator challenged excessive remuneration and pension contributions. The Court of Appeal upheld the view that the director had, in effect, taken too much out of the company once its financial position had deteriorated.
Re Continental Assurance Co of London plc
This one is worth mentioning because it shows the other side of the coin. The liquidators alleged both wrongful trading and misfeasance, including poor records and questionable payments, but the claim failed. That matters. It shows that not every suspicious-looking situation leads to liability. Evidence still matters, and courts do not simply assume misconduct because a company failed.
Brooks v Armstrong (Robin Hood Centre plc)
This case is better known as a wrongful trading case, but it is still useful here because the liquidators also alleged misfeasance. The court did not make a separate misfeasance award on the facts, but the judgment is often cited because it shows how carefully the court examines directors’ conduct, records, and decision-making when insolvency is approaching.
Revenue and Customs Commissioners v Holland [2010] UKSC 51
This Supreme Court case is helpful where there is an argument about who was really acting as a director. HMRC tried to use section 212 misfeasance arguments against someone it said was effectively acting as a director. The case did not succeed for HMRC, but it is still important because it shows that misfeasance claims can involve disputes over whether someone was a de facto director at all.
The lesson is not that every director under pressure will face a claim. It is that once insolvency is in the frame, poor decision-making, poor records, and payments that favour insiders can become very expensive.he duty shift directors often miss
When a company is solvent, directors generally act primarily in the interests of shareholders.
Once insolvency becomes likely, the position changes.
The focus shifts toward protecting creditors.
That is the point many directors misunderstand. Continuing to act as though company funds are still freely available can create personal exposure.
The government’s guidance on directors’ duties is worth reading carefully: https://www.gov.uk/guidance/your-duties-as-a-company-director
How liquidators investigate
A proper investigation is usually methodical rather than dramatic.
The office-holder will typically review:
- bank statements
- director loan accounts
- accounting records
- dividend payments
- asset disposals
- creditor payments
- tax liabilities
- company accounts filed at Companies House
Directors are often surprised by how much can be reconstructed from incomplete records. Deleting emails or relying on memory rarely helps.
Can directors defend misfeasance claims?
Yes.
Not every questionable transaction becomes a successful claim. Context matters.
Courts will usually look at:
- whether the director acted honestly
- whether decisions were commercially rational at the time
- whether professional advice was taken
- whether proper records were maintained
- whether creditors were worsened unnecessarily
Directors who engage early, cooperate, and provide evidence generally place themselves in a much stronger position. Those who ignore correspondence or become defensive often make matters worse.
Practical tips if your business is struggling
This is where experience matters most. Directors rarely need perfection. They need sensible decision-making and proper records.
A few practical points:
Keep personal and company spending separate
If it’s personal … don’t run it through the company.
Review the director loan account properly
Not approximately. Properly.
Be cautious with connected-party transactions
If it involves you, your family, or another linked business, assume it may be challenged later.
Get valuations before selling assets
Especially if the buyer is connected or the timing is close to insolvency.
Keep records
This is dull but vital. If there is a decision, there should be a paper trail.
Take advice early
A short conversation early on can prevent a long and expensive dispute later.
HMRC guidance for businesses in financial difficulty is here: https://www.gov.uk/difficulties-paying-hmrc
This connects to earlier topics
If you’ve followed the series so far, you’ll see how these issues overlap:
Misfeasance often pulls several of those strands together into one investigation.
Takeaway checklist
If your company is in difficulty, ask yourself:
- Do I know the exact position on my director’s loan account?
- Have any personal expenses gone through the company?
- Have any connected parties been repaid recently?
- Have company assets been sold, transferred or written down?
- Is there proper paperwork for all of that?
- Have I taken advice before making difficult decisions?
If several of those questions make you uncomfortable, don’t leave it. Early clarity is usually far cheaper than late argument.
Final thought
Misfeasance claims are rarely about one dramatic act. More often, they arise because directors let standards slip while trying to keep the business going.
That is understandable. But it is also dangerous.
The best protection is not clever lawyering after the event. It is disciplined behaviour before the event … good records, sensible boundaries, and early advice.
That won’t remove every risk. But it will put you in a much stronger position if the company later enters a formal insolvency process.
If you’re worried about your company and an actual or potential overdrawn director’s loan account, call or email me. 01902 672323 , paul@midlandsbusinessrecovery.co.uk
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