Liability of directors for misfeasance – s.212 IA 1986

TheLawStudent

Purpose

Any breach of duty by the directors is generally actionable by the company only. On a winding up, typically it will be the liquidator, not the company, who will bring an action against the directors under s.212 for any breaches of duty committed by them.

Section 212 does not create any new liability or rights but simply provides a summary procedure to enable the company (acting by its liquidators) to pursue claims against directors who have breached their duties. Where a person’s liability is established, the court may order that person to compensate the company in respect of money or property misapplied as a result of the misfeasance.

Who may bring a claim? – s.212(3)

  1. a liquidator (but note, not an administrator);
  2. the Official Receiver; or
  3. any creditor or contributory.

Against whom can a claim be brought? – s.212(1)

  1. any person who is or has been an officer of the company (including present or former directors, managers or secretaries of the company);
  2. any others who acted in the promotion, formation or management of the company; and
  3. a liquidator or administrative receiver (a claim for misfeasance can also be brought against an administrator under Schedule B1 to the IA 1986).

What can amount to misfeasance?

Misfeasance covers the whole spectrum of directors’ duties and therefore includes:

  1. misapplication of any money or assets of the company;
  2. breach of a statutory provision or a duty, for example:
    1. unlawful loans to a director;
    2. a director entering into a contract with his own company and failing to notify the board (s.177 CA 2006);
    3. failing to seek prior general meeting approval where a director has entered into a substantial property transaction (s.190 CA 2006); and
    4. a director failing to act within his powers (s.171 CA 2006);
  3. directors responsible for transactions at an undervalue as provided in s.238 (see section 9) or preferences as provided in s.239 may thereby commit a misfeasance; and
  4. breach of the duty to exercise reasonable care, skill and diligence, i.e. negligence (s.174 CA 2006).

What about shareholder ratification?

As you are aware, ratification by the shareholders under s.239 CA 2006 can usually absolve the directors from personal liability for breach of duty. Ratification at a time when the company is solvent should therefore preclude misfeasance proceedings.

However, when a company is facing the prospect of insolvency, case law has established that the duties of directors shift towards the company’s creditors and away from the members as a whole. This is because in these circumstances, it is the creditors rather than the shareholders of the company who stand to lose if the directors breach their duties. Consequently, it is not possible for the shareholders to ratify what amounts to a breach of directors’ duty at a time when the company’s fortunes have declined to such an extent that there is a reasonable prospect that the company will go into an insolvent liquidation or administration. This is recognised in s.239(7) CA 2006 which provides that the ratification procedure does not prejudice any rule of law which provides that shareholder ratification is of no effect.

Relief

Relief under s.1157 CA 2006 (where the court is satisfied that the director acted honestly and reasonably and, having regard to all the circumstances of the case, ought fairly to be excused) is generally not available to wrongful trading claims as by definition, a director liable for wrongful trading has not acted reasonably.

Sanction

The court will examine the conduct of the director/other person and make an order for repayment, restoration or contribution to the company’s assets or such other order as it thinks fit.

A finding of misfeasance is also a relevant factor to which a court shall have regard when considering whether to make a disqualification order against a director for unfitness under s.6 CDDA 1986.

Disqualification of directors

Some of the grounds for a director to be disqualified particularly relate to insolvency, i.e.:

  • fraud in a winding up (s.4 CDDA);
  • unfit conduct of directors of insolvent companies (s.6 CDDA); and
  • fraudulent and wrongful trading (s.10 CDDA).

A finding of misfeasance and/or responsibility for the company entering into any transaction at an undervalue (within s.238 – see section 9), a preference (within s.239 – see section 10) or a transaction defrauding creditors (within s.423 – see section 12) are also relevant factors to which a court shall have regard when considering whether to make a disqualification order against a director for unfitness under s.6 CDDA.

Where the court makes a contribution order against a director under ss.213, 214 or 246ZA or ZB, it also has a discretion to make a disqualification order against him/her under s.10 CDDA. The maximum period for disqualification under s.10 CDDA is 15 years.