Misfeasance & Insolvency Law - Breach of duty - Section 212 Insolvency Act 1986

What is misfeasance? What is the definition of misfeasance?

 

Definition of misfeasance:

"Mis" means wrong and "feasance" means "thing" or "act".  If there has been a misfeasance therefore somebody has done a wrong thing or a wrong act.  It is the law that prescribes what are the wrong things to do or what constitutes misfeasance.

 

Under the Companies Acts and common law, directors of companies have duties not to:

  • misapply company money
  • retain or misapply company property
  • breach any duty of trust when dealing with company money.

 

Section 212 of the 1986 Insolvency Act addresses the legal concept of misfeasance and makes a director personally accountable to pay back to the company the amount of the loss caused by any misfeasance to the extent that the court so orders.

 

The following abridged case summary on insolvency and misfeasance highlights the principle involved.

 

PURNELL v LEWIS

 

In this case the liquidator, Ray Purnell, took proceedings against the director of the company concerned a Mr Lewis.

 

The basis of the action was the failure of the director to properly even deduct PAYE from wages paid to employees. The director had for several years paid a substantial part of all employees wages "in cash".

 

In consequence this was a substantial and previously unreported loss to the Inland Revenue.

 

The court ordered the director to personally repay the amount of lost PAYE.

 

COMMENT

 

If Mr Lewis' company had properly deducted PAYE from his employees and was not then later able to pay over that money to HMRC that of itself would not have constituted misfeasance - and Mr Lewis would not have had to personally pay one penny - It was the fact that PAYE was not deducted in the first instance that constituted the misfeasance, not the inability to pay.