What Should Directors Do if a Liquidator Threatens Misfeasance Proceedings?

A letter from a liquidator threatening misfeasance proceedings should be taken seriously, but it does not mean liability has been established or that court proceedings will inevitably follow. Directors should avoid ignoring the correspondence or responding impulsively, as both silence and unguarded admissions may prejudice their position.

Misfeasance proceedings are applications commonly brought under section 212 of the Insolvency Act 1986, allowing the court to examine the conduct of any person who has taken part in the promotion, formation or management of the company, or who has acted as an officer, liquidator, or administrative receiver, where the statutory requirements are met. Equivalent claims against an administrator are brought under paragraph 75 of Schedule B1 to the Insolvency Act 1986 rather than under section 212. Whether such a claim succeeds depends on the statutory grounds relied upon, the available evidence and the court’s assessment of the facts.

This article explains when misfeasance proceedings may arise, the legal principles that apply and the practical steps directors should consider if a liquidator raises allegations. It provides general information on the law of England and Wales and should not be relied upon as legal advice.

What are misfeasance proceedings?

Misfeasance is a broad term commonly used for claims brought under section 212 of the Insolvency Act 1986, which allows the court, in the course of a winding up, to examine the conduct of directors and others involved in the management of a company that is in liquidation. In simple terms, it includes situations where a director or other relevant person has:

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

The court has power, if satisfied that the statutory requirements are met, to order repayment, restoration of property or contribution by way of compensation as the court thinks just. These proceedings are civil in nature and are separate from criminal offences or director disqualification, although the same conduct may be relevant to those regimes.

An application may be made by the liquidator, the official receiver, or any creditor or contributory of the company, although a contributory needs the court’s permission. In practice the liquidator is almost always the applicant. Any recovery is paid into the insolvent estate for the benefit of creditors generally, rather than to the applicant personally.

Misfeasance is also frequently threatened alongside other insolvency claims, in particular wrongful trading under section 214 of the Insolvency Act 1986 and claims to set aside preferences or transactions at an undervalue under sections 238 and 239. Those are separate causes of action with different legal tests, and a single letter from a liquidator may raise several of them at once.

Who can be pursued in misfeasance proceedings, and when

Current and former directors are the most common targets, although section 212 extends more widely to certain other persons involved in the promotion, formation or management of the company. 

The claims typically arise once the company is in liquidation, and the liquidator has had an opportunity to review the company’s affairs and transactions leading up to insolvency. The applicable limitation period depends on the nature of the alleged breach and the legal basis of the claim. Different limitation rules may apply to claims for breach of fiduciary duty, negligence or recovery of company property.

As a general guide, a six-year period commonly applies. Importantly, however, there is no limitation period at all for a fraudulent breach of trust, or for recovering company property (or its proceeds) still held by the director, so an older transaction is not automatically safe. Limitation in this area is technical and turns on how the claim is characterised, so it should be assessed on the specific facts, but it is always worth checking as a limitation defence can dispose of a claim without any examination of the merits of the claim.

Why might a liquidator investigate directors?

Liquidators have statutory duties to investigate the company’s affairs and the conduct of those who managed it before insolvency. These duties arise principally under the Insolvency Act 1986 and related legislation. Liquidators also have statutory obligations to report the conduct of directors to the Secretary of State where appropriate.

An investigation does not necessarily indicate wrongdoing. It is a normal part of many insolvencies, particularly where creditors have suffered losses or where company records require further examination.

A liquidator may review matters including:

• Payments made before insolvency. A liquidator may examine whether company funds were used appropriately and whether directors authorised payments consistently with their legal duties. Legitimate commercial decisions are not automatically improper simply because the company later became insolvent.
• Directors’ financial decisions. The liquidator may consider whether directors complied with their statutory duties under the Companies Act 2006, including the duty to promote the success of the company under section 172 and the duty to exercise reasonable care, skill and diligence under section 174. Where the directors ought to know or ought to know that the company is insolvent or bordering on insolvency, or an insolvent liquidation or administration is probable, they must give increasing weight to the interests of creditors. This is a modification of the section 172 duty rather than a separate free-standing duty owed directly to creditors and how it applies remains fact-sensitive, as explained by the Supreme Court in BTI 2014 LLC v Sequana SA [2022].

Loan Accounts, Dividends and Company Records

• Overdrawn directors’ loan accounts. Where a director has drawn money out of the company beyond properly declared salary, lawful dividends or repayment of a genuine loan, the liquidator will usually demand repayment of the outstanding balance. This is one of the most common misfeasance claims in practice, and it is often the easiest for a liquidator to evidence from the accounts alone.
• Dividends. Dividends paid when the company had insufficient distributable reserves are unlawful under Part 23 of the Companies Act 2006. They may be recoverable from the directors who authorised them as a breach of duty, and in some cases from the shareholders who received them under section 847. Where a director is also the shareholder, both routes may be pursued. Liquidators frequently reclassify historic dividends as unlawful where the accounts are later restated, for example following an HMRC assessment.
• Bounce Back Loans and other government backed lending. Where such funds were applied other than for the economic benefit of the business, liquidators and the Insolvency Service continue to pursue recovery, disqualification and compensation orders, including against directors of companies that were dissolved rather than liquidated. 
• Company records and governance. Missing accounting records, inadequate board documentation or unexplained transactions may prompt further enquiries. Poor record keeping does not itself establish misfeasance, but it can make it more difficult to explain decisions taken at the time.

What should you do if you receive a letter before misfeasance proceedings are issued?

The period before court proceedings begin can be important. The way you respond may influence how the matter develops and early engagement may assist in clarifying the factual position and narrowing issues before proceedings are commenced.

Practical steps to consider

• Preserve documents and electronic records. Keep company records, emails, accounting information, board minutes, banking records and other relevant documents. Destroying or altering documents may have serious legal consequences, and retaining complete records often assists directors in explaining commercial decisions.
• Check whether you have directors’ and officers’ liability insurance. A D&O policy may cover both your defence costs and any liability. Policies almost always contain strict notification conditions, so notify the insurer or broker as soon as a claim is threatened rather than waiting for proceedings. Late notification can forfeit cover altogether. Check any run-off cover too, which is what usually applies once a company has failed.
• Review the allegations carefully. A liquidator’s letter should be read alongside the available company records and any supporting documentation. Consider whether the allegations identify specific transactions or alleged breaches, rather than making broad assertions.
• Take independent legal advice. Misfeasance claims frequently involve overlapping issues of insolvency law, company law and directors’ duties. Early specialist advice may help clarify the strengths and weaknesses of the allegations, identify available evidence and whether relief may be available, and ensure communications are handled appropriately.

If you have received a formal threat of misfeasance proceedings, speaking to a solicitor experienced in insolvency litigation before providing a detailed substantive response can help you make informed decisions about the next steps.

How Jonathan Lea Network can help with misfeasance proceedings

Facing allegations from a liquidator can feel daunting, particularly where your personal finances and professional reputation may be at stake.

The Jonathan Lea Network is a full service, SRA-regulated firm handling contentious insolvency, director duty and shareholder disputes, including defending misfeasance and related claims. Your matter will benefit from partner‑level oversight, clear written analysis of your legal position, and a pragmatic focus on containing risk and cost. Our approach focuses on understanding the commercial background, analysing the legal issues carefully and providing practical, proportionate advice tailored to your objectives.

Where appropriate, we can assist by:

• Assessing the strength of the allegations. We review the liquidator’s correspondence alongside the available evidence and applicable law. This helps identify areas where allegations may require clarification, further evidence or legal challenge.
• Preparing responses and negotiations. We can assist with correspondence, engagement with the liquidator and, where appropriate, settlement discussions. Early, well-prepared responses may help narrow the issues in dispute, although every case turns on its own facts.
• Defending court proceedings where necessary. If litigation cannot be avoided, we can represent directors throughout the court process. We aim to provide clear advice on the procedural steps, likely issues and available options without making unrealistic promises about outcomes.

Early legal advice is often easier and more cost-effective than trying to respond after positions have hardened. If you have received a letter threatening misfeasance proceedings, we encourage you to seek advice before taking substantive action.

Frequently Asked Questions: Misfeasance Proceedings

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.