Insolvency practitioners play a crucial role in protecting creditors and other stakeholders. One key part of this job is investigating and pursuing director misfeasance. Director misfeasance is where company directors have behaved wrongfully and contributed to the company’s financial problems.

If you want to know about funding and insurance options for these claims, you can scroll to the later sections. If you’d like to understand more about director misfeasance itself, read on.

What is director misfeasance?

Director misfeasance is the wrongful or improper conduct of a director of a limited company. This might include using company money for personal benefit, preferring one creditor over others, or continuing to trade when the business is in serious financial difficulties.

In an insolvency context, it often involves:

• Misuse or misapplication of company assets
• Making payments that do not serve the interests of the company
• Failing to act in accordance with their legal duty of care
• A breach of fiduciary duty, such as putting their own interests first

When a small business enterprise or larger company enters a formal insolvency process, directors’ decisions in the period leading up to insolvency come under close scrutiny. The law expects directors to act properly and, once they know the company is insolvent, to put creditors first.

In this context, misfeasance funding and insurance become important. Litigation funding, assignment of claims and insurance can help insolvency practitioners pursue misfeasance claims while reducing financial risk. At Annecto Legal, we help clients find suitable funding and insurance options for director misfeasance and related insolvency disputes.

Directors’ conduct in insolvency

When a company becomes insolvent, a liquidator or administrator must review the directors’ conduct before and during the insolvency process. They examine whether the directors:

• Understood their legal duties
• Acted in the interests of the company and its creditors
• Continues to trade when there was no realistic prospect of avoiding insolvency
• Acted honestly and reasonably in the circumstances

If a director has breached their duties under the Companies Act 2006, or under related legislation such as the Small Business Enterprise and Employment Act 2015 (often referred to in practice alongside other enterprise and employment act reforms), they may face claims. These rules sit alongside other parts of business enterprise and employment law that aim to increase director accountability and protect creditors.

If a director is found guilty of misfeasance or wrongful trading, they can be personally liable for some or all of the company’s debts or losses caused by their actions. The court can also disqualify them from acting as a director for up to 15 years, depending on how serious the behaviour was.

The Insolvency Act 1986 and director misfeasance

The Insolvency Act 1986 provides several important tools for insolvency practitioners to challenge director misconduct. Key provisions include:

Wrongful Trading – Section 214

Section 214 allows claims for wrongful trading. This applies where a director knew, or should have known, that there was no reasonable prospect of the company avoiding insolvent liquidation, but the company continues to trade and the position of creditors gets worse.

If the court finds wrongful trading, the director can be ordered to personally contribute to the assets of the company. This is often considered alongside their general duties under the Companies Act 2006 and any relevant enterprise and employment act reforms affecting director behaviour and transparency.

Fraudulent Trading – Section 213

Section 213 deals with fraudulent trading. This is more serious and involves business being carried on with the intention to defraud creditors or for some other fraudulent purpose. If fraudulent trading is proven, directors may face:

• Personal liability for company debts
• Potential criminal sanctions

Preferences – Section 239

Section 239 deals with “preferences”. This happens when a company transfers assets or pays one creditor in a way that deliberately puts that creditor in a better position than others. An insolvency practitioner can challenge these transactions and seek to recover the assets for the benefit of all creditors.

These tools under the Insolvency Act 1986 help insolvency practitioners challenge misconduct, recover assets and hold directors to account. If, as a director, you believe you have acted honestly and have been wrongly accused, you may wish to instruct solicitors with expertise in director misfeasance, insolvency and related business enterprise and employment issues.

How litigation funding helps in director misfeasance claims

Assignment, litigation funding and insurance can all help fund bringing a claim for director misfeasance. They provide the money and risk protection needed to pursue complex and sometimes high-value disputes.

Here are some of the key benefits:

1. Financial Resources

Director misfeasance claims can be expensive. Insolvency practitioners may need:

• Specialist solicitors and counsel
• Forensic accountants
• Investigators and expert witnesses

Litigation funding or assignment of claims gives access to the funds needed to run these cases properly, without the estate or office-holder bearing all the costs upfront.

2. Risk Sharing

When a claim is funded or assigned, much of the financial risk is transferred to the funder or buyer. If the case is unsuccessful, the funding company usually absorbs the loss, not the insolvency estate. This risk-sharing can give insolvency practitioners more confidence in pursuing a strong claim.

3. Enhanced Expertise

With proper funding, insolvency practitioners can instruct experienced lawyers who understand director misfeasance, wrongful trading, the Companies Act 2006, the Insolvency Act 1986 and related enterprise and employment act reforms. This expertise helps uncover evidence and present a compelling case.

4. Taking on Larger and More Complex Cases

Funding or assigning claims allows practitioners to pursue larger, more complex disputes that might otherwise be too risky or costly. This can significantly improve returns to creditors, especially where director misconduct has seriously contributed to the company’s failure.

Director misfeasance funding and insurance options

The assignment model has become a popular option in insolvency litigation. The insolvency practitioner assigns the claim to a third party (often a funder), who then runs the claim and takes the financial risk. In return, the buyer keeps the recovery (or a large share of it).

While this can be useful for lower-value or difficult claims, giving up control is not always in the best interests of creditors, the liquidator or administrator, or solicitors. That’s why it is important to look at the full range of options, including:

After-the-Event (ATE) Legal Insurance

ATE insurance is designed to protect against adverse costs and, in some cases, to help meet Security for Costs requirements. It works a bit like a “swap”:

• For no upfront cost, or a small one, the insurer takes on the risk of having to pay the opponent’s costs if the claim is lost.
• In return, if the claim succeeds, the claimant pays a premium (often as a percentage of the damages).

This is attractive because the claimant is usually financially better off after a win than after a loss. ATE can:

• Protect against adverse costs
• Cover own disbursements and sometimes own costs
• Help with Security for Costs, including via anti-avoidance endorsements or Deeds of Indemnity

ATE insurance is often used in director misfeasance claims, either on its own or alongside litigation funding. Some funders will take assignments without ATE, while others prefer or require it. Understanding the different insurance options is important, particularly where there are links to business enterprise and employment issues, or where directors’ conduct is connected to wider matters under the employment act 2015 or similar reforms.

Third-Party Litigation Funding

Third-party funders may agree to finance an insolvency dispute in return for a share of any damages or settlement. This can be useful where the insolvent estate has limited cash but a strong claim.

Funding can be structured in different ways, for example:

• As a percentage of recoveries
• Linked to the amount spent by the funder
• Tailored to specific stages of the insolvency process

Getting the structure right is important, especially where the funding is covering:

• Disbursements
• Counsel’s fees
• Solicitors’ fees
• Investigation costs of the insolvency practitioner

An independent party with a broad view of the funding and insurance market can help design a cost-effective package.

How Annecto Legal can help

At Annecto Legal, we assist a wide range of clients with insolvency and director misfeasance issues, including:

• Insolvency practitioners, liquidators and administrators
• Those bringing a claim for misfeasance or wrongful trading
• Parties defending director misfeasance or related claims

We help identify suitable litigation funding, assignment options and ATE insurance, always with a focus on protecting creditors and supporting the proper conduct of the insolvency process.

If you are involved in an insolvency dispute involving director misfeasance, whether you are bringing a claim or defending one, and you want to explore funding and insurance options, contact Annecto Legal. We can help you understand your choices and work towards the right deal for the estate and its stakeholders.