Three terms you need to know to avoid wrongdoing when managing insolvency - Palmers Solicitors

Three terms you need to know to avoid wrongdoing when managing insolvency

Three terms you need to know to avoid wrongdoing when managing insolvency

If your business is in financial distress or it looks like you won’t be able to meet your financial obligations, there may be certain things that you need to do to meet legal requirements and repay your commercial debts to the best of your ability.

Failing to do this can be described by three terms:

  • Misfeasance
  • Malfeasance
  • Nonfeasance

These represent three types of wrongdoing that result from failing to act or act appropriately.

In the context of insolvency, committing any of these types of wrongdoing can result in further action being taken, so it’s important to understand how to avoid wrongdoing in the course of insolvency proceedings.

Misfeasance

Misfeasance means that you failed to carry out a duty correctly without the intent to cause harm.

Applied to corporate insolvency, the term typically refers to actions by company directors or officers that are lawful in nature but carried out in a manner that is negligent or breaches their fiduciary duties.

This can include making decisions that harm the company’s creditors, such as selling assets at undervalue, in order to raise capital quickly.

This is clearly not in the creditors’ best interest, but it was not done maliciously – in fact, it was done with the intent of repaying a portion of the company’s debts quickly.

Malfeasance

Malfeasance is deliberately failing to carry out a duty properly or doing something in direct contradiction with a duty with the intent to cause harm.

Within the framework of corporate insolvency, this term covers actions taken by company directors or officers that are illegal or fraudulent.

Examples include misappropriating company funds, falsifying company accounts, or engaging in fraudulent trading practices.

Malfeasance is often considered to be a more severe offence than misfeasance, as it involves deliberate wrongdoing.

Nonfeasance

Nonfeasance denotes a failure to act at all when there was a duty to do so.

In relation to corporate insolvency, nonfeasance might involve directors failing to keep adequate financial records, not filing required documents with the Government, or failing to act when the company is insolvent to mitigate losses to creditors.

What happens next?

When a business becomes insolvent, acts of financial wrongdoing can significantly affect the outcome for creditors, shareholders, and other stakeholders.

Directors and officers may face personal liability for debts or damages arising from these actions, especially if their conduct contributed to the company’s insolvency or exacerbated the financial situation.

Misfeasance, malfeasance, and nonfeasance can all trigger legal actions against the directors, leading to fines, disqualification from holding directorships and in severe cases, imprisonment.

The law imposes strict duties on directors and officers to act in the best interests of the company and its creditors, particularly when there is a potential for the business to become insolvent and default on debt payments.

It is essential for directors and officers to understand their duties and the distinction between these forms of misconduct.

Acting responsibly and in line with your legal obligations is a must to minimise the damage to you and your business caused by insolvency.

Our team of experts can advise on navigating corporate insolvency – contact us today.