In the world of corporate governance, directors are entrusted with significant power and responsibility. But what happens when poor decisions cross the line into misconduct? When does bad management become something more serious, something unlawful?

Distinguishing between poor business judgment and fraudulent behaviour is not always straightforward. Yet, for companies, creditors, and stakeholders seeking redress, this distinction is critical. Understanding when a director’s conduct moves from misfeasance to criminal fraud – and how to prove it – is essential for holding individuals accountable and recovering losses.

Misfeasance vs. fraud

At its core, misfeasance refers to the improper performance of a lawful act. For directors, this might include poor oversight, failure to act in the company’s best interest, or neglecting duties under the Companies Act or equivalent statutes. While misfeasance can lead to civil liability, it generally falls short of criminal behaviour.

On the other hand, if a director engages in wrongful conduct or the commission of an unlawful act, with intent or recklessness, this is where the legal exposure deepens. Knowingly making false representations, concealing liabilities, or misusing corporate funds are actions that cross into the realm of fraud, triggering both civil and criminal consequences.

The challenge lies in proving not just that a decision was bad or harmful, but that it involved dishonesty, deceit, or knowing abuse of power.

When does poor management become fraudulent?

Certain behaviours by directors, though cloaked in business decisions, may signal fraudulent intent. Common red flags include:

• Concealment of material information from auditors or shareholders
• Unexplained asset transfers to related parties or offshore entities
• Falsified financial statements or backdated documentation
• Use of company funds for personal benefit
• Trading while insolvent, despite warnings from advisors or finance teams

These patterns often emerge in distressed or failing companies, where directors may take increasingly aggressive or deceptive actions to delay insolvency, protect personal assets, or cover up earlier misconduct.

Legal framework and thresholds

Legal remedies vary by jurisdiction, but in the UK, for example, key mechanisms include:

• Section 212 of the Insolvency Act 1986 (UK) – misfeasance claims against directors for breach of fiduciary duty.
• Fraudulent trading (Section 213) – requiring intent to defraud.
• Wrongful trading (Section 214) – where directors continue trading when they knew (or ought to have known) there was no reasonable prospect of avoiding insolvency.

Courts will closely examine directors’ knowledge, intent, and the steps they took to fulfil their duties. Mere incompetence is not enough; litigants must demonstrate dishonesty, recklessness, or wilful disregard of responsibilities.

How investigations bridge the gap

Identifying and proving director misconduct requires more than suspicion. It demands a rigorous investigation, often under time pressure and with limited access to internal records.

This is where corporate investigation and litigation support teams play a vital role. Key tactics include:

• Forensic accounting: Tracing financial flows, identifying anomalies, and uncovering misappropriation or fictitious transactions.
• Digital evidence review: Recovering emails, deleted files, and metadata that reveal internal decision-making and intent.
• Interviews and affidavits: Building timelines through witness statements and internal testimony.
• Asset tracing: Locating diverted funds or property held through complex corporate structures or offshore vehicles.
• Data analytics: Identifying trends or irregularities across vast datasets, such as procurement, payroll, or supplier contracts.

Done effectively, these efforts convert concerns into admissible evidence, laying the foundation for legal action.

When directors face personal consequences

In recent high-profile insolvency cases, courts have not hesitated to hold directors personally liable where misconduct is proven.

An example of this can be seen in the collapse of BHS (British Home Stores). In 2024, the High Court found that former directors had wrongfully continued trading when it was clear the company had no realistic prospect of avoiding insolvency, leading to worsening losses for creditors.

The court held them personally liable under Section 214 of the Insolvency Act and introduced the concept of “trading misfeasance” to address serious management failures short of fraud. The directors were ultimately ordered to pay over £150 million in compensation, reinforcing that failure to act in creditors’ interests during financial distress can result in significant personal liability.

Another striking case involved Liam Francis Wainwright, director of Rawdon Asset Finance, who was sentenced to seven years in prison in 2023 for a £20 million investment fraud.

Wainwright knowingly sold secured loans to investors while the company was insolvent and unable to meet its obligations. He used investor funds to support personal ventures, including racehorse ownership, and falsified documents to conceal the company’s financial reality. The case highlights how the misuse of company funds, falsified records, and trading while insolvent can combine to form a compelling criminal fraud prosecution.

Similar outcomes have been seen in cases where directors were found to have concealed liabilities, falsified documents to secure loans, or misled creditors. The common thread: dishonesty and intent to deceive.

Prevention, detection and response

To minimise risk and ensure accountability:

• Strengthen internal controls around financial reporting and approvals.
• Encourage whistleblowing with safe and confidential reporting channels.
• Conduct periodic forensic reviews, especially in high-risk areas like procurement and cash management.
• Act early: when concerns arise, instruct independent investigators to preserve evidence and assess risk.
• Engage litigation support teams to assist legal counsel in evidence development and trial preparation.

While not every bad business decision is fraudulent, some cross the line, and those that do can cost stakeholders millions. The distinction between misfeasance and fraud lies in intent, concealment, and personal gain. By recognising the signs and deploying the right investigative tools, companies and creditors can hold directors accountable and support effective legal action.

Corporate investigations by ESA Risk

Our team of experienced corporate investigators is ready to support you with your investigation needs – from assistance with internal investigations to full-scale corporate investigations as an external investigations agency. We have access to digital forensics and data management technology, to aid investigations that involve large numbers of documents.

To instruct us on an investigation or for more information on our services, contact us at advice@esarisk.com, on +44 (0)343 515 8686 or via our contact form.