Court clarifies when a director’s loan can amount to misfeasance

Section 212 of the Insolvency Act 1986 is a powerful recovery tool for liquidators, but not every debt owed by a director amounts to misfeasance. A recent High Court judgment clarifies where that dividing line lies and highlights the evidence needed to show that a director's conduct caused loss to an insolvent company.

Background

In Hinton v Stobinski (Re St Mark Lions Ltd) [2026] EWHC 2386 (Ch), the liquidator brought claims against the company's sole director and shareholder. 

The company had entered creditors' voluntary liquidation with unpaid tax liabilities. The liquidator also identified an overdrawn director's loan account and asked the court to order the repayment.
Ultimately, the court ordered the director to repay over £190,000 to the company. 

However, the significance of the judgment doesn’t lie in the repayment order but in what it says about the scope of section 212 applications, directors' responsibilities and the records needed when company transactions are challenged after insolvency.

The scope of section 212

At the start of the trial, the court considered whether the liquidator could recover the director's loan account through an application under section 212 or whether that part of the claim should have been brought by the company as an ordinary debt claim.

Deputy ICC Judge Curl KC noted that, in the 40 years since the Insolvency Act was introduced, “remarkable though it may seem, …. there has not been a reasoned decision on whether or not a company's debt claim against a director falls within the modern wording of s.212 of the IA 1986.”

The distinction matters because a loan made by a company creates a debt owed to it. Once advanced, the money is no longer company property retained by the director in the sense required for a claim under section 212. Non-payment of a debt, alone is therefore not misfeasance. For section 212 to apply, the claim must involve conduct by the director in that capacity, such as breach of duty, misapplication of assets or other misconduct in relation to the company.

The court clarified that a liquidator can’t pursue an ordinary claim for repayment of a director's loan in their own name under section 212. It should be brought by the company as a debt claim. However, if there was a procedural defect in this case, that wouldn't necessarily make the proceedings a nullity. The judge indicated that, if required, the defect could have been cured by joining the company and ensuring the correct issue fee was paid, provided there was no unfair prejudice to the director.

However, the point didn’t prevent recovery because the court found that the facts in this case went beyond the non-payment of a debt. The director's conduct was analysed through the lens of directors' duties and the court was satisfied that compensation could be ordered based on misfeasance and breach of duty.

When seeking recovery of a director's loan account balance, the judgment highlighted four things office holders should identify clearly: the relevant duty, the conduct alleged to breach it, the loss caused to the company and the remedy sought.

Interaction with Companies Act duties

Although section 212 is an Insolvency Act remedy, the relevant duties will often be the statutory directors' duties contained in the Companies Act 2006. 

In this case, the court considered duties including section 171, to act within powers and for proper purposes; section 172, to promote the success of the company, as modified by the creditor interest duty where insolvency is present or probable; section 174, to exercise reasonable care, skill and diligence; and section 175, to avoid conflicts of interest.

Section 212 doesn't itself create a new substantive duty. It provides the procedural mechanism and remedial route by which the liquidator can ask the court to examine conduct and order repayment, restoration of property or compensation. The underlying wrong must be found in the director's fiduciary, statutory or common law duties.

That makes the Companies Act analysis central to any section 212 application. A payment to a director, or a failure to recover money from a director, may raise questions about proper purpose, conflicts, reasonable care and creditor interests. The court is likely to consider whether the director treated the company as a separate legal person, whether the transaction was authorised and properly explained, and whether the decision was one that a director acting in accordance with their duties could properly make.

Professional advice doesn’t transfer directors’ responsibilities

The director relied on accountants to explain the company's financial position and transactions.

The court accepted that directors aren't expected to have a professional accountant’s expertise, but they remain responsible for decisions made on behalf of the company. Directors must understand, at a practical level, why company money has been spent, why liabilities have or haven't been paid, and whether a transaction is in the company's interests.

Directors should remember that using an accountant doesn’t transfer their legal responsibilities. Professional advice may be relevant, but directors are still responsible for meeting their statutory and fiduciary duties. Where explanations are inconsistent or records are missing, the court may be slow to accept a director's account unless it's supported by records created at the time.

Creditor interests when approaching insolvency

The court also considered the creditor duty principles following BTI 2014 LLC v Sequana SA. Once a company is insolvent, or bordering on insolvency, directors must give appropriate weight to creditors' interests. The creditor duty isn't a separate free-standing duty. It's a modification of the duty under section 172 Companies Act 2006, requiring directors to consider the company's interests through the lens of those with the economic interest in the company at that stage.

In practice, directors of financially distressed companies should be particularly cautious about payments to themselves, transactions without a clear business purpose, or decisions that reduce the assets available to creditors. The nearer a company is to insolvency, the more important it becomes to record the commercial rationale for decisions and how creditor interests were considered.

This interaction gives section 212 its practical force by bringing the insolvency remedy and the relevant Companies Act duties together in a single claim. 

The office holder must still prove a breach of duty and show resulting loss. If established, the court can order the director to compensate the company.