A Debt Is Not a Duty: Directors’ Loan Accounts and Section 212

A liquidator cannot use section 212 of the Insolvency Act 1986 to pursue a simple debt claim on an overdrawn director’s loan account. The same £112,506 was nevertheless awarded through section 212 as compensation for breach of duty, within a total award of £190,153.99.

That is the effect of Re St Mark Lions Ltd [2026] EWHC 2386 (Ch) (Hinton v Stobinski), decided by Deputy ICC Judge Curl KC on 22 September 2026. The company, which appears to have been principally a service company for its sole director, entered creditors’ voluntary liquidation in 2022 with years of unpaid corporation tax and almost no records.

Why a simple debt falls outside section 212

Section 212 is a procedural route for pursuing the company’s own claims against its officers; it creates no new cause of action. A claim for repayment of a loan does not fit. Once lent, the money belonged to the director. The company held only a right to be repaid, so there was no company property for him to “retain”.

The liquidator’s alternative argument relied on the words “any fiduciary or other duty”. The judge accepted that a literal reading appeared to favour the liquidator, but held that the words cover duties that come with the office, not a contractual obligation to repay. He recorded that counsel’s researches had found no reasoned decision on the point under the modern wording.

The defect was procedural only, because the liquidator had authority to make the company sue. Had it been necessary, the court would have rectified the proceedings under CPR 19.2 and 3.10, on the liquidator’s undertaking to pay the Part 7 issue fee, following the approach in Manolete Partners plc v Hayward and Barrett Holdings Ltd [2022] 1 All ER (Comm) 1293. It was unnecessary, because the breach of duty claim succeeded.

Breach of duty and the award

Applying BTI 2014 LLC v Sequana SA, the court found the company at least bordering on insolvency from 2 December 2019 at the latest. It had almost no cash, a growing tax debt, and other assets consisting largely of a loan account of doubtful recoverability. From then on, the director’s duties to the company required proper regard to creditors’ interests, which deserved paramount or near-paramount weight in any decision applying company assets for his personal benefit.

The director was himself the debtor, so demand and repayment were both in his hands. A reasonable director would have stopped drawing and taken steps to recover the loan, at least so far as needed to deal with the tax debt. Continuing to draw breached sections 172 and 175 of the Companies Act 2006, alternatively section 174. Liability was the whole £112,506, not merely the drawings after the insolvency date.

The court assessed his conduct objectively, because he had never treated the company’s interests as separate from his own. His claim to have been advised that no tax was due failed on the evidence. The judge rejected the allegation of deliberate dishonesty.

Proof was straightforward. The balance came from the company’s own amended accounts, approved by the director, and a tax charge had been agreed with HMRC on the same figures. That established a prima facie case, and late claims to credits against the balance, including dividends said to have cleared it, failed.

The director accepted that he bore the burden of justifying the other payments and the £38,500 of “management charges”. The judge found that none of the other payments was made for the company’s benefit, and that it was highly improbable that the £38,500 formed part of the recorded dividends.

The liquidator did not attack the recorded dividends as “could not pay” claims under Part 23 of the Companies Act 2006 (distributions). His case was that, even if lawfully declared, the payments should not have been made given the company’s financial position, and the judge agreed. Both heads involved breaches of sections 171, 172, 174 and 175.

The BVI position

Section 254 of the Insolvency Act 2003 (Revised Edition 2020) uses similar wording, including “breach of any fiduciary or other duty”, but St Mark Lions, although persuasive in the BVI, does not decide BVI law. Unlike section 212, section 254 may be invoked only by the liquidator of a company already in insolvent liquidation (sections 253 and 254(1)), not by a creditor or contributory.

Until a BVI court decides the point, the cautious course is to bring any simple debt claim in the company’s name under paragraph 4 of Schedule 2 to the Insolvency Act.

BVI directors’ duties arise under sections 120 to 122 of the BVI Business Companies Act 2004, with section 123 governing reliance on advice, not under the Companies Act 2006. Distributions are subject to a statutory solvency test (sections 56 and 57 of the BVI Business Companies Act 2004).

In practice

Plead the duty case where the facts allow, and issue any bare debt claim in the company’s name from day one. For directors, the lesson is simple: once insolvency is in view, a director who owes the company money should stop drawing and start repaying.