Lloyd Edward Hinton v Dr Marek Stobinski

A liquidator cannot use section 212 of the Insolvency Act 1986 to recover a simple contractual debt owed to the company, including a lawful director’s loan, because the provision addresses misconduct or duties arising from office. The same liability may fall within section 212 where the director’s handling of the loan also breaches statutory or fiduciary duties. Where a company is bordering on insolvency, creditors’ interests must receive appropriate, fact-sensitive weight. Actions benefiting the director may require paramount or near-paramount weight. The subjective good-faith test under section 172 of the Companies Act 2006 is qualified by rationality, and an objective review applies where the director failed to consider the company’s separate interests or material creditor interests. Lawful dividends may still be paid in breach of duty.

The applicant, the liquidator of St Mark Lions Ltd, brought proceedings against its sole director and shareholder. The claims alleged breaches of sections 171, 172, 174 and 175 of the Companies Act 2006 and were commenced in the liquidator’s name under rule 1.35 of the Insolvency (England and Wales) Rules 2016.

The liquidator claimed repayment of an alleged director’s loan balance, other payments said to lack a company purpose, and management-charge payments. The principal procedural issue was whether the director’s loan balance could be pursued as a simple debt through section 212 of the Insolvency Act 1986. The substantive issues included the company’s solvency, the creditor-interest duty, the applicable standard of review, and whether the payments breached the director’s duties.

The claim succeeded in part. Judgment was entered for the applicant in the sum of £190,153.99, with interest and costs to be addressed separately.

1. Section 212. Section 212 of the Insolvency Act 1986 is a procedural gateway for a company cause of action and creates no new right. A simple contractual debt, including a lawful director’s loan, is outside the gateway where it is unconnected with misconduct in the director’s capacity. The same liability may fall within section 212 where the dealings also disclose a breach of statutory or fiduciary duty. The court followed the procedural analysis in Re Eurocruit Europe Ltd (in liquidation) [2007] 2 BCLC 598 and Manolete Partners plc v Hayward and Barrett Holdings Ltd [2022] 1 All ER (Comm) 1293.
2. Rectification. The wrong originating procedure did not make the debt claim a nullity because the liquidator had authority to cause the company to assert its own cause of action. Had it been necessary, the court would have joined the company under CPR rule 19.2 and rectified the proceedings under rule 3.10 in a single order. That conclusion was an alternative procedural determination.
3. Creditor interests and decision-making. Applying BTI 2014 LLC v Sequana SA [2024] AC 211 and Hunt v Singh [2023] BPIR 1351, the company was at least bordering on cash-flow and balance-sheet insolvency from 2 December 2019. The weight to be given to creditors was fact-sensitive. Actions for the director’s personal benefit required paramount or near-paramount weight to be given to creditors. Section 172 ordinarily involves a subjective good-faith assessment, but rationality is a threshold requirement. An objective standard applied because the director had not considered the company’s separate interests or the interests of its principal creditor.
4. Application to the payments. The director’s failure to stop drawing on, and promptly recover, the £112,506 director’s loan breached sections 172 and 175 and was alternatively negligent under section 174. The other payments were not shown to benefit the company and breached sections 171, 172, 174 and 175. The award for those payments was limited to £39,147.99 to avoid double recovery. The £38,500 management-charge payments were not shown to be dividends. Even if they had been lawfully declared dividends, paying them in the company’s financial condition breached the creditor-interest duty. The distinction was between a dividend that could not lawfully be paid and one that should not have been paid.
5. Alternative claim. The alternative claim under section 238 of the Insolvency Act 1986 was not determined because it had received little argument and would not affect the total award.

not stated in the judgment.