A new High Court judgment provides an important reminder of how seriously an overdrawn director’s loan account can be treated when a company becomes insolvent.
In Hinton v Stobinski [2026] EWHC 2386 (Ch), the liquidator of St Mark Lions Limited successfully obtained judgment against the company’s sole director and shareholder for £190,153.99.
The claim included an overdrawn director’s loan account of £112,506, together with other company payments which the liquidator challenged.
But the case is particularly interesting because it goes beyond simply saying:
“A director’s loan has to be repaid.”
The High Court considered the director’s duties as the company approached insolvency, the recoverability of the DLA, the company’s increasing Corporation Tax liability and the circumstances in which a DLA can form part of a misfeasance claim.
For directors of owner-managed companies, there are some important lessons.
What happened in Hinton v Stobinski?
St Mark Lions Limited was a company operated by Dr Marek Stobinski, who was its sole director and shareholder.
The company entered Creditors’ Voluntary Liquidation on 12 October 2022.
Its liquidator, Lloyd Hinton, subsequently brought proceedings against Dr Stobinski.
The liquidator sought £214,195.29 across three broad areas:
- £112,506 relating to an overdrawn director’s loan account;
- £63,189.29 of other payments from the company bank account which were alleged to lack a legitimate basis or supporting records; and
- £38,500 paid directly to the director and described on the bank statements as “MGMT CHARGE”.
The High Court ultimately awarded the liquidator £190,153.99, comprising the full £112,506 DLA, £39,147.99 of the other payments and the £38,500 management charge payments.
Why was the Director’s Loan Account so important?
The company had an accumulating Corporation Tax liability.
By the time of the liquidation, the statement of affairs recorded Corporation Tax of approximately £79,000.
The court found that by 2 December 2019, the company was at least bordering on both cash-flow and balance-sheet insolvency.
At that point, the company had only around £1,218 in its bank account, and its financial position depended heavily upon recovery of the money owed by its director through the DLA.
The difficulty was obvious.
The company’s largest meaningful asset was money owed by the person controlling the company.
Rather than reducing that liability, the director continued drawing from the company.
The court concluded that a reasonable director acting in good faith in those circumstances would have stopped further drawings and taken steps to repay the DLA so that the company could address its liabilities, including its Corporation Tax debt.
An overdrawn DLA is an asset of the company
This is one of the most important points for directors to understand.
If a director owes money to their company through an overdrawn Director’s Loan Account, that balance is generally an asset of the company.
It is not simply an accounting entry that disappears when the business closes.
When a company enters liquidation, the liquidator has a duty to consider whether that asset can be recovered for creditors.
The Insolvency Service itself states that money borrowed from a company remains repayable following insolvency and that a liquidator may take action against a director to recover it.
When do creditors’ interests become important?
The judgment also contains a useful discussion of directors’ duties as a company approaches insolvency.
The court referred to the Supreme Court decision in BTI 2014 LLC v Sequana SA.
As a company’s financial difficulties become more serious, directors must increasingly have regard to the interests of creditors rather than simply the interests of shareholders.
In Hinton, the High Court found that St Mark Lions Limited was at least bordering on insolvency from December 2019.
Its ability to meet its liabilities was substantially dependent on collecting the DLA from its own director.
Against that background, continuing to withdraw money rather than taking steps to repay the DLA became particularly significant.
The court found breaches of the director’s duties.
Is every unpaid DLA automatically misfeasance?
No — and this is another particularly useful part of the judgment.
The court considered the scope of section 212 Insolvency Act 1986, which provides a procedure through which liquidators can pursue certain claims involving misfeasance and breaches of duty.
The judge held that an ordinary contractual debt does not automatically become a section 212 misfeasance claim simply because the debtor happens to be a director.
A straightforward obligation to repay a loan arises from the loan relationship.
That is different from duties which arise because somebody holds office as a director.
However, the court made an important qualification.
The circumstances surrounding a Director’s Loan Account can themselves reveal breaches of directors’ duties.
Examples identified by the court included situations where:
- the loan was not properly authorised;
- a director continued drawing funds when creditors’ interests had become relevant; or
- the director placed their own interests ahead of those of the company.
In those circumstances, the DLA may become relevant to a section 212 claim.
That distinction is important for insolvency practitioners.
There may be:
a straightforward debt recovery claim;
a misfeasance or breach-of-duty claim;
or both, depending upon the facts.
Poor records did not make the problem disappear
Another important feature of the case was the lack of reliable books and records.
The judgment describes the contemporaneous evidence as unusually limited.
Various explanations were subsequently advanced for payments and the DLA balance, but the court repeatedly considered whether those explanations were supported by documentary evidence.
The company’s amended accounts recorded the DLA at £112,506 and that figure had also been used when dealing with HMRC concerning the company’s section 455 tax position.
The court ultimately accepted that £112,506 represented the director’s DLA liability.
For directors, the practical lesson is simple:
If money has been taken from the company, proper records matter.
Trying to reconstruct the position several years later can be extremely difficult.
What if the director cannot afford to repay the DLA?
This is where another increasingly important issue arises.
A liquidator will normally investigate whether an overdrawn DLA can be recovered.
That can involve considering:
- the director’s income;
- savings;
- property;
- other assets;
- liabilities;
- affordability;
- settlement proposals; and
- the likely costs and benefit of legal proceedings.
Sometimes the full DLA can be recovered.
Sometimes a commercial settlement is appropriate.
And sometimes the director simply does not have sufficient assets or income to repay the balance.
But an inability to repay does not necessarily mean the matter ends there.
HMRC and irrecoverable Director’s Loan Accounts
HMRC has specific guidance dealing with Director’s Loan Accounts in insolvent liquidations.
Where a liquidator concludes that an outstanding DLA cannot be recovered, the loan may ultimately be released or written off.
HMRC’s guidance states that liquidators should consider releasing or writing off irrecoverable balances where appropriate.
There can then be an important tax consequence for the director.
Where a qualifying loan to a participator is released or written off, section 415 Income Tax (Trading and Other Income) Act 2005 can treat the amount released or written off as income of the borrower.
There may also be National Insurance consequences.
In other words, a director could potentially find themselves in this position:
The company has failed.
They cannot afford to repay the full DLA.
The liquidator eventually writes off the irrecoverable balance.
HMRC may then treat the amount written off as taxable income.
That can come as an unpleasant surprise.
HMRC is actively identifying DLA write-offs
HMRC has also introduced a specific voluntary process for insolvency practitioners dealing with DLAs which are written off because the director cannot afford repayment.
Under that process, HMRC says information concerning the write-off can be reviewed for tax compliance risks and potential recovery.
Where an amount is not going to be recovered, HMRC’s guidance says a “nudge” letter can be sent to the individual who benefited from the loan being written off.
That letter advises the individual that the income should be reported through their Self Assessment return under section 415 ITTOIA 2005.
HMRC also says it may monitor the return and open an enquiry where the income has not been declared.
This is a separate issue from the liquidator’s recovery of the DLA itself.
But together they demonstrate why an overdrawn DLA should never be ignored when a company is experiencing financial difficulty.
What about Section 455 tax?
There is another side to the tax position.
A close company can itself become liable for tax under section 455 Corporation Tax Act 2010 where loans are made to participators and remain outstanding.
Where the loan is subsequently repaid, released or written off, the company may become entitled to relief or repayment under section 458 CTA 2010.
HMRC’s current guidance confirms this treatment in insolvent liquidations.
This creates an interesting distinction:
- the company may obtain relief in respect of previously paid s455 tax; while
- the director/shareholder may face a personal income tax charge on an amount that is released or written off.
This is one reason professional tax advice may be required alongside insolvency advice.
Can the liquidator simply agree a reduced settlement?
Potentially, but the wording and circumstances matter.
HMRC’s guidance specifically states that where a liquidator and a participator agree a partial payment in full and final settlement, the unpaid balance can amount to a release or write-off.
HMRC may therefore consider section 415 to apply to that remaining amount.
For example, suppose a director owes the company £100,000.
After reviewing the director’s financial circumstances, the liquidator accepts £30,000 in full and final settlement.
The £30,000 recovery is one issue.
The treatment of the remaining £70,000 for tax purposes is another.
Directors should therefore obtain appropriate tax advice rather than assuming that agreeing a settlement with the liquidator brings every consequence of the DLA to an end.
Why Hinton v Stobinski matters
The judgment brings together several issues insolvency practitioners regularly encounter in smaller owner-managed companies:
- increasing HMRC liabilities;
- an overdrawn Director’s Loan Account;
- the DLA representing one of the company’s main assets;
- continued director drawings;
- inadequate accounting records;
- questions regarding when creditor interests became relevant;
- disputed explanations for company payments; and
- recovery action by a liquidator.
The sums involved in Hinton may be significant, but the principles can apply just as readily to a company with a £20,000 or £30,000 DLA.
The most important point is that the financial position cannot be looked at only when the liquidation starts.
What happened before the liquidation can be equally important.
What should directors do about an overdrawn DLA?
If a company is financially healthy, an overdrawn DLA may simply be part of its ordinary financial affairs.
The position changes considerably when the company begins struggling to meet its liabilities.
Directors should be particularly careful about:
- continuing to increase the DLA;
- taking funds which have not been properly treated as salary or dividends;
- paying themselves while HMRC or other creditors remain unpaid;
- declaring dividends without sufficient distributable reserves;
- assuming the DLA will disappear in a liquidation; and
- leaving the position until a creditor forces action.
Taking advice early gives directors an opportunity to understand both the company’s position and their own potential exposure.
Worried about your Director’s Loan Account?
An overdrawn Director’s Loan Account does not automatically mean you cannot place your company into liquidation.
It also does not automatically mean court proceedings will follow.
At DCA Business Recovery, we regularly deal with companies where directors owe money through their loan accounts.
We can review the position, explain how the DLA will be treated in a liquidation and discuss what happens next.
Where appropriate, a liquidator may consider a director’s financial circumstances and any reasonable settlement proposal.
However, directors should be aware that there can also be separate tax consequences where part of a DLA is ultimately released or written off, and independent tax advice may therefore be required.
The worst approach is usually to ignore the DLA and hope it disappears when the company closes.
If your company is struggling financially and you are concerned about an overdrawn Director’s Loan Account, speak to DCA Business Recovery before making further withdrawals or payments.
Read the judgment: Hinton v Stobinski [2026] EWHC 2386 (Ch) — Official High Court judgment on Find Case Law
HMRC guidance: Director Loan Accounts written off in corporate insolvency procedures
HMRC tax guidance: Close companies: insolvent liquidations and Director’s Loan Accounts
This article is intended as general information only. It is not legal or tax advice. The treatment of a Director’s Loan Account depends on the facts of each case and directors should obtain appropriate professional advice.
