Labour has expressed astonishment at the decision to appoint a bankrupt businessman to chair a £60bn quango, demanding to know who authorised the appointment in the Treasury and Downing Street.

Tony Caplin resigned as chairman of the Public Works Loans Board on Saturday after his bankruptcy was disclosed by the Mail on Sunday.

Chris Leslie, shadow Treasury chief secretary, said: "It is astonishing that the prime minister and the chancellor could appoint someone who went bankrupt owing so much to the Treasury to run the Treasury's lending operations.

"For him to be bankrupted in 2012 and appointed by the prime minister as chairman of this key Treasury body the following year is surely a misjudgment too far by a prime minister with a track record of poor judgment in relation to his cronies.

"The prime minister and the chancellor need to set out whether they knew about Mr Caplin's bankruptcy and debts to HMRC before making the appointment, whether it was a coincidence the chairmanship was granted only weeks after Caplin was discharged as a bankrupt and on which occasions they had met Mr Caplin in the past."

Caplin was Conservative chief operating officer when Cameron became leader, and was made bankrupt in May 2012 with debts of more than £3m.

He is thought to have owed the taxman £200,000, Barclays bank more than £1m and more than £2m to other creditors.

Downing Street denied he had been appointed because he was a Cameron crony, pointing out he had initially been appointed to public bodies by the previous Labour government.

But Labour said at the time he was appointed to the Public Works Loans Board in 2003, there was no question about his suitability for office, and Labour was under a duty in such a sensitive post to ensure there was a political balance. "There is no question that he was close to Cameron," Labour said, pointing out that Caplin had played a role in preparing the Tory manifesto by co-authoring a report on waste in public spending central to the 2005 election manifesto.

The board offers loans to local government and other bodies. Caplin was asked to resign immediately over the weekend, with government officials saying he should have declared his bankruptcy at the time of his appointment to the chairmanship to the board, a Treasury body that lends money to local government, mainly for capital finance.

Caplin was one of eight commissioners on the Public Works Loan Board.

The body is a subsidiary of the Debt Management Office. In 2013 it had outstanding loans, mainly to local government, worth £65bn.

Caplin is also chairman of the North West London Hospitals NHS trust and a member of the Medical Research Council. Last year, he was reappointed chairman of the audit and finance committee of the MRC, which is part of the Department for Business, Innovation and Skills.