Directors’ loan accounts – the case of McCarthy v Marshall

Directors’ loan accounts (DLA) are used to record any money a director receives or pays into their company that is not salary, dividend or reimbursed expenses.

For many business owners, Directors’ Loan Accounts are part of everyday business life.

However, the recent High Court decision in McCarthy v Marshall [2026] EWHC 1585 (Ch) is a reminder that Director Loan Accounts can carry greater legal risk than many business owners realise.

The case shows that even where money is eventually repaid, problems can arise if the arrangements have not been properly authorised.

The Background

The case arose from a dispute between two long-standing business partners who owned and managed Emerald Meats (London) Limited and its subsidiary, Emerald Properties (London) Limited. Both were directors and shareholders, although one director was responsible for the day-to-day management of the businesses.

Over a period in time, one director used company funds to pay a variety of personal expenses through a Directors’ Loan Account. They argued that they had the authority to do so and always intended to repay the company.

When the relationship later broke down, those withdrawals came under scrutiny. The Court found that they had not been properly authorised and that company funds had been used for personal purposes without the necessary approval.

What makes the decision particularly interesting is that the Court was not persuaded by the argument that the money was always intended to be repaid.

Many directors may assume that if money is paid back to the company, there is little cause for concern. The judgment suggests the position is not always that simple. The Court focused on whether company funds had been used for personal benefit without proper authority in the first place.

In this case, the use of company money through the loan account without proper authority was found to amount to a fraudulent breach of fiduciary duty as it demonstrated a reckless indifference to company interests.

The fact that repayments had been made did not prevent the Court from reaching that conclusion.

Why this matters?

Many owner-managed businesses operate informal arrangements between directors and the company. While that may work in practice, the law still treats the company as a separate legal entity.

Even where a director owns most or all of the business, company money is not the same as personal money. Directors owe duties to the company and must be able to justify transactions involving company assets.

The judgment is not a warning against directors’ loan accounts altogether. They remain a legitimate and widely used feature of private companies. The Court recognised that such arrangements are common. The issue was the lack of proper authority and oversight.

Businesses should also remember that certain loans to directors require shareholder approval under the Companies Act 2006. Whether that applies will depend on the specific circumstances, but it is important not to assume that an informal understanding will always be enough.

How can directors protect themselves?

Directors should ensure that they:

• Treat a director’s loan account as a formal company transaction.
• Make sure withdrawals are properly authorised before funds are taken.
• Keep a clear record of why borrowing was considered to be in the interest of the company.
• Ensure loan account entries can be explained years later if necessary.
• Consider whether shareholder approval is required, even if the directors and shareholders are the same people.
• Do not assume that repayment alone will eliminate the risk if the original transaction was unauthorised.

Key takeaways

Company funds belong to the company, not to the individuals who run it. A director borrowing money from their company is still a loan and should be treated accordingly.

McCarthy v Marshall highlights the importance of clear record keeping and proper authorisation in preventing informal arrangements from becoming problematic.

How Can Morr & Co help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Corporate & Commercial team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.