Your Director’s Loan Account could be fraud — even if you intend to repay

A Common Situation

Many company directors use director’s loan accounts (DLAs) to borrow money from their business. Often, these directors believe that as long as they intend to repay the money, there is nothing wrong with the practice. However, a recent High Court decision highlights that drawing funds for personal expenses without proper approval can be far more serious than most people realise.

What happened in this case?

In McCarthy v Marshal [2026] EWHC 1585 (Ch), John McCarthy and Ivor Marshall were equal owner-managers of Emerald Meats (London) Ltd and Emerald Properties (London) Ltd. Marshall had day-to-day control of the businesses and operated what he said was a longstanding DLA arrangement under which company funds were used to meet his personal expenditure. Marshall thought it was acceptable because he planned to repay the amounts and his defence was that McCarthy knew of and agreed to this arrangement. However, when McCarthy urgently needed funds, he requested permission from Marshall rather than simply drawing the funds himself, which demonstrated that he did not approve or know about the DLA.

The court found that Marshall’s use of company funds to pay personal expenses through the DLA was unauthorised and a fraudulent breach of duty. Even though the director intended to pay the money back, his actions put the company at risk.

Why “I intended to repay” does not excuse directors’ conduct

The court highlighted that it didn’t matter that Mr Marshall intended to pay back what he borrowed. What is important is whether the arrangement was properly authorised and whether it benefited the company. In this case, it didn’t – Marshall’s conduct provided no benefit to the company and exposed it to negative consequences such as reduced liquidity, increased borrowing costs, and impaired trading.

The importance of shareholder approval

The law requires that any loan to a director must be formally approved by shareholders. Many company directors overlook this step, relying on informal agreements or their own judgement. This puts them in danger of claims for wrongdoing or even fraud.

Practical Takeaways

• Directors: Avoid informal arrangements. Ensure all director loans are formally approved by shareholders prior to withdrawing funds and clearly documented.
• Shareholders: If you suspect a director has been using company funds for personal benefit without authorisation, seek legal advice.

The case demonstrates that directors’ loan accounts are not merely accounting mechanisms. If operated improperly, they can create personal liability for breach of duty and potentially expose directors to allegations of fraud, even where all sums were intended to be repaid.

If you are unsure about your arrangements or concerned about ongoing director loan arrangements, please do not hesitate to contact our Corporate Team for tailored advice.