Directors' Loan Accounts: High Court Issues Fresh Warning to Company Directors

The High Court has recently delivered a significant reminder of the risks associated with unauthorised director withdrawals from company funds. 

In a decision handed down in McCarthy v Marshall [2026] EWHC 1585 (Ch), the Court found that a director's use of a director's loan account to fund personal expenditure amounted to a fraudulent breach of their duty to the company to act in its best interest and not abuse their position of trust for their own benefit, even though the director intended to repay the money.

What happened?

The case concerned two directors and shareholders of a group of companies. One of the directors, who was responsible for the day-to-day running of the business, had for many years used company funds to pay personal expenses through a director's loan account.

He argued that the arrangement had been agreed with his fellow director. However, the Court rejected that argument and accepted evidence that the other director neither knew about nor authorised the withdrawals.

Why was the director liable?

All directors of a company owe duties of loyalty and trust to that company, known as their fiduciary duties. These are also imposed on directors under the provisions of the Companies Act 2006.

In this case, the Court found that the loan account was being operated without proper authority and that the misuse of company money for personal purposes constituted a fraudulent breach of the director’s fiduciary duties. 

Importantly, the Court emphasised that the fact the director intended to repay the money did not excuse the conduct. The company received no benefit from the arrangement and was exposed to potential financial harm, including reduced cash flow and increased borrowing requirements.

The judgment also highlights that loans to directors may require shareholder approval under section 197 of the Companies Act 2006. Where the necessary approvals are not obtained, directors risk serious legal consequences.

Why does this matter for business owners?

Many owner-managed businesses operate informal arrangements between directors and the company. Directors may occasionally withdraw funds on the understanding that the amounts will be repaid later through dividends, salary adjustments or loan account credits.

This decision is a timely reminder that informal practice is not a substitute for proper corporate authority. Directors should ensure that:

• they understand and are mindful of their obligations to the company;
• any loans or withdrawals are properly documented;
• the company's constitutional documents and statutory requirements are followed;
• any required shareholder approvals are obtained before funds are paid to a director; and
• directors’ loan accounts are accurately maintained and regularly reviewed.

Failure to do so can expose directors not only to repayment obligations, but also to claims for breach of fiduciary duty, potentially with serious personal consequences. 

An overview 

The Court's decision reinforces a long-established principle: company money belongs to the company, not its directors. 

Even where there is no intention to cause loss and repayment is anticipated, directors who treat company funds as a personal source of finance without proper authority may find themselves facing claims of dishonesty and breach of duty.

Businesses should review the operation of their director's loan accounts and ensure that appropriate approvals and records are in place. 

Taking advice early can help avoid disputes and reduce the risk of costly litigation.  If you would like to speak to our corporate team, please contact Katherine Gilmour or Brian Levine in our Corporate and Business Team. 

Call our team at 0800 652 8373 or email [email protected].