Directors’ Loan Accounts: The Risks of Unauthorised Borrowing

Directors who treat company funds as an extension of their personal finances do so at considerable risk.

In McCarthy v Marshall [2026] EWHC 1585 (Ch) the High Court confirmed that unauthorised interest-free borrowing through a director’s loan account may amount to a fraudulent breach of fiduciary duty where the borrowing has not been approved by the company’s shareholders.

What is the risk?

For many small company director/shareholders, particularly where directors previously operated as sole traders or partnerships, it can be easy to overlook the legal rules that apply once a business is incorporated.

Unlike a sole trader, a company is a separate legal entity. Directors are therefore subject to statutory duties requiring them to act in the company’s best interests.

These duties become particularly important where a director uses company funds for personal expenditure. Such transactions create a director’s loan account (DLA) and can give rise to a conflict between the director’s personal interests and their duty to the company.

Without the necessary approvals, these arrangements may expose directors to significant personal liability.

McCarthy v Marshall (2026)

John McCarthy and Ivor Marshall were shareholder/directors of Emerald Meats (London) Limited and Emerald Properties (London) Limited.

Without Mr McCarthy’s knowledge, Mr Marshall used a director’s loan account to fund personal expenses, intending to repay the amounts when sufficient funds became available.

The High Court rejected Mr Marshall’s claim that Mr McCarthy had authorised or consented to the arrangement. The court also noted that Mr McCarthy was not the company’s only shareholder. The court found that:

• Mr Marshall had breached his fiduciary duties by operating the DLA without shareholder approval.
• The interest-free nature of the borrowing demonstrated a reckless indifference to the company’s interests.
• The breach was therefore fraudulent.

The court also confirmed that, regardless of how common DLAs may be in practice, or whether repayment was intended, the arrangement required prior shareholder approval under section 197 of the Companies Act 2006 (CA 2006).

The lessons learned

The decision reinforces the importance of keeping company and personal finances strictly separate.

It also highlights the need to obtain shareholder approval before making company funds available to directors.

Failure to comply may result in directors being personally liable to:

• repay the loan;
• account for any profits made; and
• compensate the company for any resulting losses.

What are the statutory rules

Section 197(1) of the Companies Act 2006 generally prohibits a company from making loans to its directors unless the transaction has first been approved by the shareholders.

The proposed shareholder resolution must be accompanied by a memorandum setting out:

• the nature of the loan;
• the amount of the loan;
• the purpose of the loan; and
• the extent of the company’s liability under any connected transaction.

This is required by sections 197(3) and (4) of the Companies Act 2006.

There is a limited exception for loans with an aggregate value of less than £10,000, which do not require shareholder approval under section 207(1).

How can directors protect themselves?

Directors should:

• Review the company’s articles, shareholders’ agreement, or any other governance documents before agreeing to loan company funds.
• Convene a board meeting and ensure that the terms and circumstances of the loan are discussed and recorded.
• Obtain shareholder approval before granting a loan that falls within section 197.
• Ensure the value, purpose, and terms of the loan are clearly documented and recorded.
• Ensure that balances are regularly reviewed and obtain fresh approval when required.

How can we help?

Gaby Hardwicke Solicitors advises companies on directors’ duties and corporate governance matters.

We can assist by:

• Advising directors on their duties and the statutory requirements governing loans to directors.
• Preparing the necessary corporate authorisations, including board minutes and shareholder resolutions.
• Drafting directors’ loan agreements to document the terms of the loan.

If you would like to discuss how these issues may affect your business, please get in touch with a member of our Corporate Team on 01323 435900 for tailored advice.

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