Directors beware: unauthorised use of a director’s loan account can amount to fraudulent breach of duty
22 July 2026 | posted in Corporate and business law
In McCarthy v Marshall [2026] EWHC 1585 (Ch), the High Court reinforced the importance of proper governance and financial controls over directors’ loan accounts.
The court held that a director who used a director’s loan account to pay personal expenses without proper authority had committed a fraudulent breach of fiduciary duty. This was the case even though the director intended to repay the amounts.
Under section 197 of the Companies Act 2006, loans to directors are generally prohibited unless approved by shareholders.
The drawings had been made without the knowledge of the other directors and without the necessary shareholder approval. Under section 197 of the Companies Act 2006, certain loans to directors require prior approval from the company’s members, subject to limited statutory exceptions.
The court found that the director’s conduct went beyond poor governance. He had deliberately used company funds for personal benefit in a way that was inconsistent with his fiduciary duties.
Why this matters
A key aspect of the judgment is the distinction between weak governance and dishonest conduct.
Directors have discretion in how they manage company affairs. However, that discretion does not extend to:
- treating company funds as personal assets;
- using accounting entries to justify unauthorised withdrawals.
Where a director knowingly causes loss to the company or secures a personal benefit without proper authority, the court may characterise that conduct as fraudulent. This can expose the director to personal liability.
The decision does not mean that every error involving a director’s loan account will amount to fraud. The outcome will depend on the director’s knowledge, the authority available and the particular circumstances. However, informal arrangements and incomplete records can make it much harder to demonstrate that a transaction was properly approved.
Implications for businesses
Directors’ loan accounts are often used informally, particularly in owner-managed businesses. However, this case highlights the risks where arrangements are not properly controlled or documented.
Businesses should:
- check the company’s articles, shareholders’ agreement and statutory approval requirements before advancing funds;
- ensure director loans and other related-party transactions are properly authorised;
- document the amount, purpose, interest, repayment terms and relevant approvals;
- maintain clear and accurate director’s loan account records;
- review outstanding and overdrawn balances regularly; and
- seek advice before making withdrawals or accounting adjustments that confer a personal benefit.
Clear processes and records can help protect both the company and its directors if a transaction is later questioned.
How Moore SGD Law can help
Moore SGD Law advises companies and directors on directors’ duties, corporate governance and related-party transactions.
We can help:
- determine whether shareholder or board approval is required;
- put the appropriate corporate authorisations in place;
- document director and shareholder loans;
- review existing governance arrangements and historic transactions; and
- address concerns before they develop into disputes or claims.
Taking advice early can help ensure transactions are properly authorised and documented, reducing the risk of disputes, personal liability and later challenge.
