By Toby Walker

Senior Associate Solicitor

Corporate & Commercial Law

26 August 2026

Article Blog

The recent judgment of McCarthy v Marshall & Anor [2026] EWHC 1585 (Ch) (McCarthy Case) is a timely reminder that directors’ loan accounts (DLAs) are more than just an “accounting mechanism” and should be properly authorised and recorded, even when intended to be repaid.

Have you transferred funds from the company bank account to your personal bank account, with the intention of repaying it back in the near future?

Has the company previously covered your personal expenses or purchases?

If the answer is “yes!”, then you should be asking yourself whether you have satisfied all of the requirements for approving the DLA because poor record-keeping can expose significant legal and financial risks.

In the McCarthy Case, whenever one director took money from the company through their DLA, they ensured that the other director had approved it in writing.  However, the other director would, in effect, use the company’s bank account as their own personal account without prior approval from the other director. Even though the directors both intended to repay the borrowed funds, the Court found that the director using the company’s bank account as their own personal account was in fraudulent breach of his duties to the company because he was not acting in the interests of the Company.

So now you ask, “how should I properly record and authorise borrowings taken via my DLA”?

1. Has the board approved the DLA?

To counter the problem of the directors maintaining an informal DLA facility (as was in the McCarthy Case), the board of directors should approve any borrowings by any of the directors and properly record this through a board meeting (with recorded minutes) or board resolutions. In the case of a sole director, sole director resolutions should be prepared.

By producing these records, the directors will be able to show the terms of the DLA, provide accurate accounting records, and evidence that they have considered whether it is in the interest of the company to approve such borrowings.

2. Most loans from a company to its directors must also be approved by the simple majority of shareholders, in accordance with section 197 Companies Act 2006 (CA06).

There are a few exceptions to the requirement of members’ approval (as set out at sections 204 to 209 CA06), such as using funds for a business trip or if the aggregate outstanding loans does not exceed £10,000 (this can be a combination of the DLA, formal loans, credit transactions etc.). However, where the exceptions do not apply, the directors must seek approval from the shareholders.

But what are the risks of not properly recording DLA entries?

(a) Scrutiny on insolvency

In an insolvency, the liquidator may investigate historic DLA transactions and, where the borrowings have not been properly recorded by the directors and/ or, where necessary, obtained necessary approval from the shareholders, pursue claims against the director for misapplication of company assets, breach of fiduciary duty or other causes of action.

In the McCarthy Case, the director was found to be in fraudulent breach of their fiduciary duty, which was also significant for limitation purposes. The fraud provisions of the Limitation Act 1980 meant that the claims were not time-barred on the basis of the ordinary six-year limitation period, notwithstanding that some of the transactions were more than six years old. Accordingly, in insolvency, historic DLA transactions may remain capable of giving rise to claims even where the relevant sums were taken before the turn of the decade and have subsequently been repaid.

(b) Completions in proposed sale of the company

We often see DLAs being repaid during the completion process of our acquisitions. However, since the judgement in the McCarthy Case, law firms will be reviewing DLAs in much more detail to ensure that they were properly authorised.

If the directors DLAs are properly authorised and accurately recorded, then the repayment of the DLA should simply become an accounting/ completion matter.

The McCarthy Case is likely to lead to greater scrutiny of DLAs in acquisitions, particularly where the historic documentation is vague, incomplete or non-existent. This may result in the buyer’s law firm asking for indemnities relating to the DLAs, asking for the matter to be excluded from any limitations of liability, and possibly other protections too.

It is worth noting that, as in the McCarthy Case, repayment of the DLA does not necessarily extinguish potential claims arising from how the historic DLA was dealt with.

So when you next consider borrowing funds from your company with the thought of adding it to your DLA, ask yourself whether it is in the company’s interest and, if so, ensure that the borrowings are properly authorised and recorded. Not only will this provide good governance and help establish the facts when queried, you should also have a stronger argument against any potential claim of fraudulent breach of your director’s duties.

Disclaimer: General Information Provided Only

Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.