Director’s loan accounts can be a useful tool for owner-managed businesses, but poor record keeping or unauthorised borrowing can expose directors and companies to significant legal and financial risks. A recent High Court decision highlights the importance of proper authorisation, accurate records and compliance with directors’ fiduciary duties when borrowing from a company.

Commonly used in owner managed businesses, a director’s loan account keeps track of the amount of money owed by the company to a director or owed by the director to the company. Importantly, a director’s loan account falls outside of any amounts owed in respect of salary, dividends or expense repayments.

Whatever the purpose of a director borrowing funds from a company, the company should maintain complete and accurate records of transactions so that the line between a director’s personal funds and the company’s funds does not become irreversibly blurred. Even where the directors and shareholders of a company are the same, appropriate record keeping will be vital for dealing with enquiries from HMRC, ensuring the company has an accurate balance sheet and, if a sale of the business is under consideration, smoothly resolving financial due diligence enquiries raised by a prospective buyer.

A recent decision in the High Court, John McCarthy v Ivor Desmond Marshall & Anor [2026] EWHC 1585 (Ch), highlights the risks of mismanaging a director’s loan account which is then placed under increased scrutiny due to the business’ insolvency. In this case, the two directors had very different approaches to borrowing money from the company, one ensuring they had approval from the other director for a company loan, while the other regularly and without approval paid their personal expenses with company funds. The latter approach was found to be a fraudulent breach of the director’s fiduciary duty to the company, as the unauthorised use of company funds by way of an interest-free loan showed a reckless indifference to the company’s interests.

Interestingly, the courts were not interested in the director’s claim that he intended to repay the borrowed funds , as the key issues were the failure to authorise the borrowing and act in accordance with fiduciary duties to the company.

If you operate a director’s loan account, or intend to borrow funds from your company, consider the following recommendations:

• Ensure shareholder approval is obtained for all lending, as it is otherwise prohibited for a company to lend money to a director or provide security (such as a corporate guarantee).
• Professional accounting and tax advice should be taken where:
  • a director owes their company more than £10,000 in a year;
  • interest is not charged on the amount borrowed by a director (or charged below the official rate mandated by HMRC for that tax year); or
  • the amount borrowed by a director is not repaid within 9 months of the end of the accounting period in which it was drawn down.
• Keep complete records of what a director owes to the company, and share these with the company’s accountants to ensure the amount is accurately reflected on the company’s balance sheet.
• In addition to obtaining shareholder approval, any borrowing from the company should be approved by other directors (preferably in writing) and documented in clear terms.

Whether borrowing through a director’s loan account is appropriate for you and your business depends on a wide variety of factors. Alongside legal advice, we recommend taking specialist advice on the tax and accounting implications of using a director’s loan account to ensure that you have a complete picture of the pros and cons before borrowing any funds.

Whether you are considering lending arrangements between a company and its director(s) or advising someone who is, our specialist Corporate lawyers would be happy to provide you with the support you need at any stage in the process.