Overdrawn Directors Loan Accounts do not need an insolvency to catch you out
A recent High Court judgment is a useful reminder to directors that overdrawn Directors Loan Account are not something that only becomes a problem when a company is insolvent. In McCarthy v Marshall [2026] EWHC 1585 (Ch), a director’s use of company funds through his DLA was found to be a fraudulent breach of his duties, even though the companies concerned were solvent and the funds were, in the director’s own words, always going to be repaid. Directors who assume that a healthy balance sheet means their DLA is safe from scrutiny should think again.
The DLA problem in this case is not about solvency, it’s about authorisation
We deal with overdrawn Directors Loan Accounts in our case work on a regular basis, and the pattern is a familiar one. A director draws money from the company as needed, in the belief that their accountant will sort it out at year end through a dividend, a bonus, or simple repayment. Often that works. But sometimes it doesn’t, and the balance grows, unrecorded and unauthorised, until somebody, an accountant, a fellow director, or in our case an Insolvency Practitioner once appointed looks closely enough to see it.
In McCarthy v Marshall, the two companies at the centre of the case, Emerald Meats (London) Limited and its subsidiary Emerald Properties (London) Limited, were both put into liquidation, but neither was insolvent. One was wound up by court order, and the other went through a Members’ Voluntary Liquidation. In both cases there was a substantial surplus for shareholders once creditors, who had already been paid in full, were out of the picture.
Despite that, the High Court found that one of the two directors had used his Directors’ Loan Account to fund personal expenditure without proper authorisation from his fellow shareholders, and that this amounted to a fraudulent breach of his fiduciary duty. His argument that the sums were always intended to be repaid made no difference to that finding.
The lesson for directors is simple, if uncomfortable. A DLA is not just an accounting mechanism. It is money borrowed from the company, and unless it is properly authorised, typically by way of a board resolution and, where the loan exceeds the statutory threshold, shareholder approval under section 197 of the Companies Act 2006, drawing on it without that authorisation is a breach of duty. That remains true whether the company is thriving or failing.
What we look for in any liquidation, solvent or insolvent
Whenever we are appointed as Liquidator, whatever the financial position of the company, reviewing the Directors’ Loan Account is a standard part of our work. This usually means working alongside the company’s accountant.
In an insolvent liquidation, an overdrawn DLA becomes a straightforward debt owed to the company, which we are obliged to pursue for the benefit of creditors.
In a solvent liquidation, the position is different in one important respect, there are no creditors whose interests need protecting, but the underlying obligation to account for company money doesn’t disappear simply because the company can pay its debts. As McCarthy v Marshall shows, that obligation can still be enforced, and enforced hard, by anyone with sufficient standing to bring the claim.
What can directors do about an overdrawn Directors’ Loan Account?
Where we identify an overdrawn DLA, our first step is always a detailed review with the director(s) and their accountant to establish exactly what is owed and why.
Protecting yourself as a director
The single best protection against an overdrawn DLA becoming a serious personal liability is proper record keeping and proper authorisation, applied consistently over time rather than only when things start to go wrong. We always recommend that directors:
- Document every withdrawal at the time it happens, not months later
- Get board approval, and shareholder approval where the loan is large enough to require it, before drawing funds, not after
- Don’t rely on an informal understanding that dividends will “sort it out” at year end
- Talk to your accountant regularly about the balance on your loan account, and keep it at a level you can genuinely repay
- Remember that repayment doesn’t automatically extinguish a claim over how the loan was operated in the first place
If you are concerned about an overdrawn Directors’ Loan Account, whether the company is struggling or not, we offer a confidential, no obligation free of charge initial discussion. Contact us at any of our offices: London, Bournemouth, Brentwood, Mill Hill, Salisbury or Thames Valley.
Frequently asked questions about Directors’ Loan Accounts
Does my company need to be insolvent for an overdrawn DLA to be a problem?
No. McCarthy v Marshall involved two solvent liquidations, and the director’s use of his DLA was still found to be a fraudulent breach of duty.
What is the difference between a DLA issue in a solvent liquidation and an insolvent one?
In an insolvent liquidation, the Liquidator pursues the overdrawn balance for the benefit of creditors. In a solvent liquidation, there are no creditors at risk, but the underlying duty to account for company money still applies and can still be enforced.
Does intending to repay the money make a difference?
No. In McCarthy v Marshall, the director’s stated intention to repay the sums did not prevent the court finding a fraudulent breach of fiduciary duty.
Can a Liquidator pass a DLA claim to someone else rather than pursue it themselves?
Yes. A Liquidator can assign a claim to a third party, such as a shareholder, who can then pursue it in their own name. This is exactly what happened in McCarthy v Marshall.
What should I do if I am worried about my own overdrawn directors loan account?
Speak to your accountant and, if the company is facing any financial difficulty, we are happy to help. Sooner is better than later.
