McCarthy v Marshall: Fraudulent breach of duties and director’s loan accounts – a cautionary tale

The judgment in McCarthy v Marshall [2026] EWHC 1585 (Ch) is a useful reminder that directors cannot treat company monies as their own even where there was a genuine intention to repay any money that was withdrawn. 

Background

The dispute was historic and related to events dating back 30 years in relation to two companies: Emerald Meats London Limited (“Meats”) and Emerald Properties (London) Limited (“Properties”).

Meats, a meat wholesaler, was wound up by the Court in July 2013, while its wholly owned subsidiary, Properties, entered members’ voluntary liquidation in September 2014. Meats was owned by Mr Marshall and Mr McCarthy (with one share held by Mrs McCarthy), who were both active directors, although Mr Marshall was responsible for day-to-day management.

The relationship between Mr McCarthy and Mr Marshall deteriorated from 2008, when Mr McCarthy’s financial difficulties prompted closer scrutiny of Meats’ and Properties’ affairs and which revealed accounting irregularities. Mr McCarthy took issue with various aspects of Mr Marshall’s conduct; a couple of key examples are below:

• The sale of an Aston Martin DB5, which belonged to Meats, to Mr Marshall’s mother for a sum of £20,000.00, when its declared value at the time was between £55,000.00-£90,000.00. The declaration of value was made by Mr Marshall himself.
• Misappropriation of funds of Meats and Properties for Mr Marshall’s personal expenditure which were not properly accounted for.
• The operation of director’s loan accounts to fund Mr Marshall’s personal expenses (in excess of £1,000,000.00). 

In August 2022, the liquidators of Meats and Properties assigned various claims to Mr McCarthy.

Following the assignment, Mr McCarthy brought a claim alleging that Mr Marshall had fraudulently breached his duties by misappropriating company funds, rental income, assets and stock for personal expenditure and trading, including selling the Aston Martin DB5 at an undervalue. He further alleged widespread false accounting and the destruction of evidence by Mr Marshall acting in concert with the accountant, Mr Ledger.

As proceedings were not commenced until 2023, more than ten years after Meats was wound up, claims that were neither fraud-based nor for the recovery of property were time-barred under the Limitation Act 1980.

Mr Marshall maintained that Mr McCarthy knew about his director’s loan account and was fully aware of his conduct and Meats’ and Properties’ affairs. He argued that the disputed payments were legitimate business or employment expenses or had been repaid or adjusted in the year-end accounts, and that many claims were time-barred because they did not involve fraud or the recovery of property still held.

Judgment

The judge confirmed that fraud is required to disapply limitation under section 21 Limitation Act 1980 (“section 21”) and accepted that claims outside section 21 were time-barred and that Mr McCarthy therefore had to establish a fraudulent breach, not merely a breach of duty.

The judge also accepted that once receipt of company assets is shown, the director must explain or justify the receipt but held that this does not shift the burden of proving fraud. A claimant must still prove the fraudulent breach necessary to avoid the claim being statute barred.

The judge applied the Armitage v Nurse test for fraudulent breach of fiduciary duty, requiring proof the director acted knowing his conduct was contrary to the company's interests or with reckless indifference and found that Mr Marshall misappropriated sums from Meats and Properties and that this was “not a mistake or slip; it was calculated to further his interests”. 

Mr Marshall admitted in his evidence that his retention of funds resulted in the reduction of income for Meats and Properties and caused inaccurate Corporation Tax returns. The Court therefore concluded that Mr Marshall was at times dishonest and no doubt encouraged the finding of fraudulent breach of duty. 

Further, Mr Marshall admitted that his personal expenditure was incorrectly recorded as company expenditure and the inaccurate record keeping. It was noted that Meats’ accounts were “riddled” with errors, which in turn made it impossible for Mr McCarthy to have identified these issues.

In relation to the director’s loan account, the judge accepted that Mr McCarthy had no knowledge of Mr Marshall’s director’s loan account. The judge therefore found that the operation of the director’s loan account by Mr Marshall constituted a fraudulent breach of duty by Mr Marshall. The failure to repay the director’s loan account was a separate breach and Mr Marshall’s intention to repay the same would not exonerate him.

Practical considerations

• The operation of a director’s loan account without shareholder approval can amount to a fraudulent breach of duty. 
• It should always be considered whether a director has acted fraudulently, which is a way in which he does not honestly believe his conduct is in the best interest of the company or is recklessly indifferent to whether it is. 
• Where a director has acted fraudulently, section 21 can be a helpful tool.
• It is worth thinking ‘outside of the box’ for who to approach when considering an assignment of claims and ensuring that any assignment is precise and covers all potential claims. 

Conclusion

The judgment in McCarthy v Marshall is a stark reminder to directors to ensure they seek the appropriate approval for their director’s loan accounts and to adequately separate their personal finances and expenditure from that of the company. 

Directors should ensure their loan accounts are authorised, documented and that any necessary shareholder approval is obtained. The Court is unlikely to be sympathetic to poor bookkeeping and purported assumptions that the loan will be repaid at a later date. 

Insolvency Practitioners should keep in mind pursuing fraudulent breach of duty where claims are otherwise statute barred where there is an indication of fraud based on the above. 

In summary, the case is a reminder to all that there is a substantive degree of trust in directors of companies and breaches of duties can result in severe legal implications.