Directors’ Duties and Furloughing

09 Apr 2020

Whilst the government has made clear that directors can be furloughed, subject to the terms of the Coronavirus Job Retention Scheme (CJRS) itself, this may not be practical from a company law or general business perspective.

General

Whilst there has been some discussion around the relaxation of laws associated with wrongful trading, statutory duties under the Companies Act 2006 will continue to apply to a director (furloughed or not). These include the duty to promote the success of the company for the benefit of its members as a whole and to avoid conflicts of interest.

The guidance published by the government states that if directors are furloughed – and they need to carry out particular duties to fulfil statutory obligations they owe to their company – they may do so provided they “do no more than would reasonably be judged necessary for that purpose”. What most commentators interpret this to mean is carrying out administrative activities, such as filings at Companies House (although see our article about the automatic extension of filing deadlines for annual accounts here). Whilst more guidance is awaited, it is pretty clear that, like all other furloughed employees, generating commercial revenue or providing services to, or on behalf of, the company would disqualify a claim for CJRS.

If I am a sole director?

Whilst in theory a sole director can furlough himself, it is hard to see how in practice this will work, in particular where there are no other employees. Who will pay the bills or handle any queries? Further guidance may clarify the position though.

If there are multiple directors?

This is where it may have more practical application, where the business can be successfully carried out by one director (or at least not all of them) in the short term.
However, the board may need to consider whether at precisely the time when board skill and experience is likely to be needed the most, it is right not to have its full board at its disposal. This is especially true in respect of non-income generating directors (such as the finance or HR director). The temptation might be to furlough these directors, but if the board did so it may be hard to justify it was acting in the best interests of the company when these skills are needed the most at this time.
Some may argue that furloughing has little practical application to directors given the typical salaries associated with their roles. However, it may still be of practical use, as employers can top up salary over and above the £2,500 a month limit (subject to negotiation and agreement between employee and employer).

In what is fast becoming a cliché already “we await further guidance from the government”.

For further information please call us on 0800 2800 421 or contact us here.

Author

Jamie Earley

Senior Associate