Can a furloughed director fulfil their statutory duties?

The government guidance on the Coronavirus Job Retention Scheme (the “scheme”) confirms that a director who is paid via PAYE can be furloughed. That same guidance also states that the rules of the scheme do not allow a furloughed employee to engage in any activity associated to their employment duties.

This leads to the question: how can a furloughed director fulfil the statutory duties that they owe to the company beyond those they owe as an employee?

The Companies Act 2006 requires directors to (among other things) act in the best interests of the company of which they are a director, and to act to promote the success of that company. This potentially creates a conflict.

For example, in a struggling business where a director is paid the highest or among the highest salary in the business, is there an argument that they are required to furlough themselves in order to meet their statutory duty of acting in the best interests of the company? But once furloughed they will not be able to engage in any employment activity, which in turn could damage the business further.

Thankfully, the government has stepped in to clarify the position; it has confirmed that a furloughed director can carry out those employment activities which are deemed necessary to fulfil their statutory duties, but the activity cannot generate revenue or be related to the business’s normal activities. At the very least, then, a furloughed director can deal with compliance matters.

Prior to placing a director on furlough leave, a board meeting should be held, at which discussion should take place regarding the practical considerations of a board member being furloughed.

For example which other director will be given authority for the furloughed director’s responsibilities? And is the quorum noted in the articles of association still able to be met at future board meetings without the furloughed director being in attendance?

These considerations should be carefully recorded in the board minutes; the minutes will provide valuable evidence that the company’s best interests were borne in mind, should a problem later arise.

We’re here to help

We appreciate that it is a confusing and uncertain time, but we’re here to help. Our legal services are operating as normal, with all of our lawyers able to work safely from home.

Please call 01242 514000, email Helen Howes or a member of our corporate & commercial team for advice on directors’ duties.

Helen supports the corporate and commercial team in advising organisations on corporate re-organisations, mergers and acquisitions, joint ventures and commercial contracts and GDPR. She is an employment law masters’ graduate and has extensive experience in employee relations and negotiations. Helen also advises businesses on immigration matters and assists them with securing sponsorship licences. 

We’re regularly updating our website with more COVID-19 legal insights, so keep an eye on this page for the latest legal perspectives relating to the coronavirus.