Insolvency Coronavirus Job Retention Scheme Addresses Position of Directors for First Time

7th April 2020

The Government Guidance for the Scheme was updated over the weekend and for the first time expressly addresses the position of directors:

Directors who are salaried are eligible for furlough and the support scheme. The guidance makes it clear that this also applies to directors of their own personal service companies. 

A company should consider whether furloughing is consistent with the statutory duties of the directors to be furloughed.

If the decision is taken to furlough this should be formally recorded as a decision of the company (although not expressly stated in the guidance this should be a board decision), minuted and communicated in writing to the directors concerned.  

To be eligible for the Government grant an employee on furlough is not permitted to work. This had raised issues with directors and how this interacted with their statutory duties which continue on furlough. The guidance states: “Where furloughed directors need to carry out particular duties to fulfil the 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”. It goes on to make clear that they should not be involved in revenue generating activities or providing services to clients. The use of the words “need” and “necessary emphasize this is not a matter of business as usual for furloughed directors and that involvement in company affairs will need to be justified. Companies would be well advised to document why it was necessary for a particular director to be involved. 

The specific addressing of the role of directors is to be welcomed, but directors would benefit from more practical illustrations of how the Government envisages this should work. 

For example should furloughed directors continue to receive information on the financial and trading position of the company, in order that they can decide whether heightened duties are owed? Yes as this is likely to engage the statutory duties. 

Should a furloughed director be asked to comment on proposed amendments to a trading contract with a customer, or contract negotiations? Probably not, as this is more likely to be falling within revenue generating activities.

Kind Regards,

New Square Chambers.

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