Last week the Government confirmed what many had already concluded themselves: that a company could potentially furlough one or more of its own directors under the Coronavirus Job Retention Scheme. Any director who receives a salary and is paid through PAYE, including a director of their own personal service company, can potentially be furloughed. The grant received by a company would only cover the salaried portion of a director’s income paid through PAYE, not dividends.
Despite this apparently clear Government confirmation, there remain three important legal, practical and procedural hurdles for businesses to overcome before approving furlough leave for directors, and a number of reasons why they should proceed with caution.
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1. The legal hurdle: complying with directors’ duties whilst furloughed
Furloughing a director poses its own very specific legal conundrum. Namely, how can a director continue to meet the legal duties they owe to their company whilst they are on furlough leave and precluded from carrying out any work? The Government has sought to address this by creating a very narrow exception which allows directors to carry out certain limited legal duties whilst furloughed.
What work is a furloughed director allowed to do?
The Government has confirmed that, unlike other members of staff, a furloughed director may continue to carry out certain very limited discrete tasks so long as they “do no more than is necessary for the purpose of meeting their duties to the company”. On 15 April, the Government published additional guidance to clarify this, confirming that a furloughed director can still file accounts, and “provide other information relating to the administration of [their] company” as required by law. The latter is likely to cover the filing of Confirmation Statements and other documents with Companies House, or providing any documents to HMRC if required by law (although this hasn’t been explicitly confirmed).
Until any additional guidance is issued, companies with furloughed directors should exercise caution. The Government has stated that a furloughed director should not use the limited exception as a justification for doing any work of a kind they would carry out in normal circumstances, to generate commercial revenue or provide services to or on behalf of their company.
This means, other than making filings or providing documents to authorities as required by law, a furloughed director should not carry out any other work whilst furloughed. This includes any business development work or planning for when their period of furlough leave ends, or engaging in any correspondence or conversation with customers or suppliers. Even social media postings by a furloughed director, in their professional capacity, should most likely cease during furlough leave.
2. The practical hurdle: handovers or ceasing trading?
As the directors of a company are responsible for its day-to-day management, any decision to furlough a director may impact on your company’s ability to continue trading during their period of furlough leave.
If your company intends to continue trading in the absence of the furloughed director(s), you should ensure there are other (non-furloughed) directors and/or employees who can take over the furloughed director’s day-to-day role. Otherwise, if you are the sole-director of your company and/or it is not possible for your role to be fulfilled by others during your period of furlough leave, you will almost certainly need to cease trading for a temporary period during your furlough leave.
Any necessary preparatory steps to enable you to cease trading should be taken before the period of furlough leave commences.
3. The procedural hurdle: making (and recording) the decision
The decision to furlough a director should be taken by the company’s board of directors, following the correct procedure, and properly recorded.
Be aware that any director participating in a decision to place themselves on furlough leave has a potential conflict of interest, and you should check your company’s articles of association to see how this conflict should be declared and managed. If your company has the default model articles of association, a director may need to obtain authorisation from the company’s shareholders before they participate in any meetings discussing their own furlough leave.
Our template board minutes approving furlough of a director include all the necessary approvals for a company with model articles, and link to the accompanying shareholder resolution if this is required.
To furlough or not to furlough?
Ultimately, whether furloughing a director is suitable for your company will depend on your own specific circumstances and whether you either have sufficient cover for their workload, or whether you are willing to temporarily cease trading. In either case, if you do decide to furlough a director, it is crucial to ensure you follow the right process in reaching the decision, sign all the correct legal documents, and ensure furloughed directors refrain from carrying out any day-to-day work whilst furloughed.
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Harry is General Counsel and Company Secretary of FromCounsel, the specialist corporate legal resource trusted by top global law firms and FTSE 100 companies. Before joining FromCounsel in 2021, Harry was a member of Sparqa’s editorial team for over 4 years, having previously practised as a corporate solicitor for 6 years at Farrer & Co. Harry regularly contributes his expertise to the blog, focusing on corporate and commercial law.