Directors - furlough, but don't forget

The Government has confirmed that, as office holders, salaried company directors qualify for its Coronavirus Job Retention Scheme. Under the Scheme, employers can “furlough” a worker who has no work to do – putting them on a leave of absence – and the Government will pick up 80% of their regular wage, provided they don’t do any work for the company (including providing services or generating revenue).

The Scheme appears to have gone down well with employers, and the ability to furlough salaried board members will be appealing to many companies. But businesses that are thinking of furloughing a director, and directors who are considering taking advantage of the Scheme, should bear a few things in mind.

How does a furloughed director discharge their duties?

Directors owe statutory duties to their company and are responsible for its overall day-to-day management. They must promote the company’s success and exercise independent judgment and reasonable skill, care and diligence. These duties do not disappear while a director is furloughed.

The board will need to consider carefully how well the company will run during the furloughed director’s absence. If the director brings particular capabilities and experience, furloughing may create an imbalance of skills on the board.

In any event, by simply “downing tools”, the director risks abrogating their duties to their company. The Government recognises this, noting that furloughed directors may continue to carry out duties, so long as they do no more than is reasonably necessary and don’t perform their usual duties and services. But whilst this gives comfort that occasional work will not disqualify the director from the Scheme, it will not provide protection against claims for negligence or breach of duty.

Don’t forget the furloughed

A furloughed director is still a director. Unless the company’s articles state otherwise, they will continue to have the right to receive notice of, attend and vote at board meetings. Likewise, most companies’ constitutions allow their directors to take decisions in writing instead of holding a board meeting. But decisions taken in this way normally need to be signed off by all of the company’s directors. This will include any furloughed directors.

There is a risk, therefore, that, continuing directors may forget to keep any furloughed directors in the loop and so invalidate their own proceedings and decisions.

There are a couple of ways round this. If the company’s articles allow, a furloughed director may, before going on leave, be able to an alternate to attend board meetings and sign resolutions. Alternatively, the board may be able to establish a committee comprising only the continuing directors that will run the company during any furloughed director’s absence. In both cases, the board will need to consider whether the course of action is reasonable and consistent with their duties.

Still in the firing line

Finally, remember that going on furlough will not absolve a director of their legal and statutory liabilities. Statute imposes numerous civil and criminal liabilities on directors for failing to comply with particular requirements, and there is always the risk of action by disgruntled shareholders. In some cases, a furloughed director may be able to seek relief from the court, but this is not available in all cases and certainly will not be forthcoming if the director has simply walked away from the business.

These are not necessarily new issues. Companies whose directors have taken parental leave or extended sick leave are likely to have grappled with these difficulties already and may be able to draw on their experience.

For many businesses, not only will the ability to furlough directors be attractive, it may make positive business sense. But it isn’t a decision to take lightly, and it seems to us that the Scheme may be of greater use to those businesses which are closed or substantially closed.