Statutory Duties owed by a Director of a Company; and How Do They Work with Furlough?

We have recently received numerous queries in relation directors of limited companies, whether they can be furloughed, and if so, what they can or cannot do.

The main principle is that, where a director is an employee of the company, they can be furloughed. The amount they would be paid would be according to what they are paid in PAYE from the company, nor any dividends which they take from the limited company.

The Guidance remains that, whilst furloughed, employees (and directors) cannot conduct any work for the company which may generate revenue. We are taking the cautious approach of advising that this means that they cannot:

  • Attend networking events on behalf of the company;
  • Chasing unpaid invoices or approving VAT receipts;
  • Post on social media promoting the company;
  • Conduct training of junior members of staff;
  • Do any other management tasks or profit-making activities for the company.

However, the Guidance is clear that directors can “conduct their statutory duties”. But what are these? We have reviewed the seven statutory duties owed by a director of a company under sections 171 to 177 of the Companies Act 2006, a general overview of which is given below:

1. To act with powers

The first duty that a director must abide by is that they must act within their powers under the company’s constitution, in particular the Articles of Association, and only exercise such powers of the purposes they are given.

This duty has limited applicability to furlough, save that the board must agree where a director is furloughed. A failure to then act within the limits set by the board under any furlough arrangement would potentially be in breach of this duty.  Where directors do exceed the powers under the constitution and the agreement of the board any related decisions may be reversed, and a director may have to compensate the company for any financial losses arising.

2. Promote company success

The second duty held by a company director lies with the successful promotion of their company. In terms of decision making, directors must act in good faith and consider any likely consequences in relation to stakeholders, suppliers, employees, customers and communities. Company directors should also be mindful of the reputation of the company, the company’s success in the long run and any impact the company may be having on the environment. With this in mind, a company director should ensure to follow HMRC’s guidance on their behaviour whilst furloughed, as any failure to comply with HMRC may damage the reputation of the company.

3. Exercise independent judgement

Directors must make their own decisions and develop a particular and informed view on the company’s activities. They should not be dominated by fellow directors and shareholders.

  • This means that, if a director is concerned that either the employees or fellow directors are not complying with the furlough guidance, they should not allow that opinion to be railroaded at any board meetings. HMRC has been clear; if anyone is concerned by the company’s conduct and that the company may be fraudulently profiting from the furlough scheme, they should speak up, to avoid being complicit in any such activity.

 4. Reasonable care, diligence and skill

There is a duty placed upon directors to exercise reasonable care, diligence and skill within their role. This standard is to the same extent as a reasonably diligent person with the general knowledge, experience and skill that may reasonably be expected from a person carrying out the functions of a director of a company. If a director holds a background such professional training or holds specialist skills, those individuals are held to a higher standard in such issues in comparison to any less qualified colleagues.

5. To avoid conflicts of interests

6. Not to accept benefits from third parties

7. To declare any interests in proposed transactions or arrangements within the company

The final three director’s duties are in relation to directors avoiding conflicts of interest as well as managing any conflicts of interest that do arise. With regard to specific examples of conflicts of interest that could arise, these would include situations where a director may be taking advantage of the company, doing so on a personal basis, in relation to any information, property or opportunity which technically belongs to the company. This may include where a director is suggesting furloughing staff where it is inappropriate, or prioritising (for example) family members as furloughed employees over other members of staff.

Record Keeping

Directors must prove that their legal duties and obligations have been fulfilled. This proof may be found with the minutes of board meetings; these meeting minutes must legally be kept for 10 years. In relation to furlough, it is a requirement that the board agrees to the furlough of any director, and that this is recorded in the meeting minutes.

This means that furloughed directors are able to continue to support the business and attend board meetings etc. and make decisions at aforementioned meetings (including signing off accounts etc), but are unlikely to be any further involved in the intricacies of the day-to-day running of the company.

By the Thrive Tribe

Anything within this article should not be taken as legal advice. Any information provided will be general advice and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action. If you wish to obtain specific advice to your situation and your decisions, please contact us and we will thereafter be able to advise.

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