Can it ever be meaningful to ‘furlough’ a company director?

This morning, HMRC have provided some guidance about how company directors can furlough themselves, and thereby qualify for UK Government support under the Coronavirus Job Retention Scheme.

Unfortunately, although this guidance is intended to provide clarification, it gives rise to a number of fresh questions and uncertainties. Specifically, it makes me wonder if HMRC officials entirely appreciate the role of a company director in its broadest sense.

More specifically, have they fully taken into account the nature and scope of the General Duties of Directors which are defined in sections 170-177 of the Companies Act 2006?

Here in full is the Guidance that HMRC have published this morning:

“As office holders, salaried company directors are eligible to be furloughed and receive support through this scheme. Company directors owe duties to their company which are set out in the Companies Act 2006. Where a company (acting through its board of directors) considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, the board can decide that such directors should be furloughed. Where one or more individual directors’ furlough is so decided by the board, this should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned.

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, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company. This also applies to salaried individuals who are directors of their own personal service company (PSC).”

There are two main concerns with the above guidance.

First, it suggests a conceptual misunderstanding of the nature of a board of directors.

HMRC seem to be assuming that, during the crisis, some members of a board of directors can be put into ‘deep freeze’, and thereby benefit from government support, while other members of the board carry on in a fully active manner.

However, this is surely to misunderstand the collegiate nature of board decision making. The board in its entirety is the controlling mind of a company. There is no part of a board of directors which is inherently more important or necessary than any other.

A board is created in order to supply a diverse range of skills and experience. It exists to steward an entity through the good times and the bad. It makes little sense to suggest that, at a moment of crisis, the response of the board should be to establish a hierarchy of ‘more important’ or ‘less important’ (i.e. dispensable!) board members.

 In practice, I am sure that boards won’t adopt this perspective – but the fact that HMRC thinks that this is how a board might view the situation is a source of concern.

Second, HMRC are suggesting that seeking commercial revenues or providing ‘other services’ falls outside the scope of directors’ permitted statutory duties.

However, a fundamental duty of directors – as defined in section 172 of the Companies Act – is to promote the best interests of the company. The Act does not define how directors are supposed to achieve that objective – it leaves it, quite rightly, up to the director.

Hence, if a director identifies opportunities to obtain desperately needed revenue for their company – and thereby maintain its ongoing survival, that could never – and should never - be viewed as a ‘non-statutory’ activity.

Indeed, it would be entirely counterproductive – both for HMRC and wider society - to pursue legal actions against directors based on the argument that they should not have obtained revenue for their enterprises.

However, the more immediate concern is that some directors may be inhibited from doing whatever it takes to support their entities. That would be wrong.

My concluding thought is as follows: is it actually meaningful to think that a director can ever be ‘furloughed’ in the same way as an employee can?

The work of a director cannot be started and stopped from week to week, or restricted to certain activities. A director’s legal and moral duty is to do everything he or she can to enable the survival and flourishing of their enterprise. The role cannot, therefore, be constrained or limited.

Consequently, although the financial support that will be provided to company directors through the Coronavirus Job Retention Scheme is to be welcomed, it should not create an obstacle to directors in fulfilling their role.

If that were to occur, it would represent a classic case of the law of unintended consequences - which is always a risk when policy is being made on the hoof during such a crisis.