Blog, coronavirus, Job Retention Scheme

Directors and the Coronavirus Job Retention Scheme

Posted on by Lindsay Farrer

It has been confirmed that it is possible for directors to be furloughed. The grant that will be received from the government will be 80% of the salary that is paid to them through PAYE, it does not cover dividends that are drawn from the company. For many owner managed business this salary will be relatively small. Unfortunately, this is the amount that the Coronavirus Job Retention Scheme Grant will be calculated on. Current guidance seems to suggest that while directors can complete no work from the company while furloughed, they can continue to perform their statutory obligations. While furloughed you cannot generate income or carry out services for the company.

What are directors duties and obligations?

Part of the government’s package of help during the Covid-19 pandemic is that the rules are set to be relaxed for businesses regarding wrongful trading, so that directors do not automatically have to liquidate the company if they become unable to meet their debts as they fall due.

As a director you have many legal obligations outside of running the business. There are 7 duties of a director set out in the Companies Act 2006. These are:

  1. You must act within the powers of the company’s constitution. These are found within the company’s articles of association and sets out the powers available to you as a director.
  2. You must promote the success of the company. This involves generating maximum profits for shareholders, whilst ensuring other stakeholder interests are protected. However, when a company becomes insolvent the directors obligation changes and they must minimise the losses to the creditors and other stakeholders in the company.
  3. You must always use your own independent judgement and not allow other people to influence your decisions. This does not preclude you from taking advice but you must use your own judgement to make any final decision.
  4. You must exercise reasonable care, skill and diligence, meaning you must perform to the best of your ability. If you have qualifications outside of your directorship, you must use any relevant knowledge from that, such as being an accountant.
  5. You must avoid conflicts of interest. You should always tell other directors and members about any possible conflicts that may arise, of which the process for notification is usually set out in the company’s articles of association.
  6. You must not accept third party benefits as this could cause a conflict of interest. However the company may allow you to accept benefits that are reasonable if it is clear there is no conflict, such as corporate hospitality.
  7. You must declare all interests you have in a transaction and tell other directors if you might personally benefit.

Other duties do exist, such as not misusing the company’s property and applying confidentiality.

You also have responsibilities to Companies House, you are legally responsible for ensuring information is sent to them on time, including:

–          The annual accounts

–          The confirmation statement

–          Changes in officers and changes in their personal details

–          Change to the registered office

–          Allotment of shares

–          Registration of charges

–          Updating the PSC register for changes

However with regard to point 2 and protecting creditor’s interests should the company become insolvent, the Business Secretary Alok Sharma announced on Saturday 28th March relaxations to some of the rules regarding insolvency.

Directors have a responsibility to not trade whilst insolvent. This is to keep losses to the businesses creditors to a minimum. Knowingly trading whilst insolvent, known as wrongful trading, can mean that directors will have a personal liability should the company collapse.

The relaxation of the rules regarding wrongful trading will be backdated to 1 March 2020 for three months for company directors, so they can continue to keep trading through the coronavirus crisis without the possibility of personal liability.

The business secretary pointed out that the rest of director’s duties will remain the same to preserve all stakeholders’ interests within the company.