Contractors’ Questions: What does ‘proper care and judgement’ involve while I’m on furlough?

Contractor’s Question: This article about being allowed to do a tax-deductible training course while on furlough talks of the company director having to exercise “proper care and judgement.” But what does proper care and judgement entail, in practice?

Expert’s Answer: Being a company director comes with a whole host of responsibilities, such as keeping records about the company and financial and accounting records.

Directors are also responsible for statutory filing with Companies House and filing company tax returns with HMRC, in addition to statutory duties outlined in the Companies Act 2006 and elsewhere.

Early in the life of the Coronavirus Job Retention Scheme (the ‘furlough’ scheme), the government confirmed that salaried directors are eligible to be furloughed, however this does not discharge them of their duties to the company. The guidance on the scheme states that:

“Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company during hours which they are recorded as being on furlough, they may do so provided they do no more than would reasonably be judged necessary for that purpose. i.e. 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 is restrictive, of course, and a balance must be found. The Companies Act 2006, outlines seven statutory duties of company directors:

These obligations are:

1. Duty to act within powers -- this includes acting in accordance with the company’s constitution, as set out in the Memorandum and Articles of Association.

Many companies adopt the model articles of association, and company directors are bound by these so you must ensure you act within them.

2. Duty to promote the success of the company for the benefit of its members using your skills, experience, and judgement. You must also have taken into consideration employees, suppliers, customers, the environment and the community.
3. Duty to exercise independent judgement -- In making decisions, a company director must exercise independent judgement and make decisions for the good of the business, not themselves. However, this doesn’t mean that they cannot take advice where necessary!
4. Duty to exercise reasonable care, skill and diligence -- Higher standards may be expected from company directors who are responsible for an area in which they have a specialist or professional qualification.
5. Duty to avoid conflicts of interest -- A director of a company must avoid a situation in which he/she has another interest that conflicts, or possibly may conflict, with the interests of the company.
6. Duty not to accept benefits from third parties -- A director of a company must not accept a benefit from a third party conferred by reason of his/her being a director, or his/her doing (or not doing) anything as director.
7. Duty to declare interest in proposed transaction or arrangement - If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he/she must declare the nature and extent of that interest to the other directors.

Since the March introduction of the Coronavirus Job Retention Scheme (which was extended on Thursday at the same level of 80% salary coverage until April 2021), the government has confirmed that directors may be furloughed and said while they are unable to complete any work for the company, they may still comply with their  statutory duties, including completing their accounts and the required filings with Companies House and HMRC.

Moreover, a limited company director has a responsibility to oversee all of these duties with reasonable care and skill, even while on furlough, to meet their obligations. Good luck!

The expert was Joanne Harris, technical commercial manager at contractor accountancy firm SJD Accountancy.