Can a director claim redundancy when their company is insolvent?
When a company enters insolvency and there is no hope of rescue or restructure, a director may be entitled to claim redundancy pay and other statutory entitlements following the company’s liquidation.
It is not commonly-known that directors can claim redundancy under certain conditions, but if they are also an employee of the company, they may meet the required conditions. So how does a director prove their status as an employee, and what are the other criteria?
Eligibility criteria for director redundancy
To establish their entitlement to redundancy pay, directors will need to complete a form for the liquidator to determine whether:
- A written, oral, or implied employment contract is in place
- The company has been incorporated for at least two years
- The director worked for a minimum of 16 hours per week
- Their role within the company was practical rather than advisory
Although it is more straightforward to prove a director’s employee status when a written contract is in place, the liquidator will look closely at their overall relationship with the company if they have been working under an oral or implied contract.
The office-holder will identify whether the director is paid through the PAYE system as are other employees, for example, and if they worked comparable hours to members of staff on a day-to-day basis.
How much redundancy pay could directors claim?
For directors who can prove they are a company employee, the amount of redundancy pay they can claim depends on a number of factors. These include their age, length of continuous service, and final wage.
Redundancy pay can be calculated as follows:
Aged under 22
Half a week’s pay for each full year of service
Aged 22-40
One week’s pay for each full year of service
Aged 41 and over
One and a half week’s pay for each full year of service
For redundancies occurring on or after 6th April 2017, the government has placed a cap on the length of service at 20 years, weekly wages at £489, and the maximum amount of statutory redundancy pay is capped at £14,670.
What additional statutory entitlements can be claimed by directors?
Eligible directors and employees are entitled to claim other statutory payments when a company is liquidated. These include up to eight weeks’ unpaid wages, and up to six weeks’ arrears of holiday pay.
Pay in lieu of notice can also be claimed at a rate of one week’s pay for each full year of service, up to a maximum of 12 years. Tax and National Insurance becomes due on arrears of wages and holiday pay, but redundancy payments under £30,000 are not taxable.
How directors can make a claim for statutory redundancy
Directors will need to discuss their situation with the liquidator, and if eligible, make a claim from the Redundancy Payments Service (RPS) within six months of the liquidation date. In some cases this timescale can be extended to 12 months. If a claim is accepted, it will be paid from the National Insurance Fund (NIF).
Claiming redundancy as a director provides a vital financial lifeline when their company has failed. The payment could also cover the cost of the professional fees involved in a voluntary liquidation process, and depending on how much is owed, potentially some of the debt.
It is not widely known that directors may be able to claim redundancy pay when their limited company is insolvent, but working under a written contract of employment makes the process easier to navigate.
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Written by Gary Addison; a director at Redundancy Claim. Gary advises company directors on issues related to director redundancy, employee redundancy and statutory entitlements.
