Can directors claim for redundancy?
10 March 2022: A common question we are asked by directors when advising on a company’s options is whether they can claim for redundancy in an insolvency scenario. The short answer is yes but there is a little more to it than that.
Using a creditors’ voluntary liquidation (aka insolvent liquidation) as an example, where a company ceases to trade it is usually the case that the company has to make all of its employees redundant. Often, the employees are owed wages and other entitlements, which can be claimed from the Redundancy Payments Service (RPS), a government department that sits within the Insolvency Service. If we were the proposed liquidators, we would arrange for a case to be opened with the RPS so that a unique reference number was obtained and employees could then submit their claims online.
Directors can also be employees of a company and therefore entitled to receive any outstanding wages, holiday pay, notice pay and redundancy pay. As such, there is nothing to prevent directors from also submitting claims to the RPS but, given their dual role as officers and employees of the company (potentially they are also shareholders of the company), directors need to be able to demonstrate that they were legitimately employees.
The RPS will scrutinise claims from company directors and would expect to see evidence that a director:-
- Worked a minimum of 16 hours per week;
- Had a contract of employment or other agreement between them and the company which reflects their employment status;
- Was paid via PAYE along with all other employees.
The company must have been trading for at least two years, which is of course the minimum period an employee must be employed for before they are entitled to redundancy. We are also aware of scenarios where the RPS have requested evidence that a director has not forfeit any salary when other employees have been paid or have been taking their annual leave allowance. In essence, the RPS expects a director to be able to prove they were an employee and have acted as such at all times – an employee would not agree to waive salary or to not take their holiday. The RPS will also expect a director to provide documentation such as wage slips, P60’s, a P45, and any other information regarding any dividends or other remuneration they might have received from the company.
One point that can sometimes catch directors unawares is where they are also the shareholders of the company it is common for them to be paid a salary commensurate with the threshold at which tax and National Insurance Contributions are payable, with the directors receiving drawings month to month on account of future profits, which creates a directors loan account. At year-end, a dividend is declared from profits to repay the loan from the company. This arrangement works fine when times are good but when a company becomes insolvent a dividend cannot be declared, so the overdrawn loan accounts must be repaid in cash to the company by the directors. In addition, if the directors wish to make claims to the RPS as employees, their weekly wage for the purposes of calculating their entitlements will be based on the nominal salary they were paid via PAYE and will not include any other payments or remuneration they might have received from the company.
If you are a director and have any concerns about your company please do not hesitate to get in touch with any of the BRI management team for a confidential chat without obligation.