Can A Director Claim Redundancy On Liquidation?

Overview Of Can A Director Claim Redundancy On Liquidation

Can a Director claim redundancy on Liquidation?

Yes.

but HOLD YOUR HORSES!

A Director can CLAIM. However, do not mistake a CLAIM for a PAYMENT.

The claim is the process towards payment if indeed it is successful.

Payment is not therefore guaranteed. For a claim to succeed, it needs, to satisfy the tests set by the Insolvency Service and be properly evidenced.

In particular, a Director will usually be required to show that they did indeed occupy the position of an employee at all material times and were ON the payroll and PAYE was provided for. They cannot drop into the payroll and out as and when it might conceivably suit them (or even the financial position of the business) and necessarily expect to be held as an employee for the purposes of the Insolvency Service.

How To Submit A Claim

Employees have the lawful right to claim certain payments when they are made redundant. Those rights will typically be set out in their contracts of employment.

These include:

• redundancy pay
• compensation for any unpaid notice period
• any money they are owed by their employer (for example unpaid wages, holiday)

When an employer enters a formal insolvency process such as Liquidation, these payments are made by the Insolvency Service, within restrictions set out in the legislation.

Eligibility For Directors To Claim Redundancy

Employees made redundant can submit a claim to payment from the Insolvency Service.

The right to claim extends to any employee, including notably a Director.

As is the case with any employee for a claim to be successful a Director needs to provide evidence to support it and prove they were an employee.

The Insolvency Service will consider if there was a contract of employment in place. The absence of a written employment contract is not necessarily fatal but it makes it potentially harder for the employee to prove there was one.

Additional information will be asked for based on your circumstances and may include:

• the structure of the company in terms of directorships and shareholders
• the last 3 years’ P60s
• the last 3 months’ wage slips
• employer’s bank statements for the last 12 months to review the regularity of payments
• a comparison of the contracted hours being claimed in relation to the work being undertaken
• whether the national minimum wage was paid
• a copy of the contract of employment and whether the terms of the contract were enacted
• dividends received in the last 3 years
• holiday pay arrangements
• workplace pension arrangements
• sick leave procedures
• grievance and disciplinary procedures

If for example, a Director has not drawn a minimum wage from their company in the build-up to cessation of trading and insolvency the Insolvency Service may deem it that they were no longer an employee at the point of Liquidation.

How A Director Can Claim For Redundancy On Liquidation

A Director can apply for redundancy on Liquidation by completing the application form online. This is referred to as the primary application.

The employer company must be unable to pay the Director, for example, because they’re insolvent.

Claim For Loss Of Notice Pay

The secondary application is for compensation for loss of notice pay.

You do this application later, after your notice period ends. You must complete the primary application first.

If you apply for loss of notice pay, the Insolvency Service will again ask you for additional information. This can include:

• information about who started discussions with the Insolvency Practitioner (“IP”)
• when the IP was contacted
• when IP suggested the company should enter a formal insolvency process

What If My Director Redundancy Claim Is Rejected?

The Insolvency Service can reject your claim and not make payments if they consider you have not satisfied them you were an employee.

The number of rejected Director redundancy claims disclosed by the Insolvency Service at the ICAEW webinar on 12 September 2023 “Restructuring & Insolvency Community Roadshow – Current risks and challenges facing the Redundancy Payments Service in dealing with employee claims” was said to be 46% in the period April 2022 to April 2023 (“the Period”) by Justin Dionne who is the Insolvency Service Chief Technical Officer. There were 6,408 Director claims in the Period. This is plainly a high level of rejected claims on a proportionate basis.

At that webinar, it was said although payment of minimum wage was a key factor in claims consideration in terms of determination of a Director’s status as an employee, it was not necessarily conclusive to a claim being rejected. However, Directors who wish to ensure they are able to make a claim it seems would do well to ensure that they do not cease paying themselves at least minimum wage to justify the suggestion that they would ordinarily qualify as employees.

If you disagree with that decision, you can also make a claim to an employment tribunal.

You have 3 months from the date of your rejection letter to make a claim to an employment tribunal, unless your claim is related to redundancy pay (as opposed to holiday pay, arrears of pay or loss of notice pay) in which case you usually have 6 months from the date of your dismissal.

How To Make An Employment Tribunal Claim

In order to make an Employment Tribunal Claim you need to first tell the Advisory, Conciliation and Arbitration Service (Acas) of the intention of going to Tribunal.

You will need to provide contact details for the person or organisation you are making a claim against.

You should list both your former employer and the Secretary of State as respondents.

For the Secretary of State: