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Can directors claim redundancy in insolvencies?
Conrad Beighton, Head of Midlands, Leonard Curtis
If a company has to go through an insolvency process the employees of the company are able to claim statutory entitlements, including redundancy. These claims are processed by the Redundancy Payments Service (RPS) and funds are usually paid out to employees within 6 weeks of the date of the insolvency or when an employee submits their claim (whichever is the latter).
Directors who are also employees (i.e. on the payroll) have usually been able to claim the same entitlements. However, the RPS has tightened the criteria for directors and it is worth considering this when advising your clients on whether redundancy will be available if their company fails.
The RPS will need to see evidence that a director has acted in the capacity of an employee and are likely to request some or all of the following information.
- A contract of employment
- Holiday pay arrangements
- Pension arrangements
- Dividends received in last 3 years
- Evidence of pay slips and P60s
- Minimum wage confirmation
The latter point is the most recent barrier to successful director claims for redundancy. Where a director has been paid below the National Minimum Wage, the RPS are disputing that they are classed as an employee.
Additionally, we have seen that even where directors have the correct documentation and are bona fide employees the RPS claims have been rejected where there is an overdrawn loan account. There is an expectation that this has to be repaid/ settled before any claim to the RPS would be paid out.
It goes without saying that we hope your clients do not become subject to insolvency proceedings but sometimes, particularly in the current economic climate, this is unavoidable.
Being aware of the requirements for directors to claim for their entitlements is important, and being prepared is key. For further information contact Conrad Beighton on 0121 200 2111 or conrad.beighton@leonardcurtis.co.uk.
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