Can directors claim redundancy following liquidation?

Directors’ redundancy entitlements have historically been  difficult to successfully claim for. It used to be the case that directors were unable to make redundancy claims from the government-backed National Insurance Fund (NIF) where they were also controlling shareholders. The NIF is managed by the Insolvency Service and provides statutory payments for employees that have been made redundant. However, contrary to much popular belief, the position for directors has changed in recent years. This applies even where a director is the sole director and shareholder of the company.

 

Case law: Secretary of State V Knight

The current case law relies on the court of appeal finding in the matter of Secretary of State for Business Innovation and Skills v Knight.

 

The respondent in this appeal was the sole shareholder of the business and was entitled to a salary of £20k pa under a contract of employment made between her and the business. In the last 2 years of trading, the respondent forfeited her salary in an attempt to keep the company afloat. Ultimately however, the business ceased trading and she made a claim for a redundancy payment from the Insolvency Service. At the Tribunal, the judge concluded that the respondent was an employee of the company and therefore entitled to the payment.

 

The Secretary of State had tried to argue that by not taking the payment she had either varied the contract of employment, or went even further to suggest she had terminated the contract of employment. However the judge presiding gave the following view of the matter that, “The fact that an employee decides not to require her company to pay her salary as an employee does not necessarily lead to the conclusion that she must be taken to have entered into an agreed variation of the contract or a discharge of that contract.”

 

What this means is that a valid contract of employment can take precedent over the actual salary that has been paid to the director. Like any other employee, regardless of whether payments have actually been made, the director is entitled to the funds as agreed under the contract of employment. If the company is unable to meet its obligations and the director foregoes payment, the contractual entitlements still stand. In such cases, the director will be entitled to make a claim to the NIF via the Insolvency Service for any unpaid wages and holiday entitlements, together with statutory notice and redundancy payments.

 

Why can directors now claim redundancy?

The essence of the judgment is that a director is running a business in an attempt to make a living and keep a roof over their head. Where circumstances are difficult, the most responsible of directors may often put the company’s interests ahead of their own where necessary with a longer term view to avoiding insolvency and keeping the company afloat. In such cases, they should not be penalised and unfairly deprived of their entitlements for doing so.

If you are considering liquidation, or just want further advice please contact ewall@robsonscott.co.uk.

Alternatively, read some of our articles on redundancy in liquidation at our content site Business Rescue Expert