It is not possible to make a claim for redundancy as a company director if your business is solvent, and you are selling it. To be eligible for director redundancy, the company would need to be in an insolvent position prior to its sale, with the sale taking place out of a formal insolvency procedure, such as company administration.
If your business does enter administration the office-holder could make you redundant as part of their overall plan for recovery, and they would also be able to sell the business at a later date if necessary.
Eligibility requirements for director redundancy
The conditions for eligibility as a company director include:
- Having a written, oral or implied contract of employment
- Your limited company being incorporated for at least two years
- Earning a regular salary through PAYE
- Working a minimum of 16 hours per week
- Fulfilling a role that is more than advisory
- Being owed money by your company
Although it is not essential to work under a written employment contract, it can help to establish your status as an employee. It is a little more difficult to prove the existence of oral and implied contracts, and the administrator would need to make investigations that are more detailed.
Director redundancy and company administration
If your business enters insolvency, one of the potential options for recovery is via company administration. This is a formal insolvency procedure whereby a licensed insolvency practitioner (IP) is appointed as administrator, and has eight weeks to formulate a plan to rescue the business.
The administrator may decide to make you redundant as part of a strategy for recovery, which offers the company the best chance of survival. They can still sell the insolvent business if the circumstances are favourable, however.
In this case, as long as you can prove that you are an employee, you should be able to make a claim for redundancy pay. The office-holder will give you a questionnaire to complete, which will help them determine your status within the company.
How much redundancy pay could you claim as a director?
The calculation for redundancy pay is based on three factors – your length of continuous service, which is capped at 20 years, your age, and your final wage, which is capped at £508 from 6th April 2018.
The calculation is as follows:
- Aged under 22: half a week’s pay for each full year of service
- Aged 22 – 41: 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
You then need to multiply this figure by your final wage amount. To make your claim you need to complete a claim form (RP1), and hand it to the office-holder or send it to the Redundancy Payments Service (RPS). Claims are generally paid 3-12 weeks following receipt.
What about director redundancy and company liquidation?
If your company has entered administration but the office-holder’s only option at the end of the period is to liquidate the business, you will also be eligible for redundancy as a director if you meet the above criteria.
Liquidation involves the realisation of all business assets for the benefit of creditors – the company closes down and is removed from the register at Companies House. In this case, all employees lose their jobs and the business cannot be sold on.
Being made redundant as a director
If you underperform as a company director you may be at risk of redundancy, particularly if the business is struggling. The company’s Articles of Association should dictate the process and circumstances in which directors can be made redundant.
Again, your employee status would need to be proven to receive statutory redundancy pay. You would also need to consider any personal guarantees that you have provided for business borrowing, as your liability under these would not cease on redundancy.
Essentially, a limited company needs to be formally insolvent and to have entered administration, or be undergoing liquidation, before its directors can claim redundancy pay, and this is only if specific conditions are met.
Selling a company in the normal course of events makes you ineligible for redundancy pay as a director, and any claim will be rejected by the Redundancy Payments Service.
Written by Gary Addison; director at RedundancyClaim.co.uk who specialise in helping directors with their statutory entitlements when their limited company is in financial difficulty.