Changing the rules: directors' redundancy in liquidation explained

As company director, are you entitled to redundancy after liquidation?  In short, yes.  As long as you can demonstrate you have been working for the company (more than 16 hours per week), then you are an employee.  As an employee, you are entitled to make claims for redundancy, unpaid wages, holiday pay, and notice pay in the same way as any other employee.  Once your company enters liquidation, you can make a claim to the redundancy payments service (RPS) against the national insurance fund (NIF) for outstanding monies, and expect a pay out within 4 weeks of liquidation.

But it hasn’t always been like that…a recent history of director’s redundancy claims will help us explain some common misconceptions in this area.

As company director, can I claim redundancy after liquidation?

And what about directors who are shareholders?  If I am a director who is a shareholder, do I still have a valid redundancy claim?

Prior to changes in case law in 2007, it was deemed that if a director was also a controlling shareholder (50% or more), then he was not employed, and could therefore not have a valid claim against the NIF.  However, Clark v Clark Construction Initiatives Limited (2008) changed that.  Guidelines were issued after the conclusion of that case, which stated amongst other points:

  • A director’s controlling shareholding does not prevent an employment contract arising
  • Directors loans, or bank guarantees do not necessarily alter the nature of employment claims

Will directors’ claims transfer across to a new company?

The TUPE (Transfer of Undertakings (Protection of Employment)) Regulations 2006 contained insolvency provisions which changed where the potential claims liabilities would lie in the event of liquidation.  Prior to the regulations, if a company entered liquidation and a new company purchased its assets, and employed its staff, then it’s likely that TUPE would have applied.  This would mean that directors and employees could not make successful claims against the NIF.

However, since 2006, if a company enters liquidation, and its are assets sold, TUPE regulation 8 excludes a purchaser from automatically adopting the employees’ rights.  Consequently, regardless of an asset sale, directors are still able to claim from the NIF.

What about directors who weren’t able to pay themselves a salary, can they claim money back?

Yes.  Again, up until 2014 that wasn’t deemed to be the case.

In a landmark case (the Secretary of State v Knight) heard in the Court of Appeal, the judge stated that the fact that a director does not take a salary in the lead up to insolvency does not mean that they have varied their right to receive a salary.  This was a clear acknowledgment that when insolvency appears on the horizon, oftentimes directors will sacrifice their own earnings in an effort to save the company.  The court of appeal ruling ensures that in doing so, directors are no longer penalised, and can now make a claim against the NIF for what they should have been earning, rather than what they were able to draw.

Where does that leave directors’ claims in liquidation today?

As it stands, if a company enters liquidation, and has previously operated a PAYE scheme, even though the directors may have not been paid under it in the period leading to liquidation, the directors may still have a valid claim against the NIF.

In our experience, director redundancy claims are currently averaging between £5,000 and £15,000 for each director depending on years service, age and pay rate.  Please see our quick guide for employees being made redundant in liquidation for details of how claims are calculated.

If you would like to discuss this in more detail, or you would like to find out whether you have a valid claim, and how to proceed, don’t hesitate to contact one of our business rescue experts directly. 

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