It is not widely known that you may be able to claim redundancy as a company director if your business goes under. If you are eligible, it does provide a financial lifeline in difficult times and can help you avoid personal bankruptcy.
So here are a few essential facts about director redundancy, and your eligibility.
Are you eligible to claim director redundancy?
One of the main conditions for claiming redundancy as a director is proving that you are also an employee of the company. This is typically achieved by working under a written contract of employment, but an oral or implied contract may be sufficient.
Apart from having an employment contract, other criteria come into play:
- Your company must have been incorporated for a minimum of two years, and have traded during the last 12 months
- You need to have worked at least 16 hours per week in a role that is more than just advisory, and received a salary through PAYE
- You must be owed money by your company – perhaps arrears of wages, or your original investment
You need to provide proof of your employee status to the administrator/liquidator, and this is generally done by means of a written questionnaire issued to you by the office-holder.
What are your statutory redundancy rights as a director?
If you can prove your status as an employee of the company, you should be treated in the same way as any other member of staff in these circumstances. You may be entitled to other statutory payments in addition to redundancy – these include payment in lieu of notice, and arrears of wages and holiday pay.
You can receive redundancy pay tax-free up to £30,000, although tax and National Insurance may be payable on other statutory payments. Additionally, length of service is capped at 20 years, and weekly wage at £508 (from 6 April 2018 onwards).
The amount of redundancy pay you are entitled to depends on your age, length of service, and final wage, and can be calculated in the following way:
- Aged under 22: half a week’s pay for each full year of service
- Aged 22 to 40: one week’s pay for every full year of service
- Aged 41 and over: one and a half week’s pay for each full year of service
The resulting figure is then multiplied by your final wage amount.
Can you claim director redundancy if you sell your company?
To claim redundancy pay as a director, your company must be formally insolvent. It may have entered administration and you have been made redundant as part of that process, or perhaps a liquidator has been appointed to sell the company’s assets and close it down.
It is not possible to sell a solvent business and claim director redundancy, however – the business must either be in administration or about to be liquidated.
Director redundancy and personal guarantees
If you have provided any personal guarantees for business borrowing, it introduces a significant risk for your personal financial situation. You are not released from your obligations under these guarantees when you are made redundant, and the lender can continue to pursue you through the courts to recoup their money.
Only they can release you from this obligation, and even if other directors of your company offer to take over the guarantee, the lender may only accept if they have proof that sufficient financial resources are available.
When you cannot afford to liquidate your insolvent company
If you cannot afford to liquidate your insolvent company, claiming director redundancy can provide the funds with which to do so, as the average claim for director redundancy is currently £12,000.
If other directors also make a claim, you may be able to afford the professional fees needed for a Creditors’ Voluntary Liquidation (CVL), even paying off some of the company’s debts in addition.
How to claim director redundancy
Redundancy payments are made from the National Insurance Fund (NIF) and can be claimed using form RP1. This should be completed and returned to either the office-holder or the Redundancy Payments Service (RPS), which is a division of the UK’s Insolvency Service.
On your claim, you will need to include details of your company, when your employment ended, and the monies owed to you. Claims for arrears of wages and holiday pay and other statutory entitlements can also be made, and are generally paid within 3-12 weeks of receipt.