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Can a director claim redundancy when their company is liquidated?

2018-07-18T00:00:00+01:00
Written By: , Filed under: Insolvency on:
Can a director claim redundancy when their company is liquidated?

What is redundancy?

If the company you work for run into financial difficulties and ends up closing down for good resulting in you losing your job, you may be entitled to put in a claim for redundancy. A redundancy payment is seen as a form of compensation for the loss of your job and is calculated based on the length of service you have built up with your employer and the salary you earned during this time. Other factors such as your age also have some impact on how much you may be entitled to.

In theory, however, as long as you have at least two years continuous service with your employer at the point of them entering liquidation, it is likely that you will be able to claim for redundancy and other statutory entitlements such as notice pay, holiday pay, and unpaid wages.

How are directors eligible to claim?

While company directors may be aware that their employees are eligible for a redundancy pay-out should the company fail, what many don’t realise is that as well as acting as director, they too are also classed as employees of the company. Due to this, in the event of the company becoming insolvent and subsequently entering liquidation, the director will be eligible to claim redundancy just as any other employee would.

In order to qualify, you must be able to prove that you were more than just a named director and took an active role in the day-to-day operations of the business. This is most easily evidenced by presenting a written employment contract. Although it is accepted that many directors do not take this step when setting up their business. Due to this it is possible to demonstrate that you were an employee in other ways such as being paid a salary through the PAYE system and having a verbal contract in place. Your accountant will be able to clarify how the company has been paying you and therefore whether you will be in a position to claim director redundancy.

What is liquidation?

There are two main forms of company liquidation: Members’ Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL). An MVL is designed to close down solvent companies which have come to the end of their useful lives; this could be because of retirement, the market changing, or simply a desire on the part of the director to move on to a new challenge.

A CVL on the other hand is used to bring the affairs of an insolvent company to an end. This is a company which has more liabilities than it has assets and is therefore unable to pay back the money it owes. It is important to know that director redundancy is only available to those directors who are closing down their company through a CVL process. This is because closing down a solvent company is a decision which is taken for business or personal reasons and in effect the director is voluntarily resigning; an insolvent company is left with no choice but to close, therefore its employees are seen as being made redundant.

 Next steps

If your company is insolvent and you believe you may have a claim for director redundancy, you should speak to your account in the first instance. They will be able to verify whether you have been on the payroll and therefore whether you may be in line for a pay-out. Alternatively, you can speak to the Handpicked Accountants team who can put you in touch with director redundancy specialists who will be able to quickly verify your claim. To learn more about director redundancy, or to find an accountant in your local area, call Handpicked Accountants today on 0800 063 9258.

David Tattersall
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