When a company goes into liquidation, it’s generally understood that employees are entitled to redundancy pay. But what about the company directors themselves? Ultimately it is their business that has failed, and their livelihood that has collapsed.
Unbeknown to many directors, the government does provide limited company directors with statutory entitlements, such as redundancy pay, in a number of situations where a limited company has become insolvent and entered liquidation.
With some 80,000 personal insolvencies a year and around 14,000 companies becoming insolvent annually, it’s an issue that many business owners can find themselves facing, but a lack of understanding about statutory entitlements means many limited company directors end up missing out.
We’ve therefore asked Gary Addison, an experienced insolvency and redundancy expert, to explain more about what statutory entitlements actually are, and how they apply to company directors.
Limited company directors can claim statutory entitlements
It’s a widespread belief that you have few statutory entitlements as a company director, particularly when the business becomes insolvent. Under the right circumstances, however, you’re entitled to the same payments as your employees, even though as a director of the company you fulfil an additional role.
When a business is forced into liquidation, directors often feel a huge sense of loss. Concerns for the welfare of employees will run alongside your fear of personal bankruptcy, as the original investment in the company disappears along with your livelihood.
Preparing for adversity is equally as important as planning for growth, so what actions can you take to give you the best chance of survival should the worst happen?
Company directors should have an employment contract
The key factor for company directors in being eligible to claim statutory entitlements, including redundancy pay and arrears of salary, is to have a contract of employment from day one. This should set out the basis on which you work for the company, including the number of hours and rate of pay.
In essence, a written employment contract establishes beyond doubt the relationship between the company and yourself as an employee, defining your rights, responsibilities and duties.
What are the other eligibility criteria for statutory entitlements?
A contract of employment is the starting point in becoming eligible to make a claim for statutory entitlements. Here are some of the other requirements:
- Your company must have traded continuously for a minimum of two years
- You need to have worked at least 16 hours per week for this length of time
- You must be owed money by the company, for example the amount you originally invested, or arrears of pay
- Your role within the company has to be more than non-executive
Taking a salary via the PAYE scheme is a strong indicator of your status as an employee, but it’s also likely that your overall role and relationship within the company will be examined, and compared with other members of staff.
When insolvency hits
When a company is forced into liquidation, many people assume that its directors don’t receive redundancy pay purely because of the office they hold, but this is not true.
One of the advantages of a limited company structure is that it provides a degree of protection for company directors – it is regarded as a separate entity, enabling you to be both a director and an employee. Initially, you’ll need to provide proof of your status to the liquidator, and this is done via a form provided by the government’s Insolvency Service.
They’ll need to know how many hours per week you work for the company, whether you have any form of employment contract, and if your role was ‘hands-on’ rather than purely advisory.
How to make a statutory entitlement claim
Statutory entitlement claims can be made from the National Insurance Fund (NIF) through the Redundancy Payments Service, or RPS. The NIF is made up of national insurance contributions from employers, employees and the self-employed, and is used to pay statutory entitlements such as pensions and redundancy pay.
You may also be able to claim for:
- Arrears of pay
- Accrued holiday entitlement
- Statutory notice pay
- Unpaid pension contributions
A statutory limit applies to all claims, which at the time of writing is £479 per week.
Claiming redundancy pay
You should be able to claim redundancy pay if your company has been trading continuously for at least two calendar years, and you’ve also had an employment contract for this length of time.
How much you can claim is determined by various factors – how long you’ve been an employee for instance, as well as your age and salary. The amount of gross weekly pay at the time of redundancy is used in the calculation, but caps are applied to:
- The weekly amount – £479
- Your length of service as an employee – 20 years
- The maximum statutory redundancy pay that can be claimed – £14,370
Using your age as the basis, and multiplying a proportion of your pay by the number of full years in employment, this is how the calculation is made:
- Age 18-21: half of one week’s pay
- Age 22-40: one week of pay
- Age 41 and above: one and a half week’s pay
You’ll need a claim form RP1, which can be obtained from the liquidator dealing with the insolvency, or completed online. The Government provide useful factsheets and guidance on claiming.
Once you’ve received confirmation of your claim, it’s a good idea to check that all details are correct, after which payment is generally made within six weeks.
Arrears of salary and holiday pay
Up to eight weeks’ arrears of pay can be claimed, and up to six weeks’ accrued holiday pay.
Statutory notice pay
The statutory notice period is two weeks, plus one extra week for every additional year of service. If you’ve been an employee of the company for two years or more, you’re entitled to one week’s pay in lieu of notice for every year of service, up to a maximum of 12 weeks.
Unpaid pension contributions
Employees may be eligible to claim missing pension contributions by the company. You’ll need to contact the administrator of your pension scheme in this respect.
Claims for Statutory Maternity/Paternity/Adoption Pay and Statutory Sick Pay should be made to HMRC.
The risk of personal liability
If you’ve provided a personal guarantee to one of your lenders, or there are question marks over your actions as a director leading up to the liquidation, then personal liability also becomes an issue.
The limited company structure provides some protection, but being insolvent means that creditor interests must be placed before those of the company and its shareholders.
Although the eligibility criteria for claiming statutory entitlements as a director can be complex, the knowledge that you may have recourse to claim certain payments is reassuring.
Having a written employment contract is the starting point, but in some cases directors have to rely on an ‘implied’ status as employee, or believe they had an oral contract, which results in more extensive investigations into their role within the company.
This guide has been written exclusively for ByteStart by Gary Addison is a director at Redundancy Claim and has helped thousands of company directors at their lowest ebb with advice around redundancy and statutory entitlements.