Are you entitled to director redundancy pay?
Deciding to close your limited company can be a stressful time, especially if you’re also dealing with financial issues and creditor pressure. You might wonder what happens regarding redundancy for directors.
Employee redundancy is often talked about much more than company director redundancy pay. This means that often directors are unaware that it is even an option to explore. Some directors find that they can use their redundancy payment to cover their liquidation costs.
How much does liquidation cost?
A small liquidation in the UK is going to cost around £4000 plus VAT. This is a fact, and you should only select from licensed insolvency practitioners who are offering liquidation for this price or thereabouts.
Before you appoint the insolvency practitioner, you must ensure you get all of the details in writing. This can help to reduce the risk of costs to you being higher than you anticipated.
You should also ensure that you are aware of your financial situation and know the details of your directors’ loan account, if your directors loan has become overdrawn you will be asked to repay it, once in liquidation. Be careful paying any suppliers once you have become insolvent as it may be seen as a preference payment. This will be identified, and you may face the consequences.
Redundancy for directors: Am I entitled to claim redundancy pay?
There are some strict criteria that you must meet to be eligible for director redundancy pay. You can find out if you qualify by asking yourself these three questions.
- Have you been registered on the PAYE scheme?
- Have you worked for at least two years for the company?
- Have you worked a minimum of 16 hours a week?
If you answered yes to all of these questions, you should be able to make a claim for director redundancy.
You may be asked to provide evidence of your employment status when you attempt to claim director redundancy payments. This may require payslips or a contract of employment, formal or implied.
How much director redundancy pay am I entitled to?
The amount of director redundancy pay that you are entitled to claim depends on a range of factors. These include your age, length of service and wage. For example, a 30-year-old on the National minimum wage who has only worked for two years should still get over £2,000. The average UK claim for eligible company directors’ redundancy is £9000.
This should be more than enough to cover your liquidation costs and give you a little extra left over.
Before deciding on an appropriate liquidation process, you must ensure that you have considered all of the information and made an informed decision. But also remember that if your company isn’t paying creditors, the longer you wait, the more chance you have of being forced into compulsory liquidation.
There are various options for liquidation and company closure. The sooner you act, the more options you will have available.
Creditors Voluntary Liquidation – this method should be used by an insolvent company and is the most efficient option. It allows you to have more control over the liquidation process.
Member’s Voluntary Liquidation – this method is only available for solvent companies. The company must have at least £25,000 to distribute, if you enter into MVL then you will not be entitled to redundancy.
Compulsory Liquidation – this method should be avoided if possible. A compulsory liquidation gives you the least amount of control over the process and can open the door to increased director scrutiny.
Strike off/Dissolution – this method can only be used when there are no outstanding debts. Providing the criteria are met, it is the quickest and cheapest way to close a limited company. This method does not entitle you to company director redundancy payments.
Can you always claim redundancy for directors?
There are some circumstances where you would not be eligible for director redundancy pay. You should ensure that you are aware of these before you attempt to seek statutory redundancy pay.
If you choose to strike off your company, you will not be eligible for redundancy. This is regardless of whether company directors meet the criteria to make a claim. Many company directors are not aware of this and therefore miss out on their claim for director redundancy pay.
You must also meet all three criteria. Insolvent company directors who just meet one or two will not be eligible to claim redundancy payment.
What happens to employees when a company goes into liquidation?
There’s a lot to think about when deciding to close a business. A lot of the time, the information available can be unclear, making things more difficult. If you’re closing a business with employees, you’ll need to consider them and their statutory entitlements.
Pre-pack liquidation
Sometimes companies that are struggling financially can end up restructuring, so things work better. This can be achieved using a pre-pack liquidation if there is a genuine chance that the insolvent company could survive and work more efficiently. A pre-pack liquidation involves selling company assets to a new company, allowing you to continue trading with a new structure.
Pre-pack structures also allow for the employee’s contract of employment to remain in place, which limits losses for employees or you can make some or all employees redundant. There are many things to consider before you decide that a pre-pack is the right option for you. A licensed insolvency practitioner can provide advice and support.
Insolvent company liquidations
Typically, insolvency procedures result in the termination of employee contracts. This is because the company will no longer exist when the liquidation is complete. Employees are made redundant when the licensed insolvency practitioner is appointed at the beginning of the process.
When employees are made redundant, they can usually receive statutory redundancy payments. However, they must meet specified criteria to make company employee redundancy claims.
Employees may also be eligible for other payments, such as unpaid wages, notice pay and accrued holiday pay. The statutory redundancy payments are usually the responsibility of the employer, which can cause confusion when it comes to an insolvent liquidation process.
Employees who are owed money are labelled as unsecured creditors and therefore treated the same way as the others. Find out who gets paid first in a liquidation.
In an insolvent liquidation, the employee claims the payment from the Government’s National Insurance Fund (NIF) provided by the Redundancy Payments Service. This is in place so employees do not suffer financial hardship because of the liquidation. Statutory redundancy payment applications are typically completed in about six weeks.
Employees typically receive redundancy payments based on many factors. These payments are calculated based on one week’s pay or 1.5 week’s pay and so on.
Liquidation letter to employees: Adequate notice period
We recommend giving your employees as much notice as possible when deciding to enter liquidation. Depending on how long they have been employed, there are requirements in place for this.
- Employed for one month – 2 years – at least one week’s notice
- Employed for two years – 12 years – one week per year of work
- Employed for 12 years (plus) – 12 weeks’ notice
These are the statutory notice periods for employee redundancy. The employee rights may differ for each staff member due to their length of service. The statutory minimum notice period must be followed to avoid an unfair dismissal claim. Your insolvency practitioner will take care of creating a liquidation letter for employees.
Can my company be held liable for losses suffered by employees?
In certain circumstances, yes. The company can be held liable should an employee be deemed to have faced significant loss due to the closure of the business or the dismissal was carried out without the relevant statutory notice being given.
An employee can choose to pursue an unfair dismissal claim, and should the claim prove successful, then the monies due will be held against the company as unsecured debt.
However, as an employee would be classed as an unsecured creditor, it’s unlikely that the employee would receive some or all of this sum due to the preferential order of the company’s creditors.
What claims could an employee make?
If an employee has been affected by the company entering into liquidation, then they are legally entitled to claim for any of the following payments:
- Redundancy
- Holiday pay (on a pro-rata basis)
- Unpaid wages
- Payment in lieu of any notice period (notice pay)
If the company has no money to pay then your employees will be able to make a claim from the Government for redundancy.
Company closure brings changes for both directors and their employees. Redundancy pay for company directors is often not well advertised, but it’s definitely worth looking into. Most directors who meet the criteria are pleasantly surprised by the outcome of checking how much redundancy they can claim.
We hope this article has been helpful. We know that company closure can be a difficult process, especially when you’re struggling financially, but we’re here to offer valuable advice and support you through the process. Feel free to contact us for confidential advice on your redundancy claim.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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