Are company directors entitled to redundancy payments in an insolvency?
Lynn Barr in our Business Recovery & Insolvency team recently outlined employee entitlements when their employer goes bust. Now, Lynn answers the question; Are company directors entitled to the same payments in an insolvency?
In our experience, most directors are aware that their employees are entitled to some payments from the government, (via The Insolvency Service), when made redundant, but they are not clear what they themselves are entitled to, if anything.
If the director is an employee then, they will be entitled to the same payments as other employees. However, the director needs to be able to prove their status as an employee. Typically this would be evidence of a formal employment contract or payment of PAYE and NIC on payment made to the directors. The director must complete a form to provide details of what their relationship with the company was. This covers contracts and PAYE but also looks at how many hours they worked and what they did. The Insolvency Service will review this to assess whether the director was an employee. If a director can provide satisfactory evidence of their employment then a claim for redundancy pay and any other sums owed to them in respect of holiday pay, arrears of wages etc can then be submitted online through the Insolvency Service the same as any other employee. Each case will be determined on its own specific circumstances.
Before paying anything out to a director, the Insolvency Service will confirm whether there was an overdrawn director’s loan balance at the date of the appointment. An overdrawn director’s loan balance is where the director is due to pay money back to the company. If this is the case then the Insolvency Service will deduct the amount outstanding from any payment they make to the director in respect of his employee entitlements. This has only been the case since 2016 when the Insolvency (England and Wales) Rules 2016 introduced the right of set-off in relation to mutual dealings and these are Rule 14.24 in respect of Administrations and Rule 14.25 in respect of Liquidations, and the Insolvency Service have advised that the Rules also apply in Scotland.
So is a director entitled to employee payments from The Insolvency Service when their company enters insolvency? Well, the answer is maybe.
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If you want to discuss any of the above further, please contact a member of the Business Recovery and Insolvency team.