Posted on: Tuesday 22nd May, 2018
A solvent company will have more assets than liabilities and will be able to keep up with its outgoings such as bills, wages, and debt repayments, as and when they fall due. An insolvent company on the other hand will have debts which outweigh the company’s assets and will struggle to pay its liabilities on time. Once a company is insolvent, it is the legal duty of the director to cease trading and limit the impact this situation could have on the company’s outstanding creditors.
A director can only claim redundancy from his or her company if it is insolvent and is going through a formal liquidation procedure such as a CVL. This is where an insolvency practitioner is appointed to close down the company and liquidate its asset for the benefit of the outstanding creditors.
If your company is solvent but you still want to shut it down, this can be done through a Members’ Voluntary Liquidation (MVL) process, but you will not be entitled to claim redundancy for this.
Attesting for a company’s solvency is therefore a vital part in assessing eligibility for redundancy payments.
The simple answer is everything! Anyone your company legally owes money to should be taken into consideration when undertaking a balance sheet insolvency test. This includes obvious things such as loans, credit cards, bank overdrafts, and outstanding invoices to suppliers.
Surprisingly enough you also need to take into account the effect of redundancy payments on your business. If you are made redundant from your business you will, just like any other employee, be entitled to redundancy pay. The exact amount will depend on a range of factors including your age, your salary, and how long you have been employed by the company. This money will need to be paid by the company; you therefore become a creditor.
Should the business not be in a position to pay this money to you in full, it can no longer be seen as solvent. Therefore, however strange it may sound, it is possible that the act of making a director redundant can actually tip a solvent company over the edge into insolvency.
If you have reason to believe your company is insolvent, it is your legal responsibility as a director to take swift action. It is a criminal offence to trade while knowingly insolvent or to act in ways which will worsen the position of the company’s creditors. This means you should not take on any new work, apply for additional credit, or make preference payments to creditors. This is a complex area fraught with complications, and therefore you should make it your priority to seek expert insolvency help to ensure you are meeting your obligations as company director.
If your company is insolvent you may well be able to claim a redundancy pay out following its entry into liquidation. You must be an employee of the company, and have a minimum of two years continuous service in order to qualify. If you would like to discuss your eligibility for director redundancy, call one of our experienced team today who will be able to determine how much you may be able to claim.