Many directors of limited companies are entitled to claim redundancy pay should their company become insolvent and enter a formal liquidation procedure. However, there is a criteria which must be met, and in some instances directors do not meet these conditions for a variety of reasons. Here are the most common causes of directors not being eligible for redundancy:
- Not on the payroll – In order for a director to make a successful claim for redundancy, they must be classed as an employee of the business as well as its director. This means the director must have been taking a regular salary paid via the PAYE system. If a director has not been paying him or herself, or has instead been extracting money from the company solely through dividends then they will not qualify for redundancy.
- Company incorporated for less than two years – Just like with employee redundancy, a director must have at least two years’ service with their limited company in order to have a valid claim.
- Company dissolved not liquidated – If you are looking at closing down your limited company, you may discover that there are a couple of ways of achieving this. Your first option is to enlist the help of a licensed insolvency practitioner and place your company into liquidation using a process known as a Creditors’ Voluntary Liquidation (CVL). Alternatively, you may be tempted to go down the route of striking off – or dissolving – your company instead. For many, the benefit of dissolving your business over liquidating it comes down to cost. While a CVL typically costs around £4,000, dissolving a company can be achieved for just £10. However, not only does the dissolution route not adequately deal with any outstanding company creditors, it also makes you ineligible for redundancy. With the average claim for director redundancy coming in at £12,000, you could well find yourself much better off financially by liquidating your business even accounting for the cost of the CVL. If you are considering closing your insolvent company, it makes sense to first get an idea of the amount of redundancy you may be able to claim by liquidating it before you make a final decision on how to proceed.
- Company not insolvent – As redundancy is designed to compensate for an individual in the event that their job role no longer exists only directors of insolvent companies are eligible to claim. Should a director decide to close their solvent company this is viewed as a resignation rather than a redundancy. However, it should be remembered that the onus for making redundancy payments to staff lies with the company. Therefore it is not unheard of for the potential cost of making redundancies to tip a company over from a state of solvency into a position where the directors could find themselves trading whilst insolvent.
If you would like to find out more about director redundancy and whether you would be eligible to claim, speak to the experts at Redundancy Claims UK today. We can quickly determine whether you meet the criteria, and if you do, we can take you through the entire claims process from start to finish.