It is a common misconception that limited company directors are unable to claim redundancy pay as a result of liquidation, along with other statutory payments such as holiday pay and notice pay. In the run-up to liquidation, your business may be experiencing a rocky patch due to creditor pressure, HMRC debts, and poor cash flow. It is only natural for income and business expenditure to fluctuate as customer behaviour changes as a result of mitigating factors. This can include the likes of climate change, sector trends, festive holidays and political events. As a result, your balance sheet may take a nosedive, causing reasons for concern.
If your limited company is edging closer to liquidation, the early signs should be enough to warrant an enquiry into director redundancy pay. There are strict rules in place which govern what constitutes as an eligible claim for director redundancy pay, so it’s important to act fast, writes Gary Addison of Redundancy Claims UK.
Am I eligible for director redundancy?
It is possible for a limited company director to claim redundancy pay if the business has entered into liquidation or administration. If you voluntarily liquidate the company, this nullifies you from being eligible for director redundancy as this has been strictly designed for directors which have been forcibly put out of work – not voluntarily. The average claim in the UK is £9000 and the maximum cap is £14,670 if you were made redundant on or after 6 April 2017.
In order to qualify for director redundancy, you must be able to prove your employment with the company, such as through your record on the payroll register.
Alternatively, if you resort to dissolution, also known as striking off from the Companies House register; you will not be eligible for redundancy pay.
When is the best time to claim redundancy pay?
The best time to claim redundancy pay is as soon as you become aware that the business is set to enter liquidation. The earlier you prepare, the better your chances of claiming successfully. Although you are able to claim for redundancy pay prior to the actual liquidation and post-liquidation, the rules are strict, as leaving it too late could hinder your full entitlement. You should seek redundancy pay within 12 months from the date the company entered into liquidation, but in order to maximise your chances, the six-month mark is recommended.
What is the timescale of the process?
The director will typically receive payment four to six weeks after the creditors meeting has taken place. This is subject to receiving the necessary paperwork and evidence to back up your claim.
What proof is required to back up my claim?
The following proof will be required in order to back up your claim for redundancy pay:
- Proof of employment, such as a contract. In some cases, this is not necessarily written, it can be verbal. If your role consisted of the same responsibilities as an employee and you were paid through PAYE, you will typically be classed as an employee
- The director is required to have worked a minimum of 16 hours per week
- The company should have been incorporated for a minimum of two years
- The director should have played an active and ongoing role in the day-to-day running of the company
Where will the money come from?
Director redundancy payments are issued from the National Insurance Fund which is the pot in which all National Insurance Contributions are put into. Redundancy pay is claimable from the government’s redundancy payments service (RPS).
Dissolution Vs Liquidation
Dissolution – When a limited company is facing inevitable closure, there are many routes it can take, including dissolution and liquidation. Dissolution is the act of dissolving a company, resulting in strike off at Companies House, ceasing in legal existence.
A business can only be dissolved after creditor affairs and outstanding debts have been settled. If you knowingly fail to do so, creditors will have the right to petition for the reinstatement of the business at Companies House, making it visible once again on the public register. If you resort to dissolution, it invalidates your right to claim for director redundancy.
Liquidation – During a compulsory liquidation, the assets of the business are valued and sold in order to raise money for creditors. The company is then struck off the Companies House register. As part of the liquidation process, the insolvency practitioner will settle affairs with creditors, removing any chance of the business being reinstated. Although the cost of liquidation is greater than the cost of dissolution, you are protected from creditor appeals and you will be eligible for redundancy pay.
Put simply, dissolution can leave you in debit, whereas liquidation can leave you in credit as you could be eligible for director redundancy.
Common reasons for rejection
Claims for redundancy pay are often rejected due to the following reasons:
- Company was incorporated for under two years
- You left the business before the liquidation process commenced
- Employment was transferred using TUPE regulation
If you are successful in your claim for redundancy pay, this is extra capital which can help put you on the road to financial recovery. The funds can be put forward to boost your career and to pay off any remaining debts you may have accumulated over the years.
Redundancy pay is essentially compensation for the loss of a job position in a situation which is typically out of your control. Along with this, limited company directors may also be able to claim notice pay, holiday pay and unpaid wages. By debunking the common misconception of limited company directors being unable to claim the above, you open the doors to further compensation which you may be entitled to.