When a business enters liquidation, directors often assume that redundancy claims are only available to ordinary employees. In many cases, this is not correct.

A director may be able to claim redundancy and other statutory payments following liquidation, but only if they can show that they were also an employee of the company. This is an important distinction. A director is automatically an office holder, but that does not always mean they are an employee.

Molly Monks F.I.P.A of Parker Walsh, a licensed Insolvency Practitioner, regularly advises directors on their options when a company can no longer continue trading and liquidation is being considered.

Directors Can Sometimes Claim Redundancy

A director may be entitled to claim redundancy following liquidation if they were genuinely employed by the company.

The Insolvency Service guidance confirms that only employees who are made redundant are entitled to payments from the Redundancy Payments Service, but a director who is an office holder can also be an employee and may therefore be eligible to claim. (GOV.UK)

This means the question is not simply whether the person was a director. The question is whether the director can show that they had an employment relationship with the company.

What Does the Insolvency Service Consider?

The Insolvency Service will usually look at the practical reality of the director's role within the business.

A director may be asked to provide evidence that they worked for the company in an employee capacity. This may include whether they had a contract of employment, whether they were paid through PAYE, whether they worked regular hours, whether they carried out duties beyond statutory director responsibilities and whether they were treated in the same way as other employees.

The absence of a written employment contract does not always mean a claim will fail, but evidence is important. The stronger the evidence of employment, the better the prospect of the claim being accepted.

What Can a Director Claim?

If eligible, a director may be able to claim statutory redundancy pay, unpaid wages, accrued holiday pay and statutory notice pay.

Government guidance states that employees affected by an insolvent employer may be able to claim redundancy pay, holiday pay, outstanding wages and money they would have earned during their notice period. (GOV.UK)

Statutory redundancy pay is usually available where the individual has been made redundant, was an employee and had at least two years of continuous employment with the insolvent business. Payments are subject to statutory limits, including a weekly pay cap and a maximum of 20 years' service. (GOV.UK)

Why This Matters for Directors

For many owner-managed businesses, the director has worked in the company for many years, often taking a modest salary and putting the business first.

When the company reaches the point where liquidation is necessary, the director may also lose their employment and income. In those circumstances, a redundancy claim can provide valuable financial support.

However, claims are not automatic. The director must be able to demonstrate that they satisfy the relevant employment criteria and that the company has entered a qualifying formal insolvency process.

Liquidation and the Redundancy Payments Service

Following liquidation, eligible claims are usually made through the Redundancy Payments Service.

The Redundancy Payments Service deals with certain employee claims where an employer is insolvent and unable to pay. The Government's online service allows eligible individuals to claim money owed by an insolvent employer, including redundancy and other employment-related payments. (GOV.UK)

The Insolvency Practitioner dealing with the liquidation will usually provide the information needed to allow employees, and potentially directors, to submit claims.

Common Misunderstandings

A common misunderstanding is that directors cannot claim because they owned or controlled the company. That is not always the case.

Another misunderstanding is that a director must have a perfect written employment contract in order to claim. While written evidence is helpful, the Insolvency Service will usually consider the wider facts and circumstances.

It is also important to understand that dividends are not the same as wages. If a director has mainly taken dividends and cannot show that they were paid as an employee, this may affect the claim.

Taking Advice Before Liquidation

Before entering liquidation, directors should understand all of the consequences, including whether they may have a potential redundancy claim.

Molly Monks F.I.P.A of Parker Walsh can review the company's position, explain the liquidation process and help directors understand whether they may be eligible to make a claim following liquidation.

This advice can be particularly important where the director has worked in the business for several years, received wages through payroll and has been actively involved in day-to-day operations.

Speak to Parker Walsh

A director can claim redundancy following liquidation in certain circumstances, but eligibility depends on whether they were genuinely an employee of the company.

If your company is struggling and you are considering liquidation, it is important to obtain clear advice before making any decisions.

Molly Monks F.I.P.A of Parker Walsh is a licensed Insolvency Practitioner and provides practical, confidential advice to directors dealing with insolvency, HMRC pressure, creditor claims and liquidation.

At Parker Walsh, we will explain the options available and help you understand the practical steps involved.

FAQs

Can a director claim redundancy if the company goes into liquidation?

Yes, but only if the director can show they were also genuinely employed by the company, not just acting as an office holder.

What evidence does a director need to support a redundancy claim?

Useful evidence includes a contract of employment, PAYE payslips, regular working hours and duties carried out beyond statutory director responsibilities.

How many years of service are needed to claim statutory redundancy pay?

A director, like any employee, usually needs at least two years of continuous employment with the insolvent company to qualify.

Do dividends count towards proving employment status for a redundancy claim?

No, dividends are not treated as wages, so relying mainly on dividends rather than payroll income may weaken a claim.

How does a director actually submit a redundancy claim after liquidation?

Claims are usually made through the Redundancy Payments Service, with the appointed Insolvency Practitioner providing the necessary information to support the claim.

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