Redundancy of directors in a company insolvency

When a business is forced into insolvency, concerns for the welfare of employees will run alongside the fear for your personal financial position, particularly if you have given personal guarantees in respect of company liabilities, and as a company director, it is often thought that you have few statutory entitlements. With a bit of forethought however, you will be entitled to the same rights as your employees, even though as a director of the company you fulfil an additional role, and also may be a shareholder.

Preparing for adversity is equally as important as planning for growth, so what actions can you take to give you the best chance of receiving a payout from the Redundancy Payment Service (RPS) should the worst happen? 

Are directors entitled to redundancy payments?

When a company enters into an insolvent process, employees - and directors who can provide evidence they are an employee - are entitled to the following:

• Arrears of pay – up to eight weeks
• Accrued holiday entitlement – up to six weeks
• Statutory notice pay – up to twelve weeks
• Redundancy pay – must have at least two years’ of service

If the insolvent business is unable to pay the above, employees must complete an RP1 form to make a claim for payment from the Redundancy Payments Service (RPS).

How much you can claim is determined by various factors – how long you’ve been an employee for instance - as well as your age and salary. The amount of gross weekly pay at the time of insolvency is used in the calculation, but caps are applied. The maximum weekly pay is £643 (as of April 2023), the length of service is capped at 20 years and the maximum amount of statutory redundancy pay that can be claimed is £19,290.

To establish your entitlement to claim as a director you will need to complete an RP3 form in addition to the RP1 form. The RPS will need to know:

• Whether you have a contract of employment
• If the company has been incorporated for more than two years
• If you have worked for at least 16 hours a week
• Whether you have carried out a practical role for the company, more than as a non-executive
• Whether you are paid at least the National Minimum Wage

If you have taken a salary using the PAYE scheme and can demonstrate that you have a similar connection to the company as other employees, then it is likely you will be eligible for various statutory entitlements in the event of insolvency.

Director contract of employment

A contract of employment does not have to be written down in order to be legal. Some directors work as an employee following discussions between themselves and the board, assuming this role under an oral contract. However, employee status is much easier to prove in a written contract and it is therefore good practice for a director to have a formal contract of employment from day one.

What should a director’s contract include?

• The name of the employer and the employee
• The job title and brief description of your duties and responsibilities as a director
• The date when the employment starts and any previous employment which counts as continuous
• The pay which the employee will receive and how often it will be paid
• The hours which the employee will work, the place of work and end date if applicable
• The holiday, sick pay and pension entitlement provisions
• The length of notice required from the employer and the employee
• Any collective agreements which form part of the employment

Precautions worth taking

You can protect your personal financial position as a company director by taking sensible precautions, such as having a comprehensive written contract of employment and if your salary is paid the PAYE. In order to receive the maximum level of payments from the RPS (£643 per week), your gross weekly salary will need to be at least that amount.