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Redundancy of directors

In many liquidations and some Administrations or Receiverships directors may face the prospect of being made redundant. 

Directors are often the most costly members of staff and therefore the retention of such employee must demonstrate a clear value to the business.  On occasion the Insolvency Practitioner’s staff may be able to fulfil the role and therefore the cost-benefit of retention may be more weighted towards redundancy.

To reduce the risk of redundancy early in the process the directors should try to demonstrate their value to the Insolvency Practitioner.  IPs are always looking for creative ways to rescue the business or realise the most value from the assets of the business.  Any director or employee that is considered to be disruptive or unhelpful is likely to receive their p45.

Even if directors are made redundant they still retain their responsibilities to provide assistance to the Insolvency Practitioner.  This may result in having to work for free for a short period.

Employee status

Employees are entitled to redundancy pay, holiday pay and arrears of pay subject to statutory weekly limits (330 per week from 1 Feb 2008).  Such payment would normally be made by the DTI’s Redundancy Payment Service.

In order to claim redundancy the director concerned will have to complete an RP1 and RP3 form.  This would be sent to the Redundancy Payment Service.

The RPS then determines, following confirmation from the Insolvency Practitioner, what to pay the director.  The RPS may take the view that the director was not a true employee and therefore may refuse to pay.

Determining what constitutes an employee is complex and has been subject to recent case law.  Recently there have been a number of cases where employment tribunals have found in favour of the directors.

Aspects that may indicate that a director is an employee include the existence of an employment contract, director paid like a normal employee, director behaves like an employee (e.g. hours of work, holiday, etc.).

Should a director find that the RPS will not pay redundancy then the director should consider taking the employer (the company) to an employment tribunal.  In the case of Administration this will require the consent of the IP.

More information regarding the rights of directors and employees when the business is insolvent can be found here.

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