Directors who decide not to take a salary in order to help their company through tough times may be able to claim their unpaid salary from the Government.
In a recent case, Secretary of State for Business, Innovation and Skills v Knight UKEA/0073/13/RN, Mrs Knight, who was the sole shareholder and director of her company, decided that she would forgo her salary in order for other employees and creditors to be paid.
Under her contract of employment, Mrs Knight was entitiled to a salry of £20k per year. When the company failed, Mrs Knight claimed redundancy payment from the Insolvency Service.
The employment judge in the tribunal found that Mrs Knight had not ended the employment contract she had with the company by forfeiting her salary, therefore the contract still stood and she should be treated as an employee for the company and paid redundancy pay accordingly.
Although the Secretary of State for Business, Innovation and Skills appealed the decision, the appeal was dismissed on the basis that Mrs Knight was an employee of the company at the time of insolvency.
This is a very important decisison. The grounds on which controlling shareholders and directors can make successful claims to the Redundancy Payments Office (“RPO”) has been a grey area. When directors / controlling shareholders have made claims to the RPO in the past, the RPO may have used the forgoing of salary as one of the grounds for rejecting the claim.
Directors / controlling shareholders should have contracts of employment in the same way their employees do. If they do have contracts of employment, this case means that directors / controlling shareholders should be able to claim against the RPO whether they took their salary or they agreed to forgo their salary.
It is important for anybody facing financial difficulties, whether personally, directors of limited companies or partnerships, to seek advice from a licensed insolvency practitioner as soon as possible.
To take advantage of our free consultation, please telephone Stella Flemmings on 01377 257788, 01724 230060 or 01904 520116 and she will make you an appointment with one of our insolvency professionals at our Driffield, Scunthorpe or York offices.
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