Director of insolvent company was entitled to redundancy award, rules Employment Appeal Tribunal

Out-Law News | 16 May 2014 | 10:27 am | 2 min. read

The director of a failed company can be entitled to a redundancy payment as an 'employee', depending on the facts of the particular case, the UK's Employment Appeal Tribunal (EAT) has said.

The EAT upheld the earlier ruling of an employment tribunal that a Mrs Knight, the sole shareholder and managing director of Receptors Security Systems (UK) Ltd, was entitled to the payment. Over its last two years of trading Knight had forfeited the salary that she was entitled to under a contract of employment between herself and the company. However, the judge said that this did not necessarily mean that she had "entered into an agreed variation of the contract or a discharge of that contract".

"Whether the regularity of payment in this case negatived the continuing existence of a contract was a matter of fact for the employment judge; he had to decide whether the evidence showed that the contract of employment had been varied or discharged or whether there had only been a choice by Mrs Knight not to take her salary when the company was in difficulties: and the judge found on the facts in favour of the latter alternative," the EAT judge said.

The EAT judge also dismissed arguments by the Insolvency Service to the effect that there was no 'mutuality' in the arrangement between Mrs Knight and her company during the last two years, or that the arrangement was not a contract at all because there was no 'consideration' moving from the employer to the employee. In addition, there was no "perversity in the sense that an employment judge has reached a decision which no reasonable judge could have reached", he said.

Knight set up her company in February 1991. It ceased trading due to insolvency on 18 October 2011. When the company started businesses a contract of employment, dated 13 June 1991, was drawn up between it and Knight, although it was never formally executed. It included her job description, working hours and salary, provided for bonuses and included termination provisions.

The employment judge found that in the company's last two years of trading, Knight did not enforce her contractual entitlement to pay. In her witness statement, she said that this was because of the company's financial difficulties and that she had "forfeited" her salary in order to pay her employees and the company's suppliers. When the company became insolvent, she claimed a redundancy payment of £7,296 from the Insolvency Service.

The Insolvency Service did not dispute the company's insolvency; or the fact that if Knight was an employee of the company at the point of insolvency she was entitled to the payment by virtue of the 1996 Employment Rights Act. However, it had argued that once she had stopped enforcing her right to a salary under the contract, Knight was no longer an employee.

The EAT judge said that the original employment tribunal had "specifically considered" whether the employment contract had existed during the last two years of the company's existence. He had concluded that it had, and that Knight had "chosen not to ask the company to honour her contractual entitlement to pay in order to keep the company afloat".

"That finding is inconsistent with her having agreed with the company that no salary would be payable – thereby agreeing that she would be unpaid even if, hypothetically, the company had suddenly landed a highly profitable new contract and found itself in a position in which it could pay what otherwise would have been her contractual salary," the EAT judge said.

"When the admirably concise judgment is read as a whole, it is clear that the employment judge found Mrs Knight to have been an employee during those two years in which she drew no salary and that she was an employee at the relevant date, the date at which the claimed obligation arose. No other date was relevant," he said.