As businesses continue to struggle at the moment, there’s been a recent increase in the number of SMEs who are making Directors redundant. It can often make sense: if a company’s activities have shrunk, with fewer sales and a reduced workforce, it can now appear too top heavy and under performing directors might be at risk.
Handling a Director redundancy can be much more complicated however than making a staff member redundant as we explain in the more detailed article on Director Redundancies posted last month. The critical factor is that a Director usually has several legal roles: he or she is usually an employee, an office holder, a creditor and a shareholder. Each needs to be looked at in turn.
Most Directors are also employees and, as an employee they can be made redundant, but the same procedure must be followed as for other employees and it must be fair. They will on that basis be entitled to redundancy pay.
Directors have important legal responsibilities and may have given personal guarantees to the bank, other lenders or trade suppliers. These issues need to be considered carefully in a redundancy situation.
Many Directors are also shareholders and, whilst you might be able to make a Director redundant, you can’t automatically force them to sell their shares; this will depend on the nature of the shareholder agreement.
If you run a small or family-owned business and are about to make a Director redundant, stop and consider all the issues carefully before you act.
Both parties should take legal advice, any Director feeling under threat of redundancy is certainly likely to do so. The best approach is to be prepared.
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.