Are Directors Employees?

Employees of insolvent companies are able to claim certain entitlements including arrears of wages, holiday pay, pay in lieu of notice and redundancy pay from the Redundancy Payments Office (“RPO”). A number of claims brought by directors to the RPO have been rejected on the basis that these directors did not have employee status. This issue is particularly relevant for directors who are also controlling shareholders as the RPO argues that those directors can not have employee status as they have control over their company. The Court of Appeal has recently ruled that there is no legal principle which prevents a controlling shareholder and director from being an employee. The fact that the claim is brought by the director / controlling shareholder is just one factor which should be considered in deciding whether the claimant is an employee. Other factors include:

• Is there a contract of employment?
• Is the contract a sham?
• Did the director act in accordance with the contract?

The above list is not exhaustive but if you are advising any clients in this position, the outcome of their claim will remain uncertain until all the facts have been considered.

Concern for Accountants about Going Concern!

During the first quarter of 2009, the number of corporate insolvencies soared by over 50% when compared with the same period in 2008. This huge rise in the number of insolvencies is not that surprising given the current economic climate. Given the deterioration in the economic climate concerns will inevitably be raised about the ability of a number of entities to continue as going concerns. This creates problems for directors of smaller entities and their accountants as these entities do not require audits. If the entity fails within 12 months of the directors approving the accounts and no disclosures are made regarding that entity’s ability to continue as a going concern, this may lead to claims being made against the directors by a subsequently appointed liquidator for breach of fiduciary duty. The directors should have realised that the entity had no real prospect of avoiding insolvency. They should have realised that at the time they signed off the accounts and they failed to disclose their concerns about the ability of the entity to continue in those accounts. Creditors relied on those accounts in deciding on whether to do business with the entity and as a result suffered a loss.

This issue is of potential concern for accountants as they will often be heavily involved in the preparation of the accounts on whose advice the directors will inevitably rely. In conjunction with claims being made against directors, we believe that during this downturn an insolvency practitioner may try to bring a claim against the entity’s accountant as he may be seen as a softer target with deeper pockets. In our view, accountants may consider it prudent to send a letter to their clients, when asking them to sign off their accounts, reminding them to consider and be satisfied as to the going concern principle.