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It is surprising that there have not been more cases like this where a Managing Director and sole shareholder of a firm who struggles to keep their company afloat by sacrificing their own income in preference to creditors or employees who find themselves suffering at the hands of the Insolvency Service (or secretary of state for that matter) who deny their right to redundancy payments or benefits.

The facts are relatively simple.

The company (incorporated  1991) ceased trading, as insolvent, October 2011.  Mrs Knight was the Managing Director and owned 100% of its shares.  When the company started  business , a contract of employment was drawn up between it and Mrs  Knight and referred to Mrs Knight’s employment as Managing Director (continuing as such, subject to termination on two months notice or otherwise in certain circumstances, including gross misconduct).

The document provided for working hours of 9am to 5:30pm from Monday to Friday and for a salary of £20,000 per annum and discretionary bonuses.   The document was never formally executed; but Mrs  Knight  worked for the company from its inception until its end.  The Employment Judge found that she had particular responsibility for sales and marketing and wrote all the tenders which the company put forward bids; she worked, from 8am to 7pm and travelled extensively on behalf of the company.

Although the document provided for the salary Mrs Knight’s evidence was that, when the company was operating satisfactorily, she would be paid £1000 per month ”take-home”.  The judge found that, apart from paying the other employees, the intention was that any profits would be ploughed back into the business  and that Mrs  Knight  had taken no money from the  business  other than what she received by way of pay.

Mrs Knight produced P60s which showed that she had been paid by the company as an employee: the amounts varied.  The existence of P60s indicated that PAYE was deducted from  payments which Mrs  Knight  received; and there was no suggestion that any tax and national insurance due were not paid as if she was an employee. However, the judge found that, in the last two years of the company’s trading, Mrs  Knight, in an effort to keep the company afloat, did not enforce her contractual entitlement to pay and, therefore, received no monies at all.

In her witness statement, she said that she was unpaid because of the difficulties which meant that there was insufficient money to pay her and that she had forfeited her salary in favour of her colleagues and in order to pay suppliers.

Her efforts did not succeed; the company became insolvent and ceased to trade.

The legal argument arose (amongst other points, not as important) that, by not claiming her income, the mutability condition of the employment contract (as per Readymix) of agreement ceased and therefore the Director was no longer an employee .

Fortunately for all those in a similar situation the EAT Judge disagreed.  “Under such a contract an employee could owe a duty to carry out whatever work he or she had agreed to do; and the employer would have to fulfil obligations which might not involve the payment of money, e.g. the provision of tools and equipment or the taking of reasonable care for the employee’s health and safety. “

“Money is not the only consideration which may move from an employer under a contract of employment.  “

Victory

A victory for commons sense.  But also a victory that supports Directors striving hard to rescue companies that are ailing.

On hopes we will be seeing more of  HH Jeffrey Burke QC – his judgements are easy to read, informative and he seems to get it!

I thank Alan Lewis, Employment Partner at Freeth Cartwright LLP for bring this case to my attention:

Citation: UKEAT/0073/13/RN (Secretary of State for Business, Innovation and Skills v Knight)

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