Your organisation doesn't understand the term 'voluntary redundancy'. This can apply when there is a need to reduce headcount and there are a number of a pool of surplus staff, and the employer asks for volunteers. The gist of it is the employee saying 'if you made me redundant I would accept it'. Since there is only one job of Director, he/she can't volunteer for it since there is no pool - either it is decided the job is gone or it hasn't.
Your situation is different. If you wish to accept this, then fine, that's up to you. You asked if it is legal - it is. But you should feel under no obligation to accept the change in role or job title. Just say its wonderful to be made such an offer but it is not for you.