As economic pressures continue to impact businesses across New Zealand, employees should be aware of their rights and entitlements in the event that their employer is placed into liquidation.
What happens when a company goes into liquidation?
When a company is placed into liquidation, it generally means the Company is unable to pay its debts as they fall due. While this is assumed that there will be no money available to pay employees or other creditors, that is not always the case.
Upon liquidation, employment agreements are typically terminated. However, in some circumstances, a liquidator may retain employees to continue operating parts of the business, complete projects, or assist with asset realisations. In these situations, employees enter into a new employment arrangement with the liquidator.
One of the liquidator’s key responsibilities is to identify and realise the company’s assets. The proceeds are then distributed to creditors in accordance with the priority rules set out in Schedule 7 of the Companies Act 1993 (the Act).
Do employees get paid first?
The good news is that employees are given preferential status under the Act, meaning they are paid ahead of most other creditors.
However, employee preferential claims are capped. Currently, the maximum preferential entitlement is $31,820 (before tax) per employee. Any amounts owed above this cap become unsecured claims and rank alongside other unsecured creditors.
It is also important to note that all employee preferential claims rank equally amongst themselves.
What employee entitlements are covered?
Employee preferential claims include:
- Unpaid wages, salary, and commissions earned during the four months before liquidation
- Untransferred payroll deductions and employee donations made during the four months before liquidation
- Accrued but unpaid holiday pay owing at the date of liquidation, regardless of when it accrued
- Unpaid KiwiSaver contributions, child support payments, and student loan deductions withheld from wages
- Redundancy compensation, where provided for under the employment agreement
The following amounts do not qualify as preferential claims:
- Wages or salary earned more than four months before liquidation
- Wages or salary for work performed after liquidation
- Bonus or incentive payments
- Compensation awarded by the Employment Relations Authority or Employment Court
- Compensation claims under section 123(1)(c)(i) of the Employment Relations Act 2000
As per above, any amounts that fall outside the preferential categories, or exceed the statutory cap, are treated as unsecured claims.
Who is excluded from preferential status
To prevent “insider abuse,” the following people lose their priority status (even if they were employed and are owed wages):
- Company Director(s): anyone acting as a director (including shadow or de facto directors) within the 12 months prior to liquidation
- Close relatives of the director(s): parents, children, siblings, spouses, civil union/de facto partners, or relatives of those spouses.
- Trustees and nominees: anyone holding or acting as a nominee/trustee for the directors or their relatives
The purpose of employee preferences
Losing a job because the employer has failed can be financially devastating. Employees rely on their wages to pay for necessities such as housing, food, and living expenses. Recognising this, the law gives employees priority over most creditors when distributing the remaining assets of an insolvent company.
While the preferential regime cannot guarantee full repayment in every liquidation, it does provide employees with greater protection and a better chance of recovering at least some of what they are owed.
If you have any questions or enquiries, please do not hesitate to contact the team at Waterstone.
To get in touch with our team, please contact us at reception@waterstone.co.nz or call 0800 256 733.
