What Employees Should Know About Company Liquidations

Employees’ Employment on Liquidation

When a company goes into liquidation, all of the company’s employment agreements may be terminated.  If the company has employees when it is put into liquidation, the liquidators will usually visit the business and inform the employees of the liquidation.  And, employees who have outstanding entitlements will be notified of the liquidation in writing, which is normally sent to the employee’s last known email or postal address.

 If the liquidators continue to trade the business or they require the expertise of certain employees after the company’s liquidation, the company in liquidation will re-employ the employees they require for the period they are required, which could be anywhere from a few days to months.  Employees who work for the company after its liquidation are paid as part of the company’s trading on expenses.  If the liquidators are able to sell the company’s business, the purchaser may be able to offer at least some of the company’s employees new employment.

Employees’ Claims in a Liquidation

 The Companies Act 1993 provides that employees have preferential claims for any:

  • Unpaid salary or wages and any commissions earned in the four months before the company’s liquidation; plus
  • Untransferred payroll deductions and donations made for an employee in the four months before the company’s liquidation; plus
  • Unpaid holiday pay payable to the employee as at the date that the company is put into liquidation, regardless of when the holiday pay accrued; plus
  • Untransferred KiwiSaver contributions, child support payments, and/or student loan payments deducted from the employee’s salary or wages; plus
  • Redundancy compensation, if provided for in the employment agreement.

These claims all rank equally amongst themselves.

Employee’s preferential claims are currently capped at $23,960 before tax (as from 30 September 2018).  This figure is reviewed and adjusted every three years.  The next review will be in 2021.

Some employees have both preferential and unsecured claims in a liquidation.  Claims for payment in lieu of notice of termination are currently unsecured, although this will change soon, and any preferential amounts that exceed the cap of $23,960 are both unsecured.  Any claims by employees for compensation under section 123(1)(c)(i) of the Employment Relationships Act 2000 are also unsecured. 

Draft legislation proposes employee claims for long service leave and payment in lieu of notice should be preferential claims.  These amendments are expected to be introduced in 2020.

Personal Grievance Claims

From the time a company is placed into liquidation, all proceedings against it are automatically stayed.  If an employee or former employee has filed a claim in the Employment Relations Authority (or any other Court or Tribunal), that claim cannot continue without the liquidators’ consent.

Having an order from the Employment Relations Authority or the Employment Court requiring the company to pay wages or salary, holiday pay, compensation, and/or costs does not affect whether any part of an employee’s claim is preferential or unsecured.  Generally, liquidators will not consent to the proceeding continuing unless the outcome is likely to affect the employee’s claim in the liquidation and the liquidators consider that they are not in a position to accept the employee’s claim as submitted, which the liquidators have the power to accept in part or in full.

Timing of Employees’ Preferential Payments

Companies do not usually go into liquidation with the funds to pay employee entitlements sitting in their bank accounts – in most cases, the company’s bank accounts are in overdraft – so there is likely to be some delay in collecting funds and payments to employees. 

Even if a company has lots of assets, if any of the company’s assets are secured by a specific security, the secured creditor is entitled to that asset in priority to the company’s preferential creditors until that debt is repaid.  Even if the company has late model vehicles or recently purchased new equipment, the value realised rarely covers the amount owed to the secured creditor.  If there is any surplus from realising these secured assets, those funds are paid to the liquidators for distribution. 

Payment of employees’ preferential claims rank behind the cost of the company’s liquidation, which includes any trading on costs, the cost of realising the company’s assets, the liquidators’ fees and expenses, and the petitioning creditor’s costs (if the company was put into liquidation by the High Court).   

If there are funds available to pay employee preferential claims, those funds are likely to come from selling the company’s business and assets and collecting any debts owing to the company, all of which can take time.  If there are some funds available to pay employee claims, it is not uncommon for partial distributions to be made as and when those funds become available.    

If the company does not have enough assets of value and easily recoverable accounts receivable to pay the employees’ preferential claims in full shortly after liquidation, there is likely to be a reasonable delay before employees receive any further payments, if at all.  Those further payments will be dependent on the company and/or the liquidators having claims against third parties that, if pursued, are likely to result in creditors receiving a distribution. 

Once all avenues of recovery have been exhausted and all funds have been distributed, the liquidation comes to an end.

If the company has outstanding PAYE at the end of the liquidation, as between the IRD and the employee, the IRD treats the amounts declared by the company as PAYE as paid.

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