The content of this article may be out of date - please refer to our more recent articles for up-to-date information.
Some years ago some meat processing companies failed. Workers lost their jobs and whereas wages and holiday pay were preferential, redundancy due ranked as unsecured.
Recently the Government determined that redundancy should be preferential and the Status of Redundancy Payments Bill was passed into law in the form of the Insolvency Amendment Act 2004 and the Companies Amendment Act 2004. These Acts come into force 60 days after the 30 March 2004, which is the date they received the Royal Assent. I calculate the effected dated as being 29 May 2004.
Both Acts make redundancy preferential and increase the maximum preferential claim from $6,000 to $15,000. On the surface of it workers would appear to be better off. This, however, is not necessarily the case.
Statistics New Zealand confirms that there are approximately 295,000 businesses in New Zealand. Most of these, between 240,000 and 250,000, employ ten people or less. It is with this typical business that the discrepancy in the new insolvency law reveals itself.
Imagine a typical small business which has one director, one executive and four wage earning employees. The executive is paid on the 15th of the month for the whole month. The other employees fill out timesheets and are paid weekly. Cash gets tight and the executive leaves. Being the executive she had a redundancy package. She is owed $20,000. The wage earners have no redundancy packages.
The company is placed into liquidation. The executive officer is owed $20,000 for redundancy and each of the workers are owed $800 for wages and $500 for holiday pay. The debts have been factored and there is a debenture in place. The liquidator sells the little stock of value and has $8,000 to spread around the employees.
They are paid as follows:-
| Preferential Claims $ |
Payment Received $ |
|||
| Executive | Redundancy | 15,000 | 5,940 | |
| Worker A | Wages & Holiday Pay | 1,300 | 515 | |
| Worker B | Wages & Holiday Pay | 1,300 | 515 | |
| Worker C | Wages & Holiday Pay | 1,300 | 515 | |
| Worker D | Wages & Holiday Pay | 1,300 | 515 | |
| $20,200 | $8,000 | |||
As can be seen under the new legislation, the workers do not get paid in full for the hours they have actually worked while the executive who has received all her salary gets the bulk of the available money. This seems grossly inequitable. We would all hope that the workers who had done the hours would get paid for those hours.
A much fairer result would come through if the maximum preferential claim of $15,000 were to be retained but redundancy were to rank immediately after wages and holiday pay.
If the new law were to be amended in that way then under the above scenario each of the workers would receive their full claim - that is $1,300 each. The executive would receive $2,800 - twice as much as the workers. Nevertheless, the result would be fair and equitable.
Any person reading this article might wonder why in the example given there was no preferential claim made by the director. After all, directors at the very least are invariably owed holiday pay. A day off a week - 50 days a year - does not in the mind of most directors qualify as holidays.
The answer is that for the purpose of the new law the director is no longer regarded as an employee. This is a wonderful piece of news for liquidators who in the past have not been able to disprove imaginative preferential claims from directors in respect of wages and holiday pay.
The new Act states that an employee
"…does not include a person who is, or was at any time during the 12 months before the commencement of the liquidation, a director of the company in liquidation, or a nominee or relative of, or a trustee for, a director of the company:"
Another good piece of news in the new legislation is that every three years the maximum preferential claim is adjusted - increase only - to reflect any overall percentage increase in average weekly earnings. This means that the amount of $15,000 will be updated regularly and will not become irrelevant.
Overall the new legislation is relevant and is needed. The unintended side result given in the example is capable of amendment. Also the director, the architect of the failure of the company, no longer gets to share the little money there is to go around.
DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.