Insolvency and employment

When a business is insolvent, there is often uncertainty as to what happens next for the employer and their employees.

If a business you work for has gone insolvent, you may wish to contact a Community Law Centre for advice, or contact your union.

Community Law (external link)

A business is insolvent when it cannot pay money owed when it is due to its creditors, such as Inland Revenue, banks, suppliers, landlords, employees and contractors. In most cases, when a business fails and is unable to pay its debts, what happens to the business will depend on its structure:

  • If the business is a company, it will go into liquidation.
  • If the business is a sole trader or partnership, the owners themselves may become bankrupt.

In either case, it can be a complicated process for employees to receive any money owed. For example, unpaid wages, holiday pay or redundancy compensation.

Liquidation

When a business structured as a limited liability company goes in to liquidation, a ‘liquidator’ is appointed. The liquidator’s job is to sell off all of the company’s assets to pay the individuals or businesses who are owed money by the liquidated business. Some creditors, including employees, are paid preferentially.

If the business is closed by the liquidator (it can decide to keep the business open), employment ends for employees.

The Insolvency and Trustee Service website has the following information:

The effect of liquidation on a company (external link)

Insolvency and business debt (external link)

Bankruptcy

When a registered entity (usually a business) goes into liquidation, this could mean that the directors of the company may also apply for individual bankruptcy. This can happen if the company directors have personally guaranteed some of the business’s debt or they owe money to the company that they cannot repay.

The Insolvency Act appoints an Official Assignee to administer all personal insolvency options in the case of a sole trader or partnership. The Official Assignee will decide how the business will be dealt with and if there are assets that can be sold to recoup money to pay to creditors.

If an entity is not going to continue to trade, employment of any employees is terminated. Employees can file a claim against the bankruptcy for any salary, wages, holiday pay or redundancy compensation, along with evidence of the amount owed. Employees can contact the Official Assignee to help you collect the bankrupt person’s business records as evidence.

An employee’s claim may be considered preferential, which could mean an employee is paid out before any unsecured creditors if there are funds available.

The Insolvency and Trustee Service website has the following information:

The effect of bankruptcy on a business (external link)

Personal insolvency options (external link)

Employees who are owed money when a business fails

Employees who are owed wages or salary by a failed company are creditors and must file a claim with the Official Assignee or liquidator to have their claim recognised. Depending on the structure of the employer, an employee may or may not be able to reclaim any money. Some of the amounts owed are paid in preference to other creditors.

These preferences are detailed in the Companies Act 1993 and the Insolvency Act 2006 as follows:

  1. Any wages or salary (including commission and piece rates) earned by the employee in the four months prior to the business going into liquidation.
  2. Any donations that have been deducted from an employee’s pay but not transferred by the employer.
  3. Any holiday pay that has not yet been paid to an employee.
  4. Any compensation for the employee being made redundant due to the company failing.
  5. Any child support or student loan payments that have been deducted from an employee’s pay.
  6. Any reimbursements or awards from determinations by the Employment Relations Authority (ERA) or Employment Court that found in favour of the employee. This is only if they relate to money the employee may have earned in the four months prior to the business being placed in liquidation.
  7. Any KiwiSaver payments that apply to any of the above.

Employees are not entitled to preference in the payment of:

  • any wages or salary earned prior to four months before the business going into liquidation
  • any wages or salary earned for work after the business was placed into liquidation
  • any bonuses or other incentives, or
  • any awards of compensation from determinations by the ERA or Employment Court found in favour of the employee that are not specifically mentioned above.

The maximum amount an employee can receive on this preferential basis is $23,960 (this was last increased on 30 September 2018 and may be adjusted every three years). This is outlined in the Companies Act 1993 and Insolvency Act 2006.

Any amount above $23,960 will not be paid on a preferential basis. This means that only if a business can pay off its preferential creditors will an employee receive more than this amount, which is then paid as a percentage of any remaining debt.

Once a company is placed into liquidation, any personal grievance claims automatically stop. Any claims filed with the ERA (or other Court or Tribunal) can’t continue without consent from the liquidators. It is likely that a liquidator will not consent to a proceeding continuing.

An order from the ERA or Employment Court that requires the liquidated company to pay, for example, wages, salary or redundancy compensation, doesn’t affect whether any part of a claim is preferential or unsecured.

Business restructuring

If a business or part of it is to be sold or transferred to another party, the employer has to follow a set of rules that apply to the transfer of work.

Restructuring when a business is sold or transferred (external link)

Page last revised: 04 August 2020

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