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Disclaimer: Educational purposes only. Not legal advice. Consult a qualified NZ legal practitioner for your specific circumstances.

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employment

What to do if your employer goes into liquidation

Key Takeaway

When a New Zealand employer goes into liquidation, employment contracts typically terminate. Employees become creditors for unpaid wages, holiday pay, and other entitlements. These employee claims usually receive preferential treatment over general creditors under the Companies Act 1993, but payment depends on available company assets. A liquidator manages the process and employee claims.

What is Liquidation?

Liquidation is a process where a company is wound up, its assets are sold, and its debts are paid off. A liquidator (an independent insolvency practitioner) is appointed to take control of the company's affairs, investigate its finances, realise its assets, and distribute funds to its creditors (those to whom the company owes money) [Source: Companies Act 1993, Part 16]. The company usually ceases to trade once a liquidator is appointed [Source: Companies Act 1993, s 240(1)(a)].

Impact on Employment Contracts

When a company enters liquidation, employment contracts are generally terminated, either automatically due to the company's inability to fulfil its obligations or by formal dismissal notices issued by the liquidator [Source: Companies Act 1993, s 255(2)(c)]. The termination of employment due to liquidation is typically considered a justifiable dismissal, provided the company is genuinely insolvent [Source: Employment Relations Act 2000, s 103A].

Employee Entitlements in Liquidation

Upon termination of employment due to liquidation, employees become creditors of the company for any outstanding entitlements. These may include:

  • Unpaid Wages and Salaries: Any wages, salaries, or commissions owed for work performed before the liquidation date [Source: Wages Protection Act 1983, s 4].
  • Holiday Pay: Payment for any accrued but untaken annual leave, and 8% holiday pay for any period of employment less than 12 months, calculated up to the date of termination [Source: Holidays Act 2003, s 21].
  • Notice Period Pay: If an employment agreement requires a specific notice period for termination and the liquidator terminates employment without providing that notice, the employee may have a claim for payment in lieu of notice. The employment agreement determines the entitlement [Source: Employment Relations Act 2000, s 65].
  • Redundancy Pay: Entitlement to redundancy pay only exists if it is explicitly provided for in the employee's employment agreement [Source: Employment Relations Act 2000, s 65]. If an agreement includes redundancy provisions, this entitlement would also form a claim in liquidation.

Priority of Employee Claims

New Zealand law provides employees with a preferential claim (a claim that ranks higher than others) for certain entitlements in a liquidation. This means that these employee claims are paid before most other unsecured creditors, such as suppliers or general lenders. The Companies Act 1993 specifies the following as preferential claims [Source: Companies Act 1993, s 312]:

  1. All wages or salary of any employee, whether payable for time or piece work, in respect of services rendered to the company within 4 months before the commencement of the liquidation. This is capped at a specified amount per employee (currently $24,200) [Source: Companies Act 1993, s 312(1)(a); Companies Act 1993 (Employee Priority Cap) Regulations 2023, cl 4].
  2. All holiday pay becoming payable to an employee on the termination of employment before or by the effect of the commencement of the liquidation [Source: Companies Act 1993, s 312(1)(b)].
  3. Any amounts deducted by the company from the wages or salary of an employee in order to satisfy an obligation of the employee (e.g., PAYE tax, superannuation contributions), but not paid to the person or entity to whom the deduction was due [Source: Companies Act 1993, s 312(1)(d)].
  4. Any redundancy pay payable to an employee under an employment agreement [Source: Companies Act 1993, s 312(1)(c)].

It is important to note that preferential claims are still subject to the availability of funds after the costs of liquidation are met. If there are insufficient assets, even preferential claims may not be paid in full.

Role of the Liquidator

The liquidator has a duty to identify and notify creditors, including employees, of the liquidation [Source: Companies Act 1993, s 240(2)]. The liquidator is responsible for investigating the company's affairs, selling its assets, and distributing the proceeds according to the statutory order of priority. Employees must submit a formal claim to the liquidator for any outstanding entitlements [Source: Companies Act 1993, s 245]. The liquidator will review these claims and determine their validity and priority.

Making a Claim as an Employee

Upon learning of the liquidation, employees should contact the appointed liquidator. The liquidator will provide instructions on how to lodge a formal claim, typically by completing a 'creditor's claim form' and providing documentation supporting the amounts owed. Employees should retain all relevant employment records, such as employment agreements, pay slips, and any correspondence regarding outstanding payments or leave.

When to Seek Independent Legal Advice

Individuals affected by an employer's liquidation are encouraged to seek independent legal advice to understand their specific rights and the process for making a claim. This information can be obtained from Community Law Centres or a qualified legal professional, who can provide guidance on individual circumstances.

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