For most business owners facing insolvency, the wellbeing of their employees is one of the most pressing concerns. What will happen to their jobs? What about wages, holiday pay and redundancy? Are they protected?
New Zealand law provides specific protections for employees in an insolvency situation — but those protections have limits, and there are important obligations for directors in the lead-up to and during a liquidation. This article explains exactly what happens to employees when a company goes into liquidation.
What Happens to Jobs When a Company Is Liquidated?
In most liquidations, employees lose their jobs. When a liquidator is appointed to a company that has ceased trading, employment ends — practically speaking, there is no business left to employ anyone.
Where a business continues to trade after liquidation — for example, while the liquidator arranges a sale of the business as a going concern — some employees may be retained temporarily to assist with that process. Any wages earned during this period are paid as a priority cost of the liquidation. However, this is the exception rather than the rule.
The key point for directors: you should assume that appointing a liquidator means your employees will lose their jobs. This should be factored into your planning, and employees should be told as promptly as possible.
What Are Employees Owed?
Employees who lose their jobs in a liquidation become creditors of the company — they join the queue of people owed money. However, they occupy a privileged position in that queue.
Under the Companies Act 1993, employees are preferential creditors. Their claims rank ahead of ordinary unsecured creditors such as trade suppliers. The following employee entitlements are treated as preferential:
- Wages or salary earned in the four months before liquidation (including commission and piece rates)
- Holiday pay owed
- Redundancy compensation (where provided for in the employment agreement)
- Child support and student loan deductions made by the employer but not yet transferred
- Awards or reimbursements from the Employment Relations Authority or Employment Court relating to wages earned in the four months before liquidation
- Any superannuation or KiwiSaver deductions relating to the above
How Much Can Employees Claim?
The preferential claim is capped by legislation. As at 30 September 2024, the maximum preferential amount per employee is $31,820. (This figure is set by regulation and may be updated — check the current figure at legislation.govt.nz.)
If an employee is owed more than this, the balance becomes an unsecured creditor claim — which ranks below preferential claims and is paid, if at all, from whatever assets remain after preferential creditors have been satisfied.
Employees must file a formal proof of debt with the liquidator to make a claim. The liquidator will write to known employees and provide the relevant forms. Employees should respond promptly and keep records of everything they are owed.
What If There Are Not Enough Assets to Pay Employee Claims?
If the company’s assets are insufficient to cover preferential employee claims in full, employees receive a proportional share of what is available. They may not recover everything they are owed.
In this situation, employees should be directed to Work and Income New Zealand for assistance and to a Community Law Centre or their union for advice on their individual rights.
What About Redundancy Pay?
Redundancy pay is not an automatic statutory entitlement in New Zealand — it depends on whether it is provided for in the employee’s individual employment agreement. If the agreement contains a redundancy provision, that entitlement is a debt of the company.
Under the current Employment New Zealand guidance, redundancy compensation is included in the preferential claim (within the $31,820 cap). Amounts above the cap are unsecured. Where the employment agreement is silent on redundancy, there is no automatic entitlement.
What Are Directors’ Obligations to Employees Before Liquidation?
Directors have significant obligations to employees in the lead-up to an insolvency event — and getting these wrong can have personal consequences.
Do not withhold PAYE
PAYE deducted from employees’ wages must be remitted to IRD on time. Using PAYE to fund business operations is not only a serious breach of tax obligations — IRD has specific powers to pursue directors personally for unpaid PAYE in certain circumstances. This is one of the most serious mistakes a director can make in a distressed company.
Treat all employees consistently
If a company is insolvent, paying out one employee’s entitlements in full while others receive nothing can be challenged as a preferential payment and clawed back by the liquidator. All employees should be treated consistently and equitably.
Be honest with your team — promptly
Directors sometimes delay communicating difficult news to employees out of a desire to protect them or maintain morale. In practice, employees are better served by honest, timely communication. If a liquidation is likely, your employees deserve the opportunity to make their own plans.
Do not make promises you cannot keep
Assuring employees that their jobs are secure when you know the company is insolvent — or that they will be paid in full when you know assets are insufficient — can expose you to misrepresentation claims and compounds the personal risk you face as a director.
Can the Business Be Saved — and Jobs With It?
Not every company in financial difficulty needs to be liquidated. Voluntary administration in particular is designed to give viable businesses a chance to restructure — potentially preserving employment and ongoing operations. The administrator works with creditors to develop a plan that may allow the business to continue in some form.
If there is a genuine future for the business, voluntary administration should be explored before liquidation. The sooner it is considered, the more viable it is as an option. Fixity can help you assess whether this path is right for your situation.
Frequently Asked Questions
Do employees need to do anything to make a claim?
Yes. Employees must file a formal proof of debt with the liquidator to make a claim. The liquidator will contact known employees and provide the necessary forms. Employees should also keep records of hours worked, wages unpaid, and any leave entitlements accrued.
Can employees access Work and Income if the company is liquidated?
Yes. Employees who lose their jobs as a result of liquidation may be eligible for financial assistance from Work and Income New Zealand. The liquidator and Community Law Centres can direct employees to the relevant resources.
What if an employee believes they were dismissed unfairly before the liquidation?
Employment relationship problems that arose before the liquidation — including unjustified dismissal — can still be raised with the Employment Relations Authority. However, any resulting award becomes an unsecured creditor claim against the company in liquidation. Note that once a company is in liquidation, no new legal proceedings can be commenced against it without permission from the High Court or the liquidator. Employees in this situation should seek independent employment law advice promptly.
As a director, am I personally responsible for unpaid wages?
Generally, you are not personally responsible for unpaid wages simply because you are a director — that is the protection of limited liability. However, if you have breached your director duties (such as by trading recklessly while insolvent), or if you have failed to remit PAYE to IRD, personal liability can arise. Getting advice early is the best way to protect your position.
What happens to migrant workers on employer-tied visas?
Migrant workers whose work visa is tied to their employer should contact Immigration New Zealand as soon as possible if their employer goes into liquidation. Immigration NZ can advise on how this affects their visa conditions and what options are available, including applying for a job change.
Get Advice Early — Free Confidential Consultation
If your company is in financial difficulty and you are worried about what happens to your employees, the most important thing you can do is get advice early — before the situation is forced.
Fixity offers a free, confidential initial consultation. We will assess your position, explain your options, and give you a clear picture of what a liquidation — or an alternative — means for your team.
Call 0800 FIXITY (0800 349 489) or email info@fixity.co.nz
We work with businesses across New Zealand, including Auckland, Wellington, Christchurch and nationwide. Early advice gives you — and your team — the best chance of a good outcome.
Larissa Logan | Director, Fixity | Licensed Insolvency Practitioner | FCA
