It’s a sad day when any company fails.

And if you were employed by the company and are left unpaid for work you performed, it feels even worse.

Often, when we say a company has failed, we mean it has been put into liquidation. That can happen when the company is no longer able to pay its debts. In other words, it owes more money than it has available.

But sometimes there is some money left over (even if not enough to pay everyone).

As an employee, what rights do you have to get your hands on that remaining cash so you can receive your dues?

NOT ALL CREDITORS ARE EQUAL


The process starts with the appointment of a liquidator.

A liquidator’s job is typically to round up all the company’s assets and sell off anything of value so that the company can generate funds to pay off as many creditors as possible.

There is an order of preference that is laid down in the Companies Act, which dictates who gets paid first in the long line of people who are owed money (we call them “creditors”).

That means not all creditors are treated equally. Some will be at the head of the queue, while others will be bumped to the back and left fighting over the scraps.

GOOD NEWS, BAD NEWS

There is good news and bad news for you as an employee when it comes to this order of preference.

The good news is that employees are put towards the front of the line. So if the company owes you some money for work you have done for your employer at the time your company goes into liquidation, you will be one of the first to get dibs on any money that the liquidator can find in the company’s coffers.

The bad news is that the preference you are entitled to doesn’t apply to everything you might be owed. And it is capped.

THE MOST YOU CAN EXPECT TO RECEIVE AS PREFERENTIAL PAY

Your employee entitlements that will be given high priority in the order of preference are:

• wages or salary that you earned in the four months before the liquidation;
• your payroll donations that have been deducted from your pay but have not yet been transferred by your employer;
• outstanding holiday pay;
• redundancy compensation payable as a result of losing your job when the company went bust;
• child support or student loan payments deducted from your pay;
• reimbursements or awards made in your favour by the Employment Relations Authority or the Employment Court as far as they relate to money you might have earned during the four months before the liquidation; and
• KiwiSaver payments on the above sums.

Note that the above does not include:

• wages or salary that you might have earned earlier than the four months before the liquidation, or for any work you did after the company went into liquidation;
• bonus or incentive payments; or
• awards of compensation made in your favour by the Employment Relations Authority or the Employment Court.

Further, the total sum you can receive on this special preferential basis is currently $22,160

WHAT IF I’M OWED OTHER MONEY?

If the amount your liquidated employer owes you is more than the $22,160 cap, then for any amount above that cap you do not get any preference, but you stand in line along with any other creditors who might not have preferential treatment.

Often, what happens in this case is that the liquidator can only get so much cash to be made available and will end up paying a percentage of the remaining debt.

If the company owes $100,000 to the remaining creditors, including you, but the liquidator only finds $20,000 further cash from the assets of the company, then they will only pay out 20% of what each remaining creditor was owed.

CONCLUSION

It may seem unfair when your employer goes bust and owes you money.

You’ve worked hard to earn those wages, and you may be counting on receiving them to meet your own obligations, such as mortgage or rental payments, and to put food on the table.

That is why the law requires employee entitlements be paid ahead of most other creditors – even if it doesn’t cover all your dues and is only paid out to a capped amount.

It is not ideal, but it’s never ideal when a company goes bust leaving creditors in its wake.

Have you had experience with company liquidations and the scheme of preferential creditors? How did it play out for you?