A standard technique to avoid liability for redundancy compensation in an unprofitable group of companies needing to shed staff, is to restructure the business to leave the staff employed by a 'shell' company, then put the shell into receivership. The shell company is insolvent, the redundancy compensation is not paid, but other companies in the group trade on, and engage staff on new employment terms.

The Government has announced legislation changes that will make this technique less attractive. Associate Commerce Minister, Laila Harre, recently announced the first stage of insolvency law changes following the tier one review of NZ insolvency law.

Approved by Cabinet last month, the tier one decisions include changes to the insolvency regime covering cross border insolvency, bankruptcy, voidable transactions and priority debts. One significant change will be the increase in the amount of money to which employees will have a priority claim if their employer becomes insolvent.

At present, employees can claim wages, salary and holiday pay up to $6,000 as a priority over unsecured creditors. But redundancy payments are treated like unsecured debts - in other words, they are given no priority if their employer becomes insolvent.

The new legislation would raise the cap on employee priority from $6,000 (which was set in 1988) to $15,000. It places the first $15,000 owed to workers just behind debts to secured creditors and can be made up of any combination of unpaid wages, salary, holiday pay, or redundancy payments for the four month period prior to liquidation.

According to Ms Harre, at present, 'if an employee is owed $5,000 in unpaid wages and is due $20,000 in redundancy payments, they are a preferred creditor for only $5,000 and stand in line with all other unsecured creditors for the rest of the money owed to them. Under the new regime, that same employee will receive a priority for a total payment of $15,000.'

It is not known when the above proposals will be put into effect. The Government is also to complete the tier 2 and tier 3 stages of the insolvency law review. Those stages will not be completed until 2002.

This article is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this article.

Copyright Phillips Fox, December 2001

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