In these dark days of recession, there is doom and gloom everywhere. Mass redundancies and even receiverships are commonplace. The rules relating to redundancy entitlements and procedures are well known, but what about receiverships? Do employees have any rights once receiver has been appointed, and what are the obligations on receivers?
Receivers are usually appointed by major creditor of the company, to realise the assets or manage the business of company for the benefit of the security holders, often with view to on-sale. Receivership is different to liquidation in that the company will not automatically be wound up and its assets distributed.
In general, the appointment of receiver does not immediately bring the company’s existing contracts (including employment agreements) to an end. However, there are three situations in which receivership will bring employment agreements to an end.
The first is where the receiver terminates existing employees’ agreements and enters into new employment agreements with them, usually on less favourable terms. The new agreements may be for fixed term or provide for reduced notice to reflect the uncertainties inherent in receivership situation.
The second situation is where the continuation of senior management employee’s employment is inconsistent with the role and function of the receiver (ie, where the senior employee’s role is effectively usurped by the role of the receiver).
The third situation is where the appointment of receiver is accompanied by the immediate sale of the company’s business. Generally, the employees have no right to transfer to the purchaser, and are reliant on the purchaser agreeing to take them on.
There are some qualifications to this rule. The Employment Relations Act 2000 (ERA) requires employment agreements to contain an employment protection provision (EPP), dealing with the sale or transfer of the business. The EPP must state what process the employer will follow when negotiating with the new owner about what will happen to the affected employees, including whether they will transfer to the new owner, and if so on what terms.
However, there is no automatic right under New Zealand law for employees to transfer to the new owner, except for cleaning and catering employees (along with other limited categories of employees). These individuals usually have right under the ERA to transfer across regardless of the wishes of the purchaser of the business. The difficulty for these individuals is that the EPP rules in the ERA do not apply when the employer is in receivership. These individuals will then find themselves in the same position as other employees. In the absence of agreement with the purchaser, they have no right to transfer.
Notwithstanding the above, employees still have some of the rights and remedies that apply where there is no receivership situation. The Employment Court has said that reinstatement is possible in the case of an employee who is unjustifiably dismissed from company which then goes into receivership, provided it is still trading, although generally reinstatement will not be awarded where the company has ceased trading.
The receiver can also be personally liable for payment of wages, although this does not arise where notice of termination is given by the receiver, in accordance with the Receivership Act, within 14 days of their appointment.
A receiver should follow the correct legal procedures when making employees redundant, including consultation, but in reality most do not have the time or money necessary. The receiver is usually appointed because the company is in serious financial trouble, and if they carry out full redundancy consultation, the wages paid during this process will further drain the company’s coffers.
When business goes into receivership all its debts are ranked in order of priority. Wages/salary, holiday pay and redundancy owed to employees rank highly, above money owed to the IRD and unsecured creditors. However, monies owed to employees come second to the receiver’s own remuneration and expenses, as well as to certain secured creditors.
Further, there is cap of $16,420 on the amount that is treated as preferential in relation to each individual employee, and debt in excess of that has no preferential status, and is therefore much less likely to be paid, or paid in full. There is no guarantee that employees will receive any payment after their employer has gone into receivership.
Employees do have rights in receivership situations. However, these are often of little value, because the receiver can terminate employment agreements within 14 days with no consultation. In that situation, the employees’ wages, holiday pay and redundancy pay rank highly in order of priority, but again that is little consolation if there is not enough to pay even those ranked above them, such as secured creditors.
Still, all is not lost. In many situations the business is on-sold and revived by the new owner, who will take on some or all of the existing staff.
Greg Cain is partner with law firm Minter Ellison Rudd Watts. Rebecca Wilson is solicitor with the firm.
