Directors stitch themselves up by making personal guarantees in employment mediation

With company liquidations at a 15-year high, what happens when there is an existing personal grievance claim against a company that is put into liquidation?

It makes economic sense that any personal grievance against that company dies with it.  However, legally there is a strong distinction between wage arrears and holiday pay, and personal grievance remedies and since 2016 it has been possible for employees to pursue the director(s) for wage arrears and holiday pay if these cannot be recovered through the liquidation process, under Section 142W/Y.  With many liquidations now initiated by the IRD without notice, this underscores the importance of avoiding getting caught out with wage arrears that are unable to be paid from the company before liquidation.

If a mediation is scheduled to resolve the grievance at the time of liquidation, there is simply no incentive for the liquidator to turn up to the mediation and try to settle.  If the matter progresses to an investigation meeting before a Member of the Employment Relations Authority (ERA), even if the liquidator has consented to the grievance continuing, their participation in the proceeding is likely to be perfunctory at best.   It’s simply not good use of their time to argue with an employment lawyer or advocate when they don’t have to.

That’s because liquidators know that even if the ERA eventually finds that the employee’s grievance has merit and orders remedies against the in-liquidation company, then the employee is just another creditor and is unlikely to get more than a fraction of the amount awarded.  The amount recoverable through the liquidation process would likely be a lot less than it would cost in legal fees, and it is the duty of the employee’s lawyer or advocate to advise them of this.

Also, unless the liquidator wants to call the director as a witness, the director would not normally have standing to participate in the proceeding and may even be unaware that a grievance was continuing, especially they no longer have access to their company email and they have changed their address (there is a statistical link between business failure and relationship breakups).

But there is a quiet mechanism for piercing the corporate veil which is litigation-proof.  In the last few months, two employees have gone to the ERA seeking orders for the director of in-liquidation companies to comply with the terms of a Record of Settlement.  Naively, the directors agreed to personally guarantee that they would pay the agreed amount in the event that the company couldn’t. 

Their companies failed soon after.  Links to the subsequent ERA compliance determinations are here and here.

We have no idea why the directors would agree to this, unless they didn’t actually know what a personal guarantee was at the time.  We also don’t know if they have made other personal guarantees and/or whether they are facing bankruptcy for unrelated reasons (which may put further enforcement out of reach).  But we believe there is no good reason for a director to personally guarantee employment grievance remedies.

While the two examples above could possibly be explained by naivety, a recent case that’s currently before the Employment Court is somewhat darker.

It is a challenge (appeal) to [2024] NZERA 448 Corrigan v Prime Focus Security Limited (in liquidation) & Menzies, where an employment grievance did not die with the company, and an activist legal team managed, at least on paper, to “pierce the corporate veil” and set a precedent in the process.

Some fast facts:

• Prime Focus Security Ltd (PFS) was put into liquidation in September 2022.  Its owner, Mr Menzies, had contacted Mr Kamal and agreed to have him conduct the liquidation through his heavily-marketed company, unaware that Mr Kamal was a convicted fraudster.

• Three months earlier, two things had happened.  A (reputable) chartered Accountant for PFS filed a $61,000 loss and tax arrears and negative equity that was unlikely to be survivable - hence the need to liquidate; and a former employee Mr Corrigan had raised a grievance.

• Mr Kamal, having been denied membership of RITANZ (a prerequisite for an Insolvency Practitioner’s licence) on character grounds, allocated the liquidation to a licensed proxy, although Mr Menzies did not understand the significance of this at the time.

• The licensed proxy’s first liquidator’s report, a week after appointment, contained the statement “In the statement of affairs, the Director stated that director too (sic) excessive drawings from the business.”, which Mr Menzies subsequently denied.

• Mr Corrigan’s legal team considered this statement alone to be some kind of a “smoking gun” that justified pursuing Mr Menzies personally for grievance remedies - approximately $37,500 including costs.

• The second liquidator’s report in April 2023 did not quantify or even mention excessive drawings.   It only mentioned that the shareholder account was overdrawn, which is actually a feature of the majority of liquidations.  Similarly, a negative equity figure on the balance sheet indicates that the company is technically insolvent, again, a feature of most liquidations.

• Despite this, Mr Corrigan’s legal team pursued Mr Menzies (who was unemployed for several months but eventually managed to eke out a modest living as a subcontracting security guard).

• The succeeded on paper, with the ERA finding, in reliance of evidence submitted under duress by Mr Kamal’s licensed proxy (who was later struck off for reasons unrelated to PFS), that Mr Menzies was personally liable.

• A subsequent challenge to the Employment Court failed, but Mr Menzies has applied for a second challenge based on a forensic analysis of Mr Kamal’s financial figures.

• Three of the five counsel who were involved in the employment matter have since left the firm.

• It would be inappropriate at this stage to comment on what Mr Kamal’s civil and/or criminal exposure might be, if it is found that he submitted tainted evidence to the ERA through his then licensed proxy.

  
  

Regardless of the quality of the evidence before the ERA, the legal precedent that was set seems hostile to small business, particularly hospitality and retail (which may have a large number of employees relative to turnover), but a successful appeal would sweep that precedent away.  One to watch…