Section of the month - 142Y (wage arrears and holiday pay)

Inland Revenue has been getting tough on unpaid tax, after years of relative leniency.  This includes small companies that have been running at a loss and have GST and PAYE arrears.

A recent RNZ article says that for every $1 spent on enforcement, around $12 is recovered.

Inland Revenue says tax crackdown paying off | RNZ News

In a voluntary liquidation the shareholder(s) usually appoint a private liquidator after paying an upfront fee.  However, there has been a recent increase in the number of applications the IRD has made to have distressed companies placed into liquidation, with the Insolvency and Trustee Service handling the process.

Where the IRD applies to have a company placed in liquidation, the directors and shareholders cannot say they weren’t warned, but they would likely lose the ability to pay their staff (if any) the wages they are owed plus the full value of the unused holiday pay that has accrued.

Along with suddenly not having a job, wage arrears and holiday pay would probably be one of the scariest things about liquidation, especially if it is a service company with few assets that could be sold by the liquidator to pay those wages (which take priority, along with PAYE deductions, over money owed to other creditors of the company).

In such circumstances, limited liability often does not protect a person involved in breaches of the Wage Protection Act and Holidays Act and any employee who is owed wages and holiday pay that cannot be recovered through the liquidation process can sometimes be recovered from whoever the Employment Relations Authority deems to have been involved in those breaches – usually the director.

The relevant section of the Employment Relations Act 2000 is 142Y, and it is a 2016 amendment to the Act.

Private, or public?

Up-front fees for a private liquidator are currently around the $6,000 plus GST mark.  The challenge for directors and shareholders seeking limited liability protection is being able to set aside both the liquidator’s fee and the staff wages and holiday pay that will be owed at the date of liquidation.

It would be an awful experience, but voluntary (shareholder resolution) liquidation would not be as disempowering as waiting for a creditor, such as the IRD, to apply for liquidation at a time that suits them, putting the owners at the mercy of Big Government (Insolvency and Trustee Service, part of MBIE), at which point your business has already hit rock bottom.

For business owners who are in a position to apply for voluntary liquidation, liquidators are regulated under the Insolvency Practitioners Regulation Act 2019 and membership of RITANZ (Restructuring, Insolvency, Turnaround) has been compulsory since 2020.

Loopholes and reputational threats

But even compulsory regulation is no guarantee of freedom from predatory practices.  A Porirua chartered accountant who served three months home detention for tax fraud in 2013 has been refused membership of NZICA and RITANZ since, even applying to the High Court and Court of Appeal for judicial review of RITANZ which had unsurprisingly rejected him for membership on character grounds.   

Regardless of his lack of success in the courts, the unlicensed practitioner has managed to find loopholes that allowed him to continue his predatory practices (usually fee-gouging including bullying directors out of their Kiwisaver funds) using licensed proxies.   There are two matters that are currently before the courts and tribunals that we are aware of but can’t comment on yet.

This is why it is important to ask around and choose a reputable insolvency practitioner to wind up a distressed company and not just do a late-night Google search of “liquidation nz”.

This article has been checked by a Licensed Insolvency Practitioner.

Tristam Price, Editor