Employees Preference in Liquidations Confirmed
As a result of a November 7 decision of the Supreme Court concerning Jennings Roadfreight Limited, the right of Inland Revenue to claim funds in a company bank account at liquidation in preference to all other creditors has been denied. This effectively puts employees’ claims back at the top of the pecking order in respect of such funds, subject to the fees and costs of the liquidator. But there are other important outcomes of the decision.
The Seventh Schedule of the Companies Act is the section which lays out the order in which preferential claims which must be paid by a liquidator. It defines certain priority payments, principally the costs of the liquidation, and costs of the person who applied to liquidate the company. After these priority costs have been met, a series of 9 categories must be paid out in order. The wages and salaries of employees in respect of services provided during the preceding 4 months is the first category to be paid, followed by holiday pay, redundancy compensation and deductions from payroll. Amounts owing to IRD under section 167 of the Tax Administration Act are placed at category 8
Jennings Roadfreight was placed into liquidation on 24 March 2011, owing IRD approximately $50,000 for PAYE not paid. The company’s bank account had an in funds balance of $14,076. IRD caused the bank to remit to it the credit balance in the bank account, claiming an entitlement under section 167(1) of the Tax Administration Act, which creates a statutory trust in respect of funds in a company’s bank account, to the extent there is unpaid PAYE.
The liquidators took the matter to the Courts, and although they were successful in setting aside the IRD’s claim in the High Court, IRD had the decision reversed in the Court of Appeal. The decision by the Supreme Court re-instates the decision of the High Court, and the primacy of the Companies Act in this matter.
The decision is an important one for more reasons than one. Establishing that the Companies Act takes precedence over the Tax Administration Act is a relief to anyone who has had cause to deal with a liquidation, either as a creditor or liquidator. What is a relatively straight forward set of rules for dealing with the funds in a company liquidation has now been reinforced.
But a side effect of the decision is that liquidators can continue to accept appointment to liquidations knowing that, if there are funds in the company bank account, these can be used for the purposes of the liquidation. While the funding needs of the tax man are appreciated, denuding a company in liquidation of all cash funds would make it less likely that a professional liquidator will accept appointment. While the Official Assignee is the default liquidator in such circumstances, it is accepted that his office can do little, in a liquidation where there are no funds to enable his officers to investigate and if necessary litigate to achieve a fair outcome for all.
Whether payments made to IRD prior to the liquidation of a company might be attacked by a liquidator under the Voidable Preference regime is a topic for the future…