New Zealand’s unemployment rate rose to 5.2 percent in the June 2025 quarter, according to figures released this week. As the economy takes longer to recover from the recession, costs increase and profit margins tighten, more businesses are facing solvency issues - and it is likely the unemployment figures will be higher in the next quarter.  Statistics for 2024 revealed the highest number of formal insolvency appointments for the past 10 years.  As of 30 June 2025, that annual figure is on track for another increase.

This column was also published in today’s BusinessDesk. Click here to read it.

Those statistics are perhaps not a surprise to those who spend time in the Court’s company liquidation list or reviewing public notices issued in the New Zealand Gazette. However, it is often a surprise for the employees of the business involved when the doors suddenly shut.

A distressed business is frustrating and stressful for both employers and employees. When things are going well, no one wants to think about what happens if it all goes wrong. But it’s important to understand the rights and obligations of the company and employees if the company becomes insolvent. Whether a business is placed into liquidation, receivership, or voluntary administration there are some fundamental ground rules when it comes to employment and insolvency.

When do you need to tell your employees that the end is in sight?

While there is no specific obligation to tell your employees that the business is facing financial difficulties, the Employment Relations Act 2000 (ERA) imposes obligations of good faith and consultation on employers when proposing changes that will affect employees’ jobs.

Where the business is considering a restructure or entering into an insolvency process, it may be appropriate to give some warning. However, as with all things, there’s a balance. Employers are allowed to withhold information to avoid unreasonable prejudice to their commercial position, particularly if the disclosure will harm the business or undermine the insolvency process. There are, of course, also situations where the end comes very suddenly or where consultation may offer no more than highlighting the need for the employee to look for new opportunities.

A question of balance

Finding the right balance between good faith disclosure and commercial prejudice is a fact-specific exercise, and more an art than a one size fits all approach. The ERA gave helpful guidance in the recent decision of Abernethy v Kono NZ LP which was about navigating the tension between consultation obligations and commercial confidentiality during a business sale, but it could apply equally in an insolvency situation. 

In Kono the employer did not consult about the sale of its business until the sale became unconditional, and argued that consultation would have involved releasing highly confidential and commercially sensitive information. Kono was of the view that such disclosure could cause commercial harm by triggering a number of issues including causing key employees to leave, and potentially jeopardising the sale itself. The ERA agreed and held that Kono’s decision to delay consultation until after the sale went unconditional was justified.

The decision confirms that - while the duty to consult is a fundamental employment obligation - it is not absolute. Where an employer can demonstrate that disclosure would cause genuine commercial harm, and that alternative methods of consultation are either unworkable or too risky, consultation may lawfully be deferred.

The impact on employees will often depend on whether the company continues to trade

Depending on the nature of the business, the liquidator, receiver or administrator may decide to continue trading the business and/or look to sell it to a new owner. We’ve assisted on a number of cases where a potentially profitable business is plagued by bad management. If that’s the case, then they may decide to keep on all or some of the employees to maintain the business during the sales process.

Depending on the circumstances, that may also mean employees have to sign up to new employment agreements on terms specific to the liquidation or receivership. If the employee continues to be employed through the insolvency process, they can expect to be paid for their work during that period, but their rights may otherwise be limited – for example in relation to notice periods or benefits.

What about entitlements: wages, holiday pay and other benefits?

Sometimes businesses under stress have overdue wages or accrued holiday pay obligations to pay their employees that they cannot meet.

The Holidays Act requires employers to pay all annual leave entitlements. In practice, when funds are limited, there may not be enough cash to pay employees what is owing. Parliament has recognised the vulnerability of employees in an insolvency context, providing them with a statutory preference under the Companies Act 1993 for unpaid wages, salary, holiday pay and redundancy compensation. This means that employees get paid ahead of other unsecured creditors and, in some cases even ahead of secured creditors, up to a maximum of $31,820. Whether there are funds available to meet that preference is another story. However, if the liquidator, receiver or administrator sells the business, employee entitlements are usually paid out from the sale proceeds or transferred to the new owner.

Employment agreements that contain non-monetary or bespoke benefits can also give rise to complicated recovery issues. We’ve seen employment agreements which included annual flights home, repatriation entitlements at the end of the contract, gym memberships and other subscriptions. Whether those entitlements are payable in an insolvency scenario or form part of a preferential entitlement is not clear cut and will very much depend on the terms of the employment agreement.

Final comments

For now, the financial pressures on New Zealand business are not going away. Whether you are an employer or an employee, understanding your rights and obligations is important.

As an employer, early consideration of the financial position of the business and the obligations of good faith and consultation are paramount. For employees, engaging constructively with the appointed liquidator, receiver or voluntary administrator may well result in a better outcome.

Get in touch

If you would like to discuss any of the points raised above, please get in touch with one of our experts.