ERA examines if insolvency law prevents proceeding with workers' claims
The Employment Relations Authority (ERA) recently examined whether it can proceed with claims against a company director for unpaid wages and employment breaches after he declared bankruptcy.
A Labour Inspector sought penalties and compliance orders against the director who had signed a settlement acknowledging he owed three workers over $16,000 in unpaid entitlements.
However, before any payments were made or penalties imposed, the director became bankrupt.
Original claims and settlement agreement
A construction company failed to pay three employees their minimum wage, public holiday pay, annual holiday pay and other entitlements before entering liquidation in September 2023.
The Labour Inspector initiated proceedings in June 2024 against both the company and its sole director, seeking payment of outstanding entitlements and penalties for statutory breaches.
The parties attended mediation in October 2024 and signed a record of settlement along with agreed facts.
The settlement acknowledged that the director was personally involved in recruiting employees, setting work schedules, and handling payroll as the company's sole operator, and that he was a person involved in the breaches.
The agreed facts established that three employees were collectively owed $17,016.53 in arrears, with $16,016.53 remaining after partial payments.
A payment schedule was approved with a final installment date of 15 June 2025. The director also acknowledged that penalties were available for the minimum entitlement breaches and violations of the Employment Relations Act and Holidays Act.
Payment failures and enforcement application
The director initially indicated during case management conferences that he was looking to make payments toward the settlement, but could not pay substantial amounts due to limited income from modestly paid work.
The Labour Inspector expressed willingness to prioritise ensuring workers received money over imposing penalties, though no payments had been received.
After time allowed for resolution, discussions produced no proposal from the director. A June 2025 case management conference addressed the non-payment.
The director accepted he had breached the settlement by failing to make any payments under it.
The parties agreed that matters could proceed by way of an on-the-papers investigation.
The Labour Inspector sought penalties for breaches of the Minimum Wage Act, Holidays Act and Employment Relations Act, an order requiring compliance with the settlement, and penalties for breaching the settlement itself.
However, the director declared bankruptcy on 22 August 2025 before the Authority could determine these applications.
Insolvency Act provisions and jurisdictional question
Section 76 of the Insolvency Act 2006 provides that, upon a bankruptcy adjudication, all proceedings to recover any debt provable in bankruptcy are halted.
The Labour Inspector submitted that his applications for penalties and compliance orders against the director would be halted by this provision.
The ERA examined whether the Authority falls within the scope of section 76, noting the provision's headings refer to "court proceedings" while the Authority is properly characterised as an investigative tribunal rather than a court.
However, the Authority's proceedings are declared to be "judicial proceedings" under the Employment Relations Act.
The ERA found that section 76(1) refers broadly to "all proceedings" without specifying "court."
The Authority concluded that, interpreting the provision purposively, given that a major purpose of insolvency legislation is ensuring equal treatment of all creditors, Authority proceedings should be captured by the section's operation.
Provable debts analysis and determination
The ERA examined whether the claims against the director constituted provable debts under the Insolvency Act.
Provable debts are defined as debts or liabilities owed at the time of bankruptcy adjudication, or owed after adjudication but before discharge by reason of obligations incurred before bankruptcy.
The Authority noted that while it had made no findings that breaches of employment statutes or the settlement had occurred, the elements were present that could enable such findings to be made had the director not become bankrupt.
The ERA observed that there has been a shift toward seeing more contingent liabilities as captured within provable debts.
The Authority concluded that if it found the director liable for statutory breaches, owed money under the settlement, or should pay penalties, those would be liabilities owed after his bankruptcy adjudication relating to obligations incurred before bankruptcy.
The employment relationships, settlement agreement, and all payment installments existed before the 22 August 2025 bankruptcy date.
Proceedings halted pending court authorisation
The ERA determined the claims against the director would be provable either as debts or liabilities owed at bankruptcy adjudication or owed afterward but arising from pre-bankruptcy obligations.
The Authority made no substantive findings on whether breaches occurred, whether the director was personally liable, or what penalties might be appropriate.
Instead, the ERA concluded that, in the absence of High Court permission to continue, the claims against the director are halted under section 76 of the Insolvency Act and cannot proceed.
The Authority did not determine the merits of the Labour Inspector's applications.
The determination addressed only the procedural question of whether the Authority retained jurisdiction to continue investigating the claims after the director's bankruptcy.
Costs were reserved, with the ERA noting that, given the company's liquidation and director's bankruptcy, it may be appropriate for costs to lie where they fall.
