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Director’s liability and employee’s rights when employer becomes insolvent
1 May 2016

In the beginning of April 2016, one of Hong Kong’s oldest television broadcasting companies, Asia Television Limited (“ATV”) was wound up and stopped broadcasting. It had also failed to pay wages to hundreds of its employees since December 2014. This is a common phenomenon in the current difficult economy. In this eNews, we discuss issues relating to employer and employer’s officer’s liabilities for unpaid wages as well as employee’s right to overdue wages in the event an employer becomes insolvent.

Liability of director and officer for unpaid wages

Wages will become due on the expiry of the last day of the wage period. Under the Employment Ordinance (Cap 57), an employer should pay wages to an employee as soon as practicable but in any case no later than 7 days after the end of the wage period. An employer who wilfully and without reasonable excuse fails to pay wages or delays in paying wages commits an offence. The employer’s director or officer may be prosecuted and upon conviction, subject to a maximum penalty of up to HK$350,000 and imprisonment for up to 3 years.

The fact that an employer is a company does not protect its directors or officers if they are responsible for deciding whether or not employees get paid on time and how much is paid. Under the Employment Ordinance, “employer” means not only the company that has entered into a contract of employment but also the duly authorized agent or manager of the company. Section 64B further states that where a wage offence committed by a limited company is proved to have been committed with the consent or connivance of or to be attributable to any neglect on the part of any director, manager, secretary or other similar officer of the company, they will also be guilty of the like offence and subject to the same penalty. Therefore, the criminal liability mentioned above will also attach to directors and the relevant company’s responsible persons. In the ATV case, one of its officers was convicted and fined HK$150,000.

Employee’s rights

In order to recover arrears of wages or other debts owed by an insolvent employer, an employee can file a bankruptcy or winding up petition against the insolvent employer. This process usually takes a long time and is costly, and the proceeds of sale of the company’s assets can be distributed, only after deducting the liquidators¡¦ fees and expenses, debts owed to the employer’s secured creditors before payment to employees who are only preferential creditors.

Employee’s other options

(1) Protection of Wages Insolvency Fund (“the Fund”)

Usually in Hong Kong, unpaid employee will instead apply for ex gratia payment from the Fund, which is administered by the Protection of Wages on Insolvency Ordinance (Cap 380), in respect of wages in arrears, pay for untaken annual leave, pay for untaken statutory holidays, wages in lieu of notice and/or severance payment. The Fund provides timely relief in the form of ex gratia payment to employee of insolvent employer and enables employee to receive payment without having to wait until the completion of the insolvency procedures. However, not all unpaid wages or payments are fully recoverable under the Fund. The Fund provides for payment, up to certain limits, in respect of arrears of wages (HK$36,000), wages in lieu of notice (HK$22,500) and severance payment (HK$50,000 plus 50% of the amount in excess of HK$50,000) .

If a person whose employer is an individual, and who is a member of the family of that employer, and who dwells in the same dwelling as that employer is not eligible to apply. Also, the Commissioner for Labour will not approve any application for these payments for :-

(a) wages for service rendered more than 4 months before the last day of service;

(b) wages for which the relevant application is made more than 6 months after the last day of service;

(c) wages in lieu of notice or severance payment for which the relevant application is made more than 6 months after the date of termination of the employment contract.

Applications under the Fund can only be made when a winding-up / bankruptcy petition has been presented against the employer who is a company / an individual.

(2) Termination under Section 10A of the Employment Ordinance

In the absence of a winding-up / bankruptcy petition, an employee may instead consider terminating his employment under Section 10A of the Employment Ordinance when the employer fails to pay the employee’s wages. Section 10A states that if wages are not paid within one month after they become due, an employee may terminate his contract of employment without notice or paying wages in lieu of notice. Under such circumstances, the employer is still required to pay wages in lieu of notice in addition to other statutory and contractual benefits to the employee.

In the case of Wan Shu Pui and Others v Au Yuk Lun and Another (HCA 252/2000), the employee terminated her contract of employment under section 10A and successfully claimed against the employer for outstanding statutory and contractual benefits including one month’s salary in the sum of HK$32,000. On appeal, the employer filed a defence alleging that there was an agreement for a reduction of salary by 50%. The judge dismissed the appeal and held that the employer’s defence was not believable as it is massively improbable that if such an agreement ever came into being, it would not be in writing.

Conclusion

If you have any queries regarding the above eNews or any other questions relating to employment or corporate or commercial matters, experienced lawyers in our Corporate and Commercial and Employment departments would be happy to assist you.

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