Who gets paid first in liquidation?

During liquidation one of the key issues for both the liquidator and concerned parties is what will happen to proceeds, and the order of priority of debt. If you are a creditor to a company going into liquidation, you will be keeping track of the process to ensure you are paid what you are owed. If you are a director or hold a senior management position with a company in liquidation, you will already be aware the liquidator can assist you with the distribution of proceeds.

Liquidation for solvent and insolvent companies

There are three types of liquidation: court order, creditors’ voluntary, or members’ voluntary. Members’ voluntary liquidation is typically the type of liquidation solvent companies choose, while the other two usually apply to insolvent companies. When a solvent company decides to wind up (members’ voluntary), it’s usually able to finalise and make good all its debt obligations.

This is not the case when the company is insolvent. When this occurs, trading partners, suppliers, lenders, and other creditors will be very much be concerned with the priority of debt repayment, and if they’re getting paid at all. The priority of payments to creditors depends on whether they are a secured or unsecured creditor, with the former holding priority. The priority of payment in liquidation are as follows:

The costs of liquidation
Secured creditors
Priority unsecured creditors (employees)
Unsecured creditors

Secured creditors

Secured creditors, as defined by Section 12 of the Personal Property Securities Act 2009, are those who have a security interest (for example, a mortgage or charge) over some or all of the company’s assets.

The rights of secured creditors differ from those of unsecured creditors when it comes to debt defaults. For example, if a company fails to make repayments, secured creditors have the right to appoint an independent receiver to sell some or all of the charged assets to allow the repayment of the debt.

Unsecured creditors

As unsecured creditors have no collateral or security over the company’s assets, they rank after secured creditors in the event of liquidation. Unsecured creditors could be trading partners that supplied goods or services to the business. They can also include the ATO when there is tax debt outstanding.

Unsecured creditors may be able to recover debt outstanding and get paid in the form of a dividends if there are funds left over after the secured and priority creditors are paid. If there are insufficient funds left over, unsecured creditors will be paid on a pro rata basis, with any subsequent categories receiving nothing.

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If your business is experiencing financial difficulties and is required to move into liquidation, Australian Debt Solvers can help. Contact us today for expert advice tailored to your business situation.

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What about employees?

Employees are considered priority unsecured creditors, and so in a liquidation monies owed to them take precedence over that of other unsecured creditors. According to Section 556 of the Corporations Act 2001, money owed to employees is to be paid in the form of dividends in the following order:

Wages and superannuation contributions.
Personal injury compensation, where applicable.
Leave entitlements, including annual leave, personal leave or sick leave, and long service leave.
Redundancy payments.

However there is an exception for excluded employees, who are subject to caps on their dividends. This category refers to any employee who, in the last 12 months leading up to the liquidation, served or continues to serve as a director, or is the spouse of a director, or relative of a director.

For these employees, caps of $2,000 for wage and superannuation entitlements and $1,500 for leave entitlements apply, and the balance or remaining amounts owed are paid out at the same priority level as ordinary unsecured creditors.

The relevant issue is the period for which they are a director, the spouse of a director, or the relative of a director, as excluded employees are not entitled to priority retrenchment pay for any period(s) during which they fit these descriptions.

Government assistance for employees

Note that employees who lose their job due to company liquidation might be eligible for government assistance through the Fair Entitlements Guarantee (FEG). The FEG provides payments for leave entitlements and wages, as well as payments in lieu of notice and redundancy entitlements, although it does not offer assistance for unpaid Superannuation Guarantee Contributions.

Eligible employees can claim for the following:

Unpaid wages for up to 13 weeks
Unpaid annual leave and long service leave
Payment in lieu of notice for up to five weeks
Redundancy pay for up to four weeks per full year of service.

What if the liquidator continues to trade?

Sometimes the liquidator might decide to continue trading for a short period of time to assist with the winding-up process, so employees might continue working for the company during this time. In this case, any entitlements that accrue will be considered a cost of winding up, and therefore be paid out before other employee payments.

Dealing with creditors during liquidation

Whether you are director of a company in liquidation or one about to start the process, your liquidator will provide you with useful advice on dealing with creditors, while managing any queries or problems you encounter. Creditors do have certain rights during liquidation, including the right to submit a proof of debt, question the liquidator about the process, and request a creditors’ meeting.