How Do Your Creditors Get Paid in Company Liquidation?

Once a company goes into Liquidation, one of the key issues for its directors and creditors alike is how will the creditors be paid. This comes down to what money will be available to pay creditors and the order they will be paid in. During the Liquidation process, those who are owed money (a company’s creditors) have certain rights, including getting paid for what they are owed. The appointed Liquidator’s role is to take control of the company, sell the company’s assets and distribute the proceeds to its creditors. But who gets paid first and why do some creditors have a higher priority compared to others?

If your company is looking at Liquidation, you’ll want to know who your creditors are, what funds may be available to pay them and which ones you are personally liable for. You will be required to provide the Liquidator with the necessary documents listing your company’s assets and liabilities. Your creditors are classified into different types. The type of creditor determines the order in which they will be paid under the Corporations Act.

What is the Purpose of Liquidation?

The purpose of Liquidation is to have an appointed Liquidator take control of your company so its affairs can be wound up fairly to benefit all parties involved. There are three types of Liquidation:

1. Creditors Voluntary Liquidation
2. Members Voluntary Liquidation
3. Court Liquidation

No matter the type of Liquidation, the role of the appointed Liquidator will always be to divide the proceeds of your company’s assets and any legal recovery claims among your creditors in accordance with the law.

Types of Creditors

As defined by the Australian Securities and Investments Commission (ASIC), a creditor is a person who is owed money by a company. They are usually owed money because they have provided goods or services, made loans to the company or are owed a statutory debt, such as tax. Employees with outstanding entitlements and superannuation are also classified as creditors. There are three different types of creditors:

1. Secured Creditors
2. Priority Unsecured Creditors (employees)
3. Unsecured Creditors

Priority of Payments in Company Liquidation

The priority for payment of proceeds in Liquidation is generally as follows:

1. Costs and expenses of the Liquidation, including the Liquidator’s fees,
2. Secured creditors,
3. Employee claims, and
4. Unsecured creditors.

Before any proceeds are paid to a creditor for their debt or claim, they will need to give the appointed Liquidator sufficient information to prove their debt. Payments to creditors in a Liquidation are known as dividends. Each category of creditor is paid in full before the next category is paid. If there are insufficient funds to pay a category in full, the available funds are paid on a pro rata basis and the next category or categories will not be paid. Unfortunately, there is no guarantee your creditors will be paid at all. This is the case when there is no money left in your company to satisfy creditor claims.

Secured Creditors

Secured creditors are defined as someone who has a security interest (such as a mortgage or charge) over some or all of your company’s assets and property. For example, a bank which has provided a loan to your company would generally be classified as a secured creditor. A secured creditor is entitled to:

• Appoint a Receiver or agent to secure and sell their assets,
• Vote at creditors’ meetings for the amount your company owes them less the amount they are likely to receive from the realisation of the secured assets i.e. their expected shortfall which will be unsecured, and
• Participate in any dividend to unsecured creditors on a similar basis.

Assets Subject to Security Interests

To be valid, a security interest is required to be registered on the Personal Property Securities Register (PPSR). Security interests generally fall into two categories:

1. Purchase money security interest (PMSI), or
2. All present and after acquired property (ALLPAAP).

A financer will hold a PMSI when they finance a specific asset such as a car, item of equipment or goods supplied on retention of title terms. They are paid first from the sale of that asset and then prove for any shortfall as an unsecured creditor.

An ALLPAAP will be held by a creditor that advances general finance to a company, including a bank loan or overdraft. An ALLPAAP security interest includes circulating and non-circulating security interests. When working out how the proceeds from the sale of assets subject to an ALLPAAP will be distributed, things can get a little complicated.

Proceeds from the sale of assets subject to a circulating security interest (previously known as a floating charge) are first payable to priority employee claims, with any surplus then being paid to the secured creditors. A circulating security interest covers assets with a fluctuating balance. These commonly include cash at the bank, book debts and inventory. Proceeds from a non-circulating security interest (formerly known as a fixed charge) cover fixed assets such as vehicles, equipment and goodwill, where proceeds from the sale of these assets are directly payable to the secured creditor.

Priority Unsecured Creditors

Your company’s employees are considered priority unsecured creditors. In Liquidation, money which is owed to them takes priority over other unsecured creditors. Under the Corporations Act, money owed to employees are paid in the following order:

1. Wages and superannuation contributions,
2. Personal injury compensation,
3.  Leave entitlements, including annual leave and long service leave, and
4. Pay in lieu of notice and redundancy entitlements.

Unpaid superannuation becomes payable to the Australian Taxation Office (ATO) as superannuation guarantee charge (SGC). Employees who lose their job due to a company’s liquidation could also be eligible for government assistance through the Fair Entitlements Guarantee (FEG) scheme. Under FEG, employees can claim for:

• Unpaid wages (up to 13 weeks),
• Unpaid annual leave and long service leave,
• Payment in lieu of notice (up to 5 weeks), and
• Redundancy pay (up to 4 weeks per full year of service).

FEG will stand in the shoes of employees they pay, to receive dividends in respect of any funds advanced to former employees. Directors should be aware of new laws contained in the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018. The changes, passed in April 2019, strengthen FEG’s powers to recover amounts it advances from directors and other entities and prosecute company directors who abuse the scheme to avoid paying employees.

Unsecured Creditors

An unsecured creditor ranks lower than secured and priority creditors. This means they are often paid last. Unsecured creditors may include suppliers, subcontractors, landlords and the ATO. Shortfalls to secured creditors will also be included here. Consequently, after payment of the costs and priority creditors’ claims, unsecured creditors will often only receive a return on their debts of a few cents in the dollar. Creditors who hold personal guarantees from a company’s directors can also seek payment from the director.

Liquidation can be a stressful and confusing time if you are a company director. Whether your company is in Liquidation or is about to start the process, it’s important for you to contact a business debt specialist at Revive Financial as soon as possible. Getting in early means you can minimise the amounts owed to creditors and maximise the chance of them being paid.

Revive Financial Can Help

We can help guide you through the process and answer any questions you may have about Liquidation, creditors and the priority for payment, Call us today on 1800 861 247 today for a free consultation.

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For more information on Company Liquidation, check out our Company Liquidation page here.