Author
Domenic CalabrettaChief Executive Officer & ASIC Registered Liquidator
During liquidation, one of the key issues for both the liquidator and concerned parties is what will happen to the 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 that the liquidator can assist you with the distribution of proceeds.
Liquidation for solvent and insolvent companies
There are three types of liquidation in Australia:
- Court-ordered liquidation – initiated by a court when a company is insolvent.
- Creditors’ voluntary liquidation – initiated by directors and creditors when a company is insolvent.
- Members’ voluntary liquidation – initiated by shareholders when a solvent company chooses to close.
In members’ voluntary liquidation, debts are typically repaid in full before closure. However, in insolvent liquidations, there may not be enough funds to pay all debts. This makes the priority of creditors in liquidation a key issue, as it determines who gets paid first.
The payment order is as follows:
- The costs of liquidation – covering the liquidator's fees and expenses.
- Secured creditors – those with registered security interests over company assets.
- Priority unsecured creditors – typically employees owed wages, leave entitlements, and superannuation.
- Unsecured creditors – suppliers, lenders, and the ATO, among others.
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.
Secured creditors take priority over unsecured creditors in liquidation because they have collateral backing their debt. 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 below 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 dividends if there are funds left over after the secured and priority creditors are paid. However, if there are insufficient funds left over, unsecured creditors will be paid on a pro rata basis, with any subsequent categories receiving nothing.
Get in touch
Speak to one of our experts now for a free consultation. Enter your details below or call 1300 750 599.