When a company enters liquidation in Australia, a major issue for the liquidator and the creditors is the order in which the proceeds will be distributed. Creditors are those that a company owes money to. Usually, a creditor is owed money because they have provided goods or services, or made loans to the company.
What is Liquidation?
When a company is in financial trouble, its shareholders, creditors, or the court can put the company in liquidation to wind up and finalise the company’s affairs. Generally, this involves collecting assets and investigating and organising the distribution of funds. Liquidation can occur in two main ways. Either the court may order it, or through a creditors’ voluntary liquidation.
Liquidation of an insolvent company occurs when an independent and suitably qualified person (the liquidator) takes over the company in order to manage and wind up the repayments to creditors in a fair and just manner.
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What is the Order of Payment?
The order 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 are paid first to ensure there is a professional available to complete the liquidation transition.
- Next, secured creditors receive a payment if they hold security over the company’s assets. This is someone who has a registered security Interest or mortgage over the company
- Priority unsecured creditors (also known as employees) share any remaining surplus;
- Finally, unsecured creditors (such as customers, contractors, and suppliers) receive payment;
- Shareholders come last in the order of priority.
Isn’t That Unfair for Employees?
In some situations, employees not only lose their job but may not be repaid their wages. Fortunately, they may be able to recover some of their losses through the Fair Entitlements Guarantee (FEG). The FEG is a scheme allowing employees of liquidated companies to claim up to 13 weeks of unpaid wages, annual leave, and more.
Final Thoughts
If your company goes into liquidation it is important to remember that there is an order of priority when it comes to who gets paid.
If you are considering a company liquidation, you should speak with an insolvency specialist. You can get a free quote or speak with one of our Insolvency Lawyers today.
