When a company is wound up, employees are often among the people most affected. You may be owed wages, leave, redundancy pay, or superannuation, and suddenly, there’s no payroll to rely on and no clear answer about what happens next.
As professional insolvency accountants, we’ve seen this play out too many times, so we want to explain exactly how employee entitlements are treated in a liquidation, what legal protections apply, and what both employees and directors need to know.
What Happens to Employee Entitlements When a Company Is Liquidated?
When a company enters liquidation, a registered liquidator is appointed to wind up its affairs. The company ceases trading, its assets are realised, and the proceeds are distributed to creditors in the specific order set out in the Corporations Act.
For employees, this typically means your employment is terminated. Any entitlements that were unpaid at the time of liquidation, including wages, leave, and superannuation, become debts owed to you by the company.
Whether employees are paid in full depends on how much the liquidator can recover from the company’s assets. In some liquidations, there is enough to cover employee entitlements in full. In others, particularly where assets are limited or heavily secured, employees may only receive a partial payment, or nothing at all from the liquidation itself.
Types of Entitlements Covered
Employees may be owed a range of entitlements when a company is liquidated. The most common include:
- Unpaid wages and salary: Any wages earned but not yet paid at the date of liquidation, including regular pay, overtime, and commissions.
- Annual leave: Accrued but untaken annual leave must be paid out on termination. This applies regardless of whether the company is in liquidation.
- Long service leave: Employees who have reached the qualifying period for long service leave are entitled to be paid out any accrued balance on termination.
- Redundancy pay: Employees who are made redundant as a result of the liquidation may be entitled to redundancy (or severance) pay, depending on their length of service and their award or enterprise agreement.
- Unpaid superannuation: Superannuation Guarantee contributions that were not paid to an employee’s fund before liquidation are treated as a debt of the company. Unpaid super ranks alongside wages in the priority order.
Priority of Employee Claims in Liquidation
Not all creditors are treated equally in a liquidation. The Corporations Act establishes a strict order of priority that determines who gets paid first.
Employees are given priority over most other unsecured creditors. The general order is:
- Costs and expenses of the liquidation (including the liquidator’s fees)
- Outstanding employee wages and superannuation
- Leave of absence entitlements (annual leave, long service leave, and sick leave where applicable)
- Retrenchment pay
- Unsecured creditors (such as suppliers and trade creditors)
- Shareholders
Employees are near the front of the queue, but they still sit behind the costs of administering the liquidation itself, and behind secured creditors (such as a bank holding a fixed charge over company assets) who are paid before the priority waterfall begins.
If the company has insufficient assets to cover all amounts above the employee priority, some entitlements will remain unpaid, and this is where the Fair Entitlements Guarantee can help fill in the gaps.
The Fair Entitlements Guarantee (FEG)
The Fair Entitlements Guarantee (FEG) is a federal government scheme that acts as a safety net when an employer enters liquidation and cannot pay outstanding employee entitlements in full.
If the liquidation doesn’t produce enough funds to cover what you are owed, the FEG may cover the shortfall for eligible entitlements. This includes:
- Unpaid wages (up to 13 weeks)
- Annual leave and long service leave
- Payment in lieu of notice (up to 5 weeks)
- Redundancy pay (up to 4 weeks per year of service, capped at 16 weeks)
The FEG doesn’t cover unpaid superannuation. Super contributions that were not remitted to your fund are a separate matter, and you may need to lodge a complaint with the ATO if you believe super has been withheld.
How Employees Make a Claim
If your employer has gone into liquidation and you are owed entitlements, there are two steps to take as early as possible.
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Step 2: Lodge a claim through the FEG
Make yourself known to the appointed liquidator as soon as possible. The liquidator will be asking employees to complete a proof of debt, which formally records the amounts you are owed.
Director Liability for Unpaid Employee Entitlements
For directors, liquidation doesn’t always mean a clean break. There are specific circumstances where directors can be held personally liable for unpaid employee entitlements.
Director Penalty Notices (DPNs)
The ATO has the power to issue a Director Penalty Notice to hold directors personally responsible for certain unpaid company debts. If a company has failed to remit super contributions to employees’ funds and the amounts have not been reported to the ATO within the required timeframe, directors can become personally liable for the full amount. That liability can’t be avoided by placing the company into liquidation after the fact.
If you’re a director who’s been issued a DPN, you do have some options to remit the penalty, but it’s important to act fast. Once a DPN is issued, the window to act is narrow.
Insolvent trading
Directors also face potential liability if they allowed the company to continue trading while insolvent and incur debts that it couldn’t pay. A liquidator is required to investigate the company’s financial history and may pursue directors personally for losses caused by insolvent trading.
If your company is struggling to meet payroll or super obligations, taking early advice is essential. The earlier you act, the more options you have.
How SV Partners Can Help
Whether you’re an employee trying to understand what you’re owed, or a director navigating the serious personal risks that come with a company in financial difficulty, SV Partners can help.
Our team has extensive experience managing the employee entitlement process in liquidations, from identifying and verifying claims to liaising with the FEG on behalf of employees and ensuring distributions are handled correctly.
For directors, we provide confidential advice on your obligations and exposure, including the risk of Director Penalty Notices, insolvent trading claims, and the steps you can take to protect yourself.
To arrange a confidential consultation with one of our expert advisors, contact us online or call our confidential assist line on 1800 246 801.