Liquidators are responsible for looking after the interests of a company’s creditors. In most cases, Liquidators aim to provide the highest returns possible to secured and unsecured creditors.
To ensure creditors are treated equitably, money that is collected by the Liquidator is paid in a predetermined order. The order of payments is set by ASIC and applies in most situations.
In this article, we learn who gets paid first in liquidation, and what happens if there is not enough money to pay all creditor claims.
Who Gets Paid First in Liquidation?
Any proceeds that arise from the liquidation (e.g. from the sale of company assets) are held by the Liquidator. At the end of the process, these funds are used to pay dividends to creditors in the following order:
-
The Liquidator’s Fees, Costs and Expenses
The Liquidator’s fees, costs and expenses are paid first in liquidation.
Winding up a company is a substantial investment of time and expertise by the Liquidator. The Liquidator may also incur expenses, such as:
- Expenses arising from creditor’s meetings
- Legal and forensic accounting fees
- Costs associated with recovering voidable transactions
- Costs associated with real estate agents and property valuers
- Stationery, printing and record storage expenses
Paying the Liquidators fees, costs and expenses ensures that skilled practitioners are available to wind up companies in an ethical and efficient manner.
In cases where there are insufficient funds to pay 100% of the Liquidators fees, costs and expenses, the Liquidator may accept partial payment, or they may make an arrangement with a third-party to cover the shortfall.
-
Secured Creditors
Secured creditors are paid next in Liquidation. A secured creditor is any creditor that holds a security interest over company assets, such as real estate, vehicles, plant and machinery.
When a company enters Liquidation, secured creditors have several options. They can:
- Appoint a Receiver to sell secured assets – Secured creditors maintain their normal right to repossess and sell assets that are subject to a security interest. This is typically achieved by appointing a Receiver separate to the liquidation proceedings. Secured creditors have a right to appoint a Receiver after a company enters Liquidation.
- Ask the Liquidator to deal with secured assets – Secured creditors may ask the Liquidator to deal with secured assets. The creditor is required to pay any fees, costs or expenses incurred by the Liquidator.
If the Liquidator recovers more money than the value of the security interest, the surplus is paid to unsecured creditors as a dividend.
If the Liquidator recovers less money than the value of the security interest, the secured creditor can list the shortfall as a company debt and receive a dividend
- Surrender the security interest to the Liquidator – Secured creditors have the option of surrendering their security interest to the Liquidator. Where this occurs, the security interest is dealt with for the benefit of all creditors. The secured creditor effectively becomes an unsecured creditor and receives an appropriate dividend.
A secured creditor may choose to surrender a security interest if the asset has very little value, if it’s subject to multiple liens, or if they will receive a better outcome as an unsecured creditor.
-
Priority Unsecured Creditors
Priority unsecured creditors are paid next. This group includes employees and certain other creditors, such as the Court.
Employees are the most common type of priority unsecured creditors. Outstanding employee wages and entitlements are paid in the following order:
- Outstanding wages and superannuation
- Outstanding leave entitlements (including annual leave and long service leave)
- Retrenchment pay
Each category must be paid in full before the next category receives a dividend. If there is not enough money to pay a category in full, each employee receives a pro-rated amount.
Employees may also be able to claim the Fair Entitlements Guarantee (FEG) if the dividend does not cover all of their entitlements. The FEG allows employees to claim wages, leave entitlements, payment in lieu of notice, and redundancy pay up to a certain limit.
-
Unsecured Creditors
The remaining unsecured creditors are paid. Unsecured creditors are owed money by the insolvent company, but these debts are not subject to a security interest.
Common examples of unsecured creditors include contractors, suppliers and customers.
-
Shareholders
Finally, any remaining money is paid to company shareholders. Shareholders have taken a known risk by investing in the company, so they receive the lowest priority in most liquidation matters.
What If There Is Not Enough Money to Pay Everyone?
Liquidation typically provides low returns to creditors. This leads to situations where there is not enough money to discharge all of a company’s debts.
If this happens, dividends are paid in the predetermined order listed above. Each category must be paid in full before the next category receives a dividend.
If there is only enough money to make a partial payment to a certain category of creditors, each creditor receives a pro-rated amount and the following categories receive nothing.
You can learn more in our Ultimate Liquidation Guide.
Learn More About Liquidation From the Team at SV Partners
Liquidation is subject to strict legislative requirements. The order of payments is determined by ASIC, and it applies in most cases.
SV Partners is a team of Registered Liquidators that works with creditors and companies across Australia. If you are a creditor, or if your company is facing financial difficulty, we can discuss your options and find the right solution for your situation.
Contact us to learn more, or call us for a confidential consultation.
