When a company is insolvent and is consequently wound up, its enterprises are brought to an end and a liquidator appointed to sell the company’s assets. Any realisations from the sale of those assets and any other recoveries are then used to pay as much of the company’s debts as possible. But who gets paid, and in what order?
The starting point can be found at section 555 of the Corporations Act 2001 (Cth) (the Act) That section establishes the ‘pari passu’ principle, being that all debts and claims proved in the winding up of a company will rank equally and, if there are insufficient funds to pay those debts and claims in full, they must be paid proportionately.
However, section 556 of the Act overrides section 555, which sets out a priority ‘waterfall’ by which payments to creditors are required to be made.
The Big Picture
In broad terms, liquidation can be viewed as a ‘queue’, in which all creditors must stand in line. The liquidator must distribute any funds recovered the in liquidation in a set order in accordance with the priorities set out in section 556 of the Act. In effect, this means that if there are insufficient funds to pay all debts, those further back in the queue may miss out on a return.
First, there are a number of payments made prior to a dividend being declared to creditors. Generally speaking, these are:
- fees and costs of the liquidation, being the expenses properly incurred by a liquidator in preserving, securing and realising company assets (for example, auctioneers’ fees in auctioning company property) and the remuneration of the liquidator in conducting the liquidation process;
- in the case of a Court ordered winding up (or where an application to wind up the company was made but the Court did not make an order), the applicant’s costs of that application; and
- secured creditors with perfected security interests over some or all assets of the company. Any such secured assets will be sold by the liquidator and the funds (after payment of the above) will be paid to the creditor who holds security over that asset. If there are multiple secured creditors in respect of an asset, the creditor with the earliest registered security will be first in line.
If after realising the security interest (in good faith and in a proper manner) there is a balance due to the secured creditor(s), those creditors are entitled to prove for the balance as an unsecured debt.
If any funds remain after payment of the above, a dividend is then declared for the remaining unsecured creditors. Those funds are paid in the following order:
- first, unpaid superannuation and wages for employees incurred prior to liquidation, noting that directors and any related persons of a director who were employees of the company are limited to claiming the sum of $2,000 in respect of any unpaid entitlements. These amounts are paid in priority to any other unsecured creditors.
- Next, a ‘pari passu’ payment to all remaining unsecured creditors of the company. In the context of an insolvency company, it is not uncommon for any dividend to unsecured creditors to be very small (if there is any dividend at all).
- If there are any funds remaining (which will not be the case where the company in liquidation was insolvent), the remaining funds are to be paid to the members of the company, in accordance with their shareholding.
If you are a creditor of a company that has gone into liquidator and have any queries regarding the liquidation process, please get in touch.