What Happens to Proceeds When a Company Enters Liquidation?
For creditors and the liquidator, one of the key concerns is what will happen to the money and the order of priority the debt is paid. If you are a creditor of a company entering into liquidation, you will be monitoring the process to ensure that you are receiving all payments owed. If you are a director, you will be aware that the liquidator can assist you distribute the proceeds.
Liquidation: Solvent and Insolvent Companies
There are three types of liquidations: court ordered, creditors’ voluntary and members’ voluntary. The first two apply to insolvent companies while the latter is the type of liquidation solvent companies tend to choose.
Solvent companies are generally able to make good its debt obligations, however this is not the case for insolvent companies. Under these circumstances, shareholders, suppliers, lenders and other creditors will be concerned about the order in which debts are repaid, if at all.
The order in which debt repayments are made depends on whether the creditor is secured or unsecured, with secured creditors receiving priority. The priority of payment is:
1. Liquidation costs
2. Secured creditors
3. Priority unsecured creditors, i.e. employees
4. Unsecured creditors
Secured creditors is defined in section 12 of the Personal Property Securities Act 2009 and refers to those who have a security interest, such as a mortgage or charge, over some or all of the company’s assets.
Secured creditors have different rights to unsecured creditors in terms of debt defaults, and are allowed, for example, to legally appoint an independent receiver to sell some or all of the charged assets to repay the debt.
Unsecured creditors have no security over the company’s assets and could be trading partners that supply goods or services to the business. It may also include the ATO where there is outstanding tax debt.
If there are sufficient funds remaining after the payment of secured and priority creditors, unsecured creditors can get paid in the form of dividends.
During these uncertain times, stay informed on the latest updates by subscribing to our newsletter. If your business is struggling from the impact of the pandemic or is looking for more information on company liquidations, please contact Australian Company Liquidations on 1800 731 155. We are registered company liquidators who offer a FREE 24/7 insolvency hotline for Australian directors seeking expert advice.