Creditors Prioritisation in Liquidation: An Overview

When a company enters liquidation in Australia, its assets are sold to repay its debt to creditors. However, not all creditors are treated equally in the distribution of assets. The Corporations Act 2001 (Cth) establishes a hierarchy of Creditors Prioritisation, determining the order in which creditors are paid.

At the Liquidation Advisory Centre, we can ensure you have a complete understanding of the prioritisation of creditors in the liquidation process, as it is essential for both creditors and stakeholders involved to know what to expect and who gets paid first. Here’s an overview of how creditors are prioritised:

Secured Creditors

• Definition: Secured creditors hold security interests over specific company assets, such as mortgages or charges.
• Priority: Secured creditors have the first claim on the proceeds from the sale of their secured assets. They are entitled to be paid from the proceeds of the sale of the secured assets before any other creditors.
• Example: Banks or financial institutions that have provided loans secured by the company’s property or assets.

Priority Creditors

• Employee Entitlements: Certain employee entitlements are given priority over other unsecured creditors. These include unpaid wages, superannuation contributions, and redundancy payments.
• Statutory Charges: Some statutory charges, such as taxes owed to the Australian Taxation Office (ATO), may also be given priority status in the distribution of assets.

Unsecured Creditors

• General Creditors: Unsecured creditors include suppliers, service providers, trade creditors, and other parties with outstanding debts the company owes.
• Distribution: Unsecured creditors are paid from the company’s remaining assets after secured creditors and priority creditors have been satisfied. However, they are typically lower in priority and may not receive full repayment of their debts.

Shareholders

• Equity Investors: Shareholders are considered the owners of the company and typically have the lowest priority in the distribution of assets in liquidation.
• Residual Claim: Shareholders are entitled to receive any remaining funds after secured creditors, priority creditors, and unsecured creditors have been paid. However, in many cases, insufficient funds may be left to satisfy shareholder claims.

Insolvent Trading Claims

• Director Liability: Directors who engage in insolvent trading may be personally liable for debts incurred during insolvent trading.
• Recovery Actions: Liquidators may pursue recovery actions against directors to recover funds for the benefit of creditors. These funds may be distributed to creditors in accordance with the priority regime.

Creditors Prioritisation in Liquidation

Understanding the Creditors Prioritisation in liquidation is essential for creditors, directors, and other stakeholders involved in the process. By recognising the hierarchy of creditor priority established by the Corporations Act, stakeholders can assess their potential recovery prospects and make informed decisions.

Secured creditors, priority creditors, and employee entitlements are typically prioritised in asset distribution. In contrast, unsecured creditors and shareholders may sometimes receive lower priority or no repayment. At the Liquidation Advisory Centre, we can help creditors navigate the complexities of the liquidation process, help you understand the Creditors Prioritisation process and maximise their chances of recovering outstanding debts.