Law

After the Company Liquidation who will be Paid First?

While a company goes through the liquidation process, then one key issue that always haunts in the mind of the liquidator as well as the concerned parties is how the company proceeds will be distributed.

As a creditor to any company who has declared voluntary liquidation, you will certainly be concerned about your receivables and hence, you will continuously keep track of the whole process to make sure that you are paid as early as possible.

Director of the company, which is under liquidation will like to take help from the liquidator, who can help you while distributing the company proceeds.

While any company enters into the liquidation process, it is responsibility of liquidator to pay all creditors in full and usually for making these payments they are prioritized as per the following order:

  1. Those who are secured creditors having fixed charge will be given top priority
  2. Preferential creditors will be the next
  3. Secured creditors having floating charge
  4. Those who are unsecured creditors
  5. Lastly the shareholders

What about employees?

Actually, employees will be considered as priority unsecured creditors, hence their payments will be done while the payment of all other unsecured creditors shall be processed. 

As per Corporations Act 2001, section 556 suggests that the money owed to the company employees has to be paid like dividends payment in the following order:

  1. Their wages and also superannuation contributions.
  2. Any personal injury compensation, as applicable.
  3. Leave entitlements, which include annual leave, sick leave or personal leave and also long service leave.
  4. Any other redundancy payments.

There is however an exception for all excluded employees, who may be subject to certain caps on dividends. 

Employees come under this category are those who during the last 12 months of the liquidation process, served or still serving as director, or spouse of director, or relative.

However, the relevant issue here is that during the period while they are director, or spouse of the director, or any relative of the director will be treated as excluded employees who may not be entitled for any payment for priority retrenchment pay.

Government assistance meant for employees

It is important to note that those employees who end up losing their job because of company liquidation may also be eligible for certain government assistance under the FEG (Fair Entitlements Guarantee).

The FEG will provide payments for their leave entitlements and also wages. Besides that, various payments instead of notice or redundancy entitlements are also paid. It may not offer any assistance for any unpaid contributions for superannuation guarantee.

All eligible employees are also allowed to claim the following:

  • All unpaid wages up to maximum 13 weeks
  • All unpaid annual leave along with long service leave
  • All payment for notice period maximum up to 5 weeks
  • All redundancy payments for maximum up to 4 weeks/full years of service.

Each group of creditors should be paid completely prior to liquidator will distribute various funds to the next group. It will be important to maximise interest of creditors after entering into insolvency, to avoid accusation of unlawful or wrongful trading.

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