When a company goes into liquidation, one of the first questions creditors ask is a simple one: will I get paid? The honest answer is that it depends, and it depends largely on where you sit in the order of priority established by law.

Liquidation is the formal process by which a company’s assets are collected, sold, and distributed to those it owes money to. Once a liquidator is appointed, they are responsible for realising the company’s assets and distributing the proceeds in a defined order prescribed by the Corporations Act 2001 (Cth) — with the priority of unsecured debts set out in section 556. That order determines not only whether you will be paid, but how much, and when.

Understanding where you sit in that order, and what steps you can take to improve your position, is essential knowledge for any business that extends credit, supplies goods or services on terms, or lends money to another company.

The Priority Waterfall: How It Works

The law does not treat all creditors equally. Assets are distributed in a strict hierarchy, and each tier must be paid in full before anything flows to the next. In most insolvencies, there are insufficient assets to pay everyone in full, which means your position in the hierarchy can be the difference between recovering most of what you are owed and recovering nothing at all.

Here is how the order of priority generally operates.

1.  Costs and Expenses of the Liquidation

The first call on a company’s assets is the costs and expenses of the liquidation itself. This includes the liquidator’s fees and disbursements, costs of preserving and realising assets, professional costs such as legal fees incurred in the course of the liquidation, and the costs of the creditor who applied to wind up the company (where the liquidation was commenced by a creditor). These costs are paid before any creditor receives a cent.

This is an important practical point. In a liquidation with limited assets, a significant portion of whatever is recovered may be consumed by the costs of the liquidation itself, leaving little for creditors further down the hierarchy.

2. Secured Creditors

Secured creditors hold a security interest over specific assets of the company, such as a registered mortgage over real property or a perfected security interest registered on the Personal Property Securities Register (PPSR). A secured creditor’s right to be paid comes from the specific asset over which they hold security, rather than from the general pool of assets available to other creditors.

When those assets are realised, the proceeds go first to the secured creditor up to the value of the debt owed. If the value of the secured asset exceeds the debt, the surplus flows back into the general pool. If the secured asset is insufficient to cover the debt in full, the secured creditor may lodge a proof of debt for the shortfall and will rank as an unsecured creditor for that remaining amount.

One important distinction under the Personal Property Securities Act 2009 (Cth) is between circulating assets (broadly, assets that change in the ordinary course of business, such as cash, receivables, and inventory) and non-circulating assets (such as plant, equipment, and real property). Secured creditors holding security only over circulating assets rank behind employee entitlements in the distribution of those assets, not ahead of them. This is a nuance that matters, particularly for banks and financiers whose security is structured around a company’s trading stock and accounts receivable.

3. Employee Priority Creditors

Employees occupy a special and protected position in the priority order. Under section 556 of the Corporations Act, employees are entitled to be paid their outstanding entitlements ahead of general unsecured creditors. Those entitlements are paid in the following order of priority:

• Wages and superannuation contributions in respect of services rendered before the liquidation
• Leave entitlements, including annual leave, long service leave, and in limited circumstances personal leave
• Retrenchment payments (redundancy pay), which rank after the above but still ahead of general unsecured creditors

There are caps on the amounts that attract priority, and where entitlements exceed those caps, the excess ranks as an ordinary unsecured debt. Where a company’s assets are insufficient to meet employee entitlements in full, employees may be able to access the Fair Entitlements Guarantee (FEG), a federal government scheme of last resort for employees whose employers have entered liquidation.

4. General Unsecured Creditors

This is the category that most trade creditors, suppliers, and service providers fall into. General unsecured creditors rank after the costs of the liquidation, secured creditors, and employee priority creditors. In practice, this means that in many liquidations, general unsecured creditors receive little or nothing.

Unsecured creditors share in the remaining pool of assets on a proportionate basis, meaning that if there is $100,000 available to be distributed and total unsecured debts are $1,000,000, each unsecured creditor receives ten cents in the dollar, regardless of the size of their individual claim.

There is no preference between unsecured creditors based on who has been owed money the longest, or who acted most diligently in pursuing their debt. They all share equally in what remains.

5. Shareholders

Shareholders sit at the very bottom of the priority order and are only entitled to any return once all creditors have been paid in full. In the vast majority of insolvent liquidations, there are insufficient assets to satisfy creditor claims in full, meaning shareholders receive nothing. This reflects the fundamental commercial bargain: equity holders accept the risk of loss in exchange for the potential upside of ownership.

What Every Creditor Should Know

Registering Your Security Interest Matters

If you supply goods under a retention of title arrangement, lend money, or lease equipment to other businesses, the PPSR registration of your security interest can make the difference between recovering your asset and losing it to the general pool. An unregistered or defectively registered security interest will not be enforceable against a liquidator. If your security interest is properly registered and perfected before the company enters liquidation, you stand in a fundamentally different position to an unsecured creditor.

Unfair Preference Payments: A Risk for Creditors Too

Creditors who receive payments from a company in the period before it enters liquidation may find that a liquidator demands those payments be returned. Under section 588FA of the Corporations Act, a payment made by a company to a creditor while the company was insolvent, and which gives that creditor more than they would have received in the liquidation, can be recovered by the liquidator as an unfair preference.

The look-back period for unfair preference claims is generally six months before the relation-back day (the date the liquidation is taken to have begun), or two years where the creditor is a related party. This means that if you received payment from a company that subsequently went into liquidation, you may receive a demand from the liquidator for some or all of that money to be repaid. Defences are available — including a good faith defence under section 588FG, where the creditor had no reasonable grounds to suspect insolvency and provided valuable consideration — but the burden of establishing the defence rests with the creditor. If you receive a demand of this kind, obtaining legal advice quickly is essential.

Acting Early Improves Your Position

For creditors who suspect that a company they are dealing with may be heading toward insolvency, acting quickly can meaningfully improve the prospects of recovery. The longer a debt is left outstanding, the more likely it is that the company’s financial position will deteriorate, that assets will be dissipated, or that other creditors will take steps ahead of you. In some circumstances, a creditor may be able to obtain a secured position through negotiation, or to take enforcement steps that put them in a better position than they would otherwise occupy.

Monitoring the financial health of key customers and counterparties, maintaining robust credit terms, registering security interests where available, and acting promptly when payment is overdue are all practical steps that reduce a creditor’s exposure to the risk of a downstream insolvency.

How Rose Litigation Lawyers Can Assist

At Rose Litigation Lawyers, our insolvency and debt recovery team regularly acts for creditors, liquidators, and other stakeholders in all aspects of corporate insolvency, including advising on creditor priority, lodging proofs of debt, contesting unfair preference demands, and pursuing recovery strategies in the lead-up to and following the appointment of a liquidator.

We understand that receiving news of a customer’s or counterparty’s liquidation can be stressful and disorienting. Our role is to give you clear, practical advice on where you stand, what steps are available to you, and how to maximise your prospects of recovery in circumstances that are rarely straightforward.

Our services in this area include:

• Advice on creditor priority and your position in a particular liquidation
• PPSR registration and advice on securing and perfecting security interests
• Proof of debt preparation and lodgement with liquidators
• Defence of unfair preference claims made by liquidators
• Debt recovery in the lead-up to insolvency, including letters of demand, statutory demands, and court proceedings
• Winding up applications where a company owes you a debt and has failed to comply with a statutory demand

If a company you are dealing with appears to be in financial difficulty, early advice is critical. The steps available to you narrow as a company’s financial position deteriorates, and the window to take meaningful action can close quickly.

If a customer or counterparty has entered liquidation, or you have received a demand from a liquidator, contact our team for clear, early advice about your position and the options available.

Contact Rose Litigation Lawyers today for tailored, strategic advice.

The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive, nor does it constitute legal advice and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.