An Australian’s Guide to Priority of Payments in Liquidation

When a company enters liquidation, who gets paid (and in what order) can make all the difference. In Australia, the priority of payments is governed by strict rules under Section 556 of the Corporations Act 2001. These rules determine the order in which creditors are repaid, starting with liquidation costs, then secured creditors, priority unsecured creditors (typically employees), followed by other unsecured creditors, and finally shareholders.

Understanding where you stand in this hierarchy is crucial. Whether you’re a business owner facing insolvency, a creditor of a distressed company, or an employee concerned about unpaid entitlements, knowing how payment priorities work in 2025 can help you better protect your interests.

Understanding Liquidation

Liquidation is the process of converting all assets into cash to settle debts based on strict priority rules. It differs from voluntary administration or restructuring because liquidation permanently closes the company.

Australian law recognises three types of liquidation:

1. Directors can initiate creditors’ voluntary liquidation when they realise their company can’t pay its debts. This is the most common approach. 
2. A court order starts court liquidation, usually after creditors apply. 
3. Solvent companies can use members’ voluntary liquidation to wind down their operations properly.
   

The liquidator becomes responsible for the company and carries out these significant functions:

• Converting company assets into cash
• Investigating the company’s financial affairs
• Contacting creditors and processing their claims
• Sending progress reports to creditors
• Investigating potential offences or inappropriate transactions
• Distributing available funds according to legal priorities

Creditors get specific rights beyond attending meetings and receiving dividends. They can share relevant information with the liquidator, ask for specific reports, check certain books, and in standard liquidations, appoint a reviewing liquidator. They can also remove and replace the existing liquidator through resolution.

The liquidator must give creditors a report within three months after appointment. This report covers completed work, expected completion dates, and possible dividend payments. The simplified liquidation process skips creditor meetings. Instead, proposals decide matters without meetings.

A clear grasp of the liquidation process helps creditors understand payment priorities and improve their recovery chances. We’ll explore these aspects in upcoming sections.

Legal Framework

The Corporations Act 2001 serves as the foundation of Australia’s liquidation priority framework. This Act creates a detailed system to manage insolvent companies. Section 556 of the Act clearly states which claims “must be paid in priority to all other unsecured debts and claims.”

This priority system moves away from the traditional pari passu principle where all unsecured creditors receive equal treatment. The preference to protect certain creditors started with the UK Companies Act 1883. This law emerged during the Industrial Revolution to safeguard factory workers.

The current framework splits company assets into two main categories. These include: 

1. Circulating assets like inventory and receivables
2. Non-circulating assets such as equipment and real estate

The Personal Property Securities Act 2009 introduced this difference to replace older concepts of fixed and floating charges.

Employee claims get special priority protection for circulating assets. The reasoning makes sense: employees should have priority over assets they helped create. This protection becomes crucial because employees can’t shield themselves from their employer’s insolvency.

The Act creates a strict waterfall structure, where each category needs full payment before moving down. If funds run short, available assets are distributed proportionally within a tier, leaving nothing for the remaining categories.

Legal developments have made certain parts of this framework clearer. The 2023 BCA National Training Group case confirmed an important point. Liquidators’ remuneration keeps priority over employee claims under Section 556. Section 561 only handles disputes between secured creditors and employee claims.

The Fair Entitlements Guarantee acts as a safety net to protect eligible employees when companies can’t pay entitlements. The scheme has shown impressive results. Since 2000-01, it has recovered $940 million in dividends. The Recovery Program, established in 2015, has collected $651 million.

The Priority Order – Who Gets Paid First?

A company’s liquidation follows a strict payment hierarchy that determines who gets paid first. This hierarchy matters a lot to anyone who has money tied up in a struggling business.

The liquidator’s fees and expenses come first. These costs cover asset sales, business operations and legal fees. The process needs these funds to keep running smoothly.

The creditor who started the court liquidation gets paid next. Their legal fees and costs for starting the process get priority, but this doesn’t include their actual debt.

Secured creditors follow in the payment line. These lenders have claims on specific company assets, such as property or equipment. They can sell these assets to recover their money, and any unpaid amount becomes an unsecured claim.

We prioritised employee payments in the sequence. This covers unpaid wages, super contributions, leave and redundancy payments. Employee claims rank higher than general unsecured creditors and can outrank secured creditors for certain assets like inventory.

Unsecured creditors like suppliers and customers get whatever money remains. Depending on circumstances, they could receive just a fraction of what the company owes them. The available funds get split proportionally among these creditors.

If money remains after paying all creditors, shareholders might get something. This rarely happens in insolvent liquidations. The liquidator must follow legal requirements and keep everyone updated about the process and likely outcomes.

​Special Considerations

Payment distribution in Australian liquidations follows special rules that can change dramatically from the standard priority order says.

The Fair Entitlements Guarantee (FEG) serves as a vital safety net for employees when companies can’t pay what they owe. This government scheme covers unpaid wages up to 13 weeks, annual and long service leave, payment instead of notice up to 5 weeks, and redundancy pay up to 4 weeks per year of service. However, workers must go through the ATO to claim unpaid superannuation contributions since FEG doesn’t cover them.

Treatment varies among employees. “Excluded employees” (i.e., directors, their spouses, and relatives) face significant restrictions on their priority claims. Their entitlements have caps for outstanding wages, superannuation, and leave entitlements. More than that, they rank as ordinary unsecured creditors with no priority for retrenchment pay.

Phoenix activity raises serious concerns. This illegal practice happens when someone deliberately liquidates a company and starts a new one to run the same business while dodging debts and employee entitlements. Such schemes hurt employees, contractors, suppliers, and government revenue. The Phoenix Taskforce works to curb these activities, and people can report suspicious behaviour through a dedicated Tip-Off Hotline (1800 060 062).

The Australian Securities and Investments Commission (ASIC) helps with cases of businesses abandoned without formal liquidation. ASIC can wind up companies registered under the Corporations Act to help employees get their entitlements.

Tax debts lost their priority status in Australian liquidations back in November 1979. Only tax instalment deductions and withholding tax kept their priority until June 1993. The UK waited until 2003 to make this same change.

Practical Advice for Different Stakeholders

When companies go into liquidation, each stakeholder faces its own set of challenges. Quick action and the right strategies can greatly improve outcomes for everyone involved.

Creditors who sell goods on credit should protect their interests through the Personal Property Securities Register (PPSR). Your position in the payment hierarchy improves dramatically when you register your security interest and become a secured creditor instead of an unsecured one. This registration needs to happen before the company goes into liquidation to work. Secured creditors usually avoid the “claw-back” rules that might force unsecured creditors to return preference payments made before liquidation.

Company directors should look out for signs of trouble: continuous losses, cash flow problems, poor financial records, growing debt, demands from creditors, and unpaid taxes. The situation rarely gets better if you ignore these warning signs. Your first step should be to ask a registered liquidator or specialist insolvency accountant to check your company’s solvency and explain your options. Note that directors can become personally liable if they let a company trade while insolvent.

Employees worried about unpaid entitlements should know their claims usually come before unsecured creditors. The Fair Entitlements Guarantee lets employees claim up to 13 weeks of unpaid wages. This process starts only after the company enters liquidation.

Small business owners have restructuring options available before they think about liquidation. The small business restructuring process lets eligible companies work out debt arrangements with creditors while keeping control in directors’ hands. 

Professional advisors should guide their clients to the right insolvency strategies based on specific situations. Stay away from sketchy advisors who suggest moving assets for little or no payment. These moves could lead to serious legal trouble.

Expert advice from qualified specialists early on is a great way to maximise the business’s value and protect everyone’s interests.

Real-world Scenario

Here’s a hypothetical scenario in which an Australian manufacturer goes into liquidation.

After taking charge, the liquidator found total realisable assets worth $4.5 million, including commercial property, manufacturing equipment, and inventory. The company’s total debts stand at $3.8 million.

The liquidator distributes the funds based on statutory priority:

• Liquidation costs: $350,000 to cover the liquidator’s fees, legal expenses, and valuation services
• Secured creditor claims: $1.2 million to the bank that holds security over the manufacturing equipment and property
• Employee entitlements: $1.5 million to cover unpaid wages, superannuation, annual leave, and redundancy payments
• Unsecured creditors: $2.2 million owed to suppliers and other creditors

After paying the first three priorities, which totaled $3.05 million, only $1.45 million was left for unsecured creditors. With $2.2 million in claims, these creditors receive about 66 cents per dollar.

Employees receive most of their entitlements because they have priority over unsecured creditors. In addition, they can access the Fair Entitlements Guarantee to claim up to 13 weeks of unpaid wages, annual leave, and redundancy pay.

The biggest challenge arose when the liquidator found that a supplier had registered their security interest on the PPSR for goods supplied under retention of title. Other creditors objected, but the goods returned to the supplier instead of being sold to pay other debts.

This example shows that while the payment hierarchy rules are clear, real-life application depends on several factors. These include properly registered security interests, available assets, and their classification as ‘circulating’ or ‘non-circulating’ assets under the Personal Property Securities Act.

Don’t Let Debt Get You Down – Contact Business Savers Today

Understanding how payments are prioritised during liquidation can make a big difference in protecting your interests. At Business Savers, our team of highly qualified registered trustees and liquidators brings deep experience in both personal and corporate insolvency. We support clients through small business restructuring, voluntary administration, and liquidation, always working toward the best possible outcome.

Talk to us today if you’re concerned about your company’s financial position or your place in the payment hierarchy. We’ll help you understand your options and confidently take the next step.