An Australian’s Guide to Priority of Payments in Liquidation

Realising your business can’t pay its bills can be stressful. Whether it’s unpaid suppliers, mounting tax obligations, or staff wages you’re struggling to meet, the pressure can feel relentless. But financial distress doesn’t mean the end of your company or your credibility as a director.

Insolvency is more common than you might think, and there are clear, legal pathways to address it. What matters most is taking action early. The longer you wait, the fewer options you’ll have and the greater the risk to your business, your employees, and your personal liability.

If your company is under financial pressure, don’t wait for things to get worse. Use this guide to understand your options, then get in touch with Business Savers for expert, confidential advice to help you take the next step with confidence.

What Does “Company Can’t Pay Its Debts” Mean?

If your business cannot pay its debts when they are due, it is legally considered insolvent. When your company is insolvent, continuing to incur debt can expose you to personal liability.

Key indicators of insolvency include:

• Continual losses
• Overdue taxes and superannuation
• Inability to obtain finance
• Legal action taken by creditors
• Dishonoured cheques or returned payments

It is important to note that balance sheet insolvency (liabilities outweighing assets) and cash flow insolvency (inability to pay debts as they fall due) both qualify. Once insolvency is suspected, directors should seek immediate professional advice to avoid breaching their fiduciary duties. Ignoring these signs can result in ASIC investigation, civil penalties, or even criminal charges if reckless trading is proven.

Conduct a Financial Health Check

Before making any decisions, we recommend getting a complete picture of your business’s financial situation. Start with a short-term cash flow projection covering 30, 60, and 90-day windows. This will show if your business can meet its obligations in the immediate future.

Examine:

• Accounts receivable: What payments are expected soon? Are they likely to arrive?
• Accounts payable: What bills are overdue? Are any subject to legal action?
• Bank balances: Do you have enough liquidity to operate for the next 30 days?
• Stock levels: Are there items that can be liquidated?
• Asset valuations: Could any assets be sold quickly?

Aged creditor and debtor reports are especially useful. These reports help identify which debts are at risk of escalation, and which customers may default. If the analysis reveals that your liabilities significantly exceed your income, it’s time to seek professional help.

Immediate Response: Informal Remedies

Before moving into formal insolvency, there are informal steps you can take to try stabilise your business. These approaches are often quicker, less public, and more flexible.

1. Communicate with Creditors

Open communication can preserve business relationships and reduce stress. Proactively reach out to creditors to explain your situation. Many businesses are willing to work with you if they believe you are acting in good faith.

Business Victoria has friendly and formal reminder email templates, which you can use to initiate the conversation. If those fail, follow up with more formal overdue notices. Keep written records of all correspondence.

2. Negotiate Payment Plans

Creditor negotiation is often the most immediate and practical option. Propose a payment plan that outlines:

• Amounts you can pay upfront
• Frequency of payments
• Duration of the arrangement

Ensure all parties sign a formal agreement. Be sure to stick to the terms to rebuild trust, as variations in terms may trigger tax consequences or require updates to existing contracts.

3. Compromise or Settle Debts

If you can’t repay in full, offer a partial payment and final settlement. This is common when creditors prefer a smaller, guaranteed amount over pursuing uncertain legal action. Agreements should be documented in writing and signed by both parties.

These actions can buy your company breathing room and show you are taking responsible steps to fix the situation.

Formal Insolvency Options

If informal solutions are unsuccessful, you may need to consider formal insolvency processes. Each option has specific legal frameworks and consequences:

Voluntary Administration

This involves appointing a Registered Liquidator to take control of the business. The administrator will investigate the company’s affairs and propose options to creditors, such as:

• A Deed of Company Arrangement (DOCA)
• Liquidation
• Return of control to directors

Administration provides a temporary freeze on legal actions against the company. The goal is to find a better outcome for creditors than immediate liquidation. Creditors vote on the administrator’s recommendations at a creditors’ meeting.

Receivership

Receivers are usually appointed by a secured creditor (e.g., a bank) to recover debt. A receiver’s primary responsibility is to act in the interest of that creditor by selling company assets or managing operations until debts are repaid.

Receivership doesn’t always end the business, but directors lose control of the secured assets. It can run concurrently with other forms of insolvency, such as liquidation.

Liquidation

Liquidation involves winding up the company and selling its assets to repay creditors. It can occur by:

• Creditors’ Voluntary Liquidation (CVL): Initiated by the directors/shareholders
• Court-Ordered Liquidation: Initiated by a creditor via a court petition

Liquidation results in:

• Asset sales
• Ceased trading
• Distribution of funds to creditors (in order of priority)
• Deregistration of the company

Liquidators must investigate the company’s financial affairs, including actions taken by directors before insolvency. Misconduct or illegal trading may be reported to ASIC.

Legal & Professional Support: When and Why

Navigating insolvency without expert advice is risky. Engaging professionals early can make the difference between saving the business and closing it down.

Who you should speak to:

• Insolvency Practitioners: Registered liquidators and administrators can assess your company’s viability and guide you through voluntary administration or liquidation.
• Business Advisors: Offer restructuring strategies, debt refinancing options, and turnaround planning.
• Solicitors: Provide legal protection, help negotiate creditor agreements, and ensure compliance with directors’ duties.

The earlier you seek help, the more options are available. These professionals can also help directors avoid personal liability and meet their legal obligations.

Don’t wait until your options run out. Speak to the experts at Business Savers today for confidential, no-obligation advice that can help protect your business.

Preserving Your Leadership & Reputation

Acting decisively and responsibly during periods of financial distress can protect your professional standing. Directors who seek advice, communicate transparently, and document decisions are more likely to avoid blame.

Steps to protect your position:

1. Maintain clear, dated records of financial decisions
2. Document communications with creditors and advisors
3. Avoid making promises you cannot fulfil
4. Don’t hide financial information from partners or stakeholders

Even if your company enters liquidation, responsible actions during the lead-up can help with future directorships, credit applications, or investor relations. Demonstrating integrity matters to courts, regulators, and your professional network.

Next Steps Checklist

This checklist should be followed in order and revisited weekly during times of financial stress. Don’t skip steps or assume the problem will resolve on its own.

Avoid These Common Mistakes

Many directors delay action, hoping things will turn around. Unfortunately, time often makes the problem worse.

Avoid:

• Delaying contact with creditors: This increases hostility and reduces chances of negotiation.
• Continuing to trade: This exposes directors to personal risk and potential legal action.
• Using company funds for personal use: Doing so during insolvency could be seen as misconduct.
• Failing to document decisions: Courts and regulators expect proof that directors acted responsibly.
• Ignoring employee entitlements: Failing to pay superannuation, leave, and wages can lead to ATO investigations.

Being proactive protects both the business and your future. Don’t let fear or pride stop you from acting.

Take Control Before It’s Too Late

Insolvency doesn’t have to mean the end of your business, but ignoring the warning signs can. Whether you’re already feeling the pressure or just want to understand your options, acting early is key.

Business Savers is here to help you make informed, confident decisions. Contact our team today for personalised support and practical solutions tailored to your situation.