What happens when a company goes into liquidation?

 

On the day the liquidator is appointed, the company director is no longer in control - their powers as a director are suspended. All company assets and property are controlled by the liquidator. This does not affect the position of any secured creditors who have a valid security interest over an asset.
 
When a company goes into liquidation unsecured creditors cannot commence or continue a legal action against the company unless the courts permit. All the debts owed to unsecured creditors are dealt with through the liquidation.
 
The liquidator will then sell the company assets, collect any debtors or other monies owed to the company and make any claims they may have against other parties or the directors etc. After the payment of their fees and costs any money available is distributed to creditors. 

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What are the consequences of liquidating a company?

 

The consequences of liquidating a company depends on the individual circumstances of each company. A director may face claims from the liquidator for uncommercial transactions, for recovery of a debt they owe the company, for insolvent trading etc. Some directors may face no such claims.
 
Usually, a company will have both secured and unsecured creditors when it enters liquidation. A secured creditor is one that has a registered security interest over the whole company, such as goodwill, or specific assets that the company owns, like motor vehicles. A secured creditor will be paid from the proceeds of sale of the assets they have security over before unsecured creditors. They also have the right, in most cases, of recovering the asset they have security over. Liquidation deals with the unsecured debts of the company. 
 
If the director has provided a personal guarantee to a creditor this is a separate obligation and is not covered by the liquidation. So, once the company goes into liquidation a creditor that holds a personal guarantee may make a claim for payment from the guarantor, usually the director. A personally guaranteed creditor may have been granted a mortgage over property or the right to lodge a caveat on the guarantor’s property. These rights are not affected by liquidation.
 
The director’s credit record will also show that they have been the director of a company under external administration, in this case, a liquidation. This notation will stay on the credit file for 10 years after the finalisation of the liquidation and the de-registration of the company. This could make obtaining finance more difficult, and ideally, any personal financial arrangements should be made prior to the appointment of a liquidator. 

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Who gets paid first in liquidation?

 

In simple terms, the liquidator’s costs get paid first. Then, secured creditors get paid. Employee entitlements are next in line after secured creditors are paid. After this has been done, unsecured creditors are next in line. Finally, shareholders are entitled to receive anything that is left. 
 
Of course, nothing is ever that simple and there are some priority for payment issues around secured creditors, and whether they hold security over fixed assets or circulating assets. Fixed assets are things like motor vehicles, plant & equipment etc. Circulating assets including things like debtors. 

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Do employees get paid when company goes into liquidation?

 

Employee entitlements have priority for payment in a liquidation and rank only behind secured creditors who hold a security interest over fixed assets. This does not necessarily mean that they will be paid once a company goes into liquidation. For example, the costs of liquidation and the debts owed to the secured creditors may exceed the amount available for distribution.
 
If a company is placed into liquidation and employee entitlements remain unpaid, the Attorney General’s Department may be able to assist under the Fair Entitlements Guarantee (FEG) scheme. The FEG scheme is aimed at helping employees who have not been paid. In general terms, this scheme does not cover related party entitlements, such as leave entitlements owed to the owners of the business or their family members. Importantly, unpaid superannuation is not provided for under the FEG scheme.  The scheme provides assistance with the following employee entitlements:

 

• Wages—up to thirteen (13) weeks of unpaid wages;

• Accrued annual leave, other than sick leave;

• All long service leave;

• Payment in lieu of notice (up to 5 weeks); and

• A limited amount of redundancy (where a legal entitlement exists)—up to four (4) weeks per full year of service.

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Employment entitlements are capped by reference to the FEG maximum weekly wage. This is currently $2,451 per week. If an employee earned more than the FEG maximum weekly wage, their entitlements will be calculated at the FEG maximum weekly wage at the time their employment ended.

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How much does it cost to liquidate a company?

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The cost of liquidation can vary considerably due to the different size of companies and complexities of the liquidation process. Generally a liquidator will require an amount to consent and act as the liquidator. The director is usually not liable for any other costs of the liquidation. If the liquidator is able to sell company assets or recover monies owing to the company they would be entitled to recover the costs of these actions from the funds available. 

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Can a company still work when in liquidation?

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A company can still trade while in liquidation, but this is at the discretion of the liquidator. There may be rare instances where a liquidator continues to trade a business to collect debtors, sell assets or pursue the sale of the business. This does not happen often as it exposes the liquidator to liabilities that arise from the continue trading. As a general rule, the liquidator will terminate the employment of all staff and all business trading operations will cease. 

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What happens if a company goes into liquidation and owes you money?

 

If you are an unsecured creditor and a company that owes you money goes into liquidation you will only be paid by the company through the liquidator. You are prevented from commencing or continuing a legal action against the company unless a court permits you to. If you are an unsecured creditor you will only receive a distribution after the costs of liquidation, all secured creditors and employee entitlements have been paid in full.
 
If a company owes you money and goes into liquidation you should contact the liquidator and let them know that you are owed money. You should arrange to lodge a proof of debt form with the liquidator and provide evidence that you are owed the money.
 
Any rights you have under a security interest remain in force. If you have a personal guarantee from a director or other party and have not been paid by the company you can pursue recovery action against the guarantor. In many cases this may be your best chance of getting paid.