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Chasing unpaid invoices is, unfortunately, a common part of running a business. However, what happens if you discover that the company you’ve been trading with has gone into liquidation? Can your debt still be paid? This article will explain what happens when a company goes into liquidation and the steps you should take to maximise your chances of receiving payment.

What is Liquidation?

A company goes into liquidation when it is insolvent, meaning that it can’t pay its debts. Liquidation can be triggered voluntarily by the company’s directors, or by a court order that the company be wound up. Usually, the company’s creditors apply for a winding-up order. However, it can also be triggered by other related parties, such as shareholders or even the Australian Securities and Investments Commission (ASIC).

Liquidation involves the appointment of an independent and qualified person, a liquidator, to control the company and wind up its affairs. They do this in an orderly way for the benefit of all creditors. The liquidator’s main duty is to the creditors.

Liquidation usually involves the liquidator:

  • collecting, protecting and realising the company’s assets;
  • investigating the company’s affairs, including any claims against its directors;
  • reporting to creditors;
  • ordering payment for the costs of the liquidation; and
  • paying any remaining dividends to creditors in order of priority.

What Type of Creditor Am I?

There are two main types of creditors:

  1. secured creditors, who hold a security interest such as a mortgage in some of the company’s assets. The Personal Property Securities Register (PPSR) registers any security interests over personal property; and
  2. unsecured creditors, who have no security interest in the company’s assets and include customers, trading partners and employees.

What Do You Need to Do?

If you are an unsecured creditor, you cannot commence legal action against a company if it’s in liquidation. Therefore, if you had started any legal proceedings, you will need to discontinue them.

It is important to let the liquidator know that you are a creditor and provide them with details of your debt. You should:

  1. contact the liquidator and advise them that the company owes you a debt;
  2. provide the full details of the debt owed. They will provide you with a formal proof of debt form that you should complete, attaching copies of any relevant documents that illustrate what debt the company owes you;
  3. request details of any upcoming creditors’ meetings and copies of any reports to creditors previously issued;
  4. ask the liquidator to provide the status of the liquidation to date. They may be able to give you an idea of whether creditors are likely to receive payment for any dividends; and
  5. attend any creditors’ meetings. At meetings, the liquidator will usually give information on the progress of the liquidation and may seek the creditors’ approval for a particular action, such as approving to pay fees for liquidator.

When Will I Get Paid?

The bad news is, there is no guarantee that you will receive payment for your debt during the liquidation process. You will only receive payment if there are funds left over after the liquidator first makes payments that are a higher priority. The priority order for payments of dividends are the:

  1. costs of the liquidation, including fees to liquidators;
  2. outstanding employee wages and superannuation;
  3. outstanding employee leave payments and retrenchment pay; and then
  4. unsecured creditors.

The liquidator must pay each of these categories in full before they can pay the next category. If there aren’t enough funds to pay a category in full, then the liquidator distributes the remaining funds among creditors on a pro rata basis. In other words, you may only receive payment for a portion of the debt, or nothing at all if there are no funds available.

Key Takeaways

While there are no guarantees that your debt will be paid from a company in liquidation, there are steps you can take to ensure you will be paid out of any available funds. Ensure that you contact the liquidator and give details of your debt. Also, you should keep track of the liquidation process to have the best chance of recovering any payments remaining after the company has been liquidated. If you have any questions about the liquidation process or recovering a debt, please call LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.


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