Who gets what in Liquidation?
May 28, 2019
We are often asked about how funds are distributed in a liquidation scenario. Occasionally we need to clarify some misunderstandings around the process generally and order of priority of dividend distributions.
This article is designed to shed some light on the process and the order of payments.
Funds remaining in a liquidation after payment of the Liquidator’s remuneration and other costs, are declared as a dividend.
The first step is for creditors to prove their debts. When a dividend becomes available, the Liquidator will advise creditors of the intention to declare a dividend and the distribution process includes a period of time (not less than 21 days) for creditors to prove their debts. Creditors then issue the Liquidator with a Formal Proof of Debt form and supporting documentation for their claim.
The Liquidator then works through an adjudication process for each claim and either admits the debt in full, in part, or rejects the claim from the creditor. There is a formal process for the partial or full rejection of a creditor’s claim, which allows for time to for the creditor to appeal the Liquidator’s decision in Court, however mostly the adjudication process is settled by agreement.
Once all of the claims are adjudicated upon and admitted for dividend purposes, the Liquidator then distributes the dividend. This where there is sometimes some confusion – who gets what?
Generally, the order in which funds are distributed is, priority unsecured creditors first, this includes:
- Outstanding employee wages and superannuation (equal ranking)
- If there are insufficient funds to settle this first category in full, the available funds are divided between wages and super on a pro rata basis
- Often this category is comprised of a claim from the Australian Taxation Office for Superannuation Guarantee Charge and wages claims either directly from employees or via the Federal Government’s Fair Entitlement Guarantee (which makes wages advances on behalf of former employees)
- Outstanding employee leave of absence
- Annual leave
- Long service leave
- Employee retrenchment pay
- Payment in lieu of notice
And then unsecured creditors:
- Unsecured creditors (the four listings below are all ranked equally)
- Which includes the Australian Taxation Office in respect of GST, PAYG-w, FBT, Income Tax etc – a common misnomer is that the ATO has a priority in the dividend distribution process
- Trade creditors
- Shortfalls on secured financed equipment
- Related party loans
If there are insufficient funds to pay any category in full, the available funds are paid on a pro rata basis (and the next category or categories will be paid nothing).
An additional consideration in this process is that Directors and their direct relations are limited in the amounts that they can receive as priority unsecured creditors. Directors and their direct relations are capped at $2,000 for wages and superannuation and $1,500 for leave of absence entitlements. There is no priority amount for termination. All amounts above these limits / exclusion are then included in the unsecured claim pool.
A final element of nuance is where a secured creditor (i.e. a bank) is involved; however this is a discussion for a later article.
Hopefully this article provides some guidance on the process of declaring and paying dividends in a straightforward liquidation scenario. Stay tuned for a further article that discusses the complexities of who gets what out of funds arising from the sale of ‘circulating’ and ‘non-circulating’ assets are distributed in a liquidation scenario where a ‘bank’ is involved.
About the author
Greg Quin is a Director at HLB Mann Judd Insolvency WA and has been with the team for 10 years. Greg oversees the daily operations of the many insolvency appointments managed by the team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to email@example.com.