What return do creditors typically receive in a liquidation?
When a company enters liquidation, creditors often want to know how much of the money they are owed they are likely to recover. In many cases, creditors receive nothing at all, and sometimes they receive only a small portion of their debt. The outcome depends on the value of the company’s assets, the number of creditors, and the priority of each claim.
Recoveries depend on the company’s assets
One of the liquidator’s main responsibilities is to identify, collect, and sell the company’s assets. These assets may include cash, equipment, stock, property, intellectual property, or money owed to the company by customers. The proceeds from selling these assets form the pool of funds available for distribution to creditors. If the company has limited assets or significant debts, the available funds for distribution may be small or even nil.
Payments follow a statutory priority order
Creditors are paid according to a strict order of priority set out in the Corporations Act to ensure that certain claims are paid before others. The order of priority is:
- Secured Creditors
- Costs and Expenses of the Liquidation
- Employee entitlements/Priority Unsecured Creditors
- General Unsecured Creditors
- Members/Shareholders
Because secured creditors and employee entitlements are paid first, the return to unsecured creditors is often limited or nil.
Dividends to creditors
When funds are available for distribution, creditors may receive a dividend, which is payment representing a percentage of the debt owed to them. For example, if unsecured creditors receive a dividend of 10 cents in the dollar, a creditor owed $10,000 would receive $1,000.
In some cases, the company may have no realisable assets at the time the liquidator is appointed. Assets may already be secured to lenders, or their value may be significantly lower than the company’s outstanding liabilities.
Additional recoveries may increase returns
Liquidators may recover additional funds through investigations and legal action. This can include recovering unfair preference payments, voidable transactions, or other assets transferred before the liquidation. If these are recovered, it may increase the amount distributed to creditors.
Creditors report during the liquidation process
Liquidators may recover additional funds through investigations and legal action. This can include recovering unfair preference payments, voidable transactions, or other assets transferred before the liquidation. If these are recovered, it may increase the amount distributed to creditors.
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