Who Gets Paid First in a Liquidation

Who Gets Paid First in a Liquidation

When a company enters liquidation, the order of payments is governed by secured creditor rights and then section 556 of the Corporations Act 2001, which sets out how remaining company property must be distributed.

Secured creditors enforce their security separately, so there are two stages of payment.

Step 1: Secured Creditors

Secured creditors are paid first from the assets secured in their favour. They are paid from the proceeds of the sale of the secured assets.

For example, if a lender holds security over equipment or property, they are entitled to recover the proceeds from the sale of those assets before funds are distributed to other creditors. If the sale of secured assets does not fully repay the debt, any shortfall becomes an unsecured claim and ranks accordingly.

It can get quite complicated when the secured assets are debtors and stock, because the Corporations Act requires the secured creditor to pay employee entitlements out of those assets before paying themselves.

Step 2: Distribution of Remaining Company Property

Once secured assets have been dealt with, the remaining company property is distributed in the order set out in Section 556.

1. Costs and Expenses of the Liquidation

The costs of administering the liquidation are given priority because the liquidation process cannot proceed without them. These include:

• Liquidator remuneration.
• Legal and professional fees.
• Costs associated with preserving and realising company assets.

2. Employee entitlements/Priority Unsecured Creditors

    Employees are afforded statutory priority for certain unpaid entitlements, including:

• Outstanding wages and superannuation
• Annual leave and long service leave
• Retrenchment pay, if applicable

Under Section 556, employee claims rank ahead of general unsecured creditors. This reflects a policy decision to protect workers in insolvency situations. Where company assets are insufficient, eligible employees may seek assistance under the Fair Entitlements Guarantee scheme administered by the Australian Government.

3. General Unsecured Creditors

Trade suppliers, contractors, and the ATO (for unsecured tax debts) are paid proportionally after priority claims are satisfied. In many insolvent liquidations, the return to unsecured creditors is limited or nil. 

4. Members/Shareholders

Shareholders are last in priority. They only receive a distribution if all creditor claims are paid in full, which rarely occurs in insolvent liquidations.

Once a company becomes insolvent, directors must prioritise creditor interests over shareholders. Understanding the order of creditor priority is important to prevent common misunderstandings about who “ranks” ahead of whom in liquidation, as the statutory framework ensures higher-ranking claims are addressed first, while any remaining funds are distributed proportionally among lower-ranking creditors.

In practice, it is often safest to leave the distribution of funds to a liquidator, as they are intimately familiar with this area of law and any new relevant case law that may arise.

Do you have more questions about our Company Liquidation? Read our full guide here