If you are a creditor of a business that has gone into liquidation, you need to understand your rights. There are certain duties, or processes, that the liquidator must follow. As a creditor, you should ensure that you get as much of the money owed to you as possible. It is important that you understand the liquidation process and the role of the liquidator.
At this stage, it is recommended that you consult with a professional financial advisor. A financial expert will understand the liquidation process and will help make sure you do whatever is necessary to maximise your payout from the process. A letter of demand could be issued. This includes documentation such as invoices and notifications to reinforce your claim.
Which creditors get paid first in a liquidation process?
The role of the liquidator is to sell assets of the insolvent company to pay their debts. The funds realised from the sale of the assets are generally distributed to creditors in the following order:
- The liquidator
- costs and expenses including the liquidator’s fees
- Secured creditors
- often banks and financial institutions. Secured creditors have provided credit backed by collateral. This may be property or other company assets.
- Employees of the company
- outstanding wages and superannuation, leave and redundancy payments
- Unsecured creditors
- providers of goods and services or small lenders. If there is unpaid tax, the ATO may be classed as an unsecured creditor
- includes unsecured creditors with an association to the insolvent company
Each type of creditor must be paid in full before the liquidator can begin to pay the next group. If the liquidator has insufficient funds then the available funds are distributed to the current class of creditor on a pro-rata basis. The remaining categories will receive nothing.
The liquidation process for creditors
The liquidator’s role is to take control and wind up the affairs of the company. They must sell the insolvent company’s assets to generate funds to pay debts owed to the company’s creditors. The liquidator will also investigate the cause of the failure of the company, including any offences that may have been committed. Any irregularities are reported to the Australian Securities and Investments Commission (ASIC).
Creditors have rights and entitlements during liquidation, concluding in the settlement of their debt. The liquidator must follow a process that includes the following:
1. Creditors’ reports
The liquidator provides updates and formal reports to the creditors. An initial report provides notice of the appointment of the liquidator and information advising creditors of their rights.
Within three months, the liquidator must issue a statutory report to creditors. This report is a summary of the liquidator’s investigations. The report lists the company’s estimated assets and outstanding debts. It should include details of what may have caused the company to become insolvent and the likelihood of creditors receiving any funds. It must also outline the rights of creditors.
2. Creditors’ meetings
The liquidator may arrange creditors’ meetings to provide updates on progress. Creditors may request a meeting to provide information on the company or to ask questions about the liquidation. Concerns about the liquidator’s conduct may be raised and may result in the liquidator being replaced.
3. Committee of Inspection
Creditors may form a committee of inspection to assist and advise the liquidator. The committee may review progress and assess the conduct of the liquidator. The committee members will be asked to approve the liquidator’s fees before the distribution of funds.
4. Payment of debts
Debts will be settled in the order detailed above. It is highly recommended that you seek financial advice to help ensure that you receive all of the funding that your business is entitled to. Ideally, you would have asked for advice as soon as you realised that you were trading with a company at risk of insolvency. A professional finance team will help to keep your business trading profitably.
Corporate Lifeline – Options and strategies for creditors
It would be a wise business decision to seek financial advice as soon as you spot the signs that a customer or trading partner is having financial problems. Corporate Lifeline understand liquidation and will advise and guide you to ensure you reach the best outcome to keep your company viable.
The liquidation process is stressful and often difficult for creditors. Ask Corporate Lifeline to help ease you through the process while making sure your business remains competitive.
Don’t leave it too late, contact Corporate Lifeline today.