PCI knows insolvency – september 2019
Sep 14 2019
Priorities In A Liquidation: Who Gets Paid First?
In a liquidation, surplus funds are distributed generally in the following order:
- Costs of the Liquidation
- Outstanding employee entitlements
- Unsecured creditors
Every creditor in each category must be paid in full prior to payment of subsequent categories.
Should there be insufficient funds to enable a one hundred cents in the dollar dividend distribution for a particular priority group, the remainder of any surplus funds will be paid to each creditor on a pro rata basis.
Costs of the liquidation
Various components make up the costs of the liquidation: -
- The first in priority are expenses properly incurred by the Liquidator in preserving, realising or getting in property of the company, or carrying on the company’s business.
- Next, if the Court ordered the Winding Up, the applicant’s taxed costs with respect to the application of the Order.
- Finally, remuneration and disbursements of the Liquidator approved by creditors.
Outstanding employee entitlements
Once the costs of the liquidation have been satisfied in full, the remaining funds will be paid towards outstanding employee entitlements. However, the amounts payable towards excluded employees are limited.
An excluded employee is an employee who was atAn excluded employee is an employee who was at any time within 12 months prior to the date of liquidation, also a director, a spouse of a director, or a relative of a director. Priority dividends payable to excluded employees are limited subject to the type of employee entitlements outstanding. Any priority amounts exceeding the limits will be considered as an ordinary unsecured claim in the liquidation.
In order of priority, employee entitlements are paid as follows: -
- Wages and superannuation entitlements outstanding to employees prior to the date of liquidation. Payment for wages and superannuation to excluded employees is limited to a maximum of $2,000;
- Amounts owed in relation to injury compensation which arose prior to the date of liquidation;
- All amounts due on or before the date of liquidation with respect to leave entitlements (i.e. annual leave and long service leave). Payment for leave entitlements to excluded employees is limited to a maximum of $1,500;
- Retrenchment entitlements are paid last. Excluded employees are not entitled to any priority claim for retrenchment payments.
Secured creditors
Secured creditors are not considered in the Act. Instead, payment of secured debts will be made upon the realisation of the respective secured assets.
Secured creditors may elect to take possession of and realise their secured assets by way of appointment of a receiver or agent for the mortgagee in possession.
When a receiver is appointed by a secured creditor in relation to a circulating security interest such as cash, debtors and stock, the receiver or other person taking possession of the property or assuming control of property of the company must pay out of the property coming into their hands certain debts including outstanding employee entitlements, in priority to any claim made by the secured creditor.
In relation to a non-circulating security interest such as plant and equipment, the proceeds of sale are only applied to the debt of the secured creditor. There are no other priority claims.
Alternatively, secured creditors may allow a liquidator to realise the secured property and account to them regarding the proceeds of sale of the secured property.
Should the net proceeds, after deducting realisation costs, be insufficient to pay the secured creditor’s debt in full, the shortfall will be treated as an ordinary unsecured claim in the liquidation.
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