The economic fallout of the COVID-19 pandemic has impacted businesses in a big way and unfortunately that means a rise in insolvencies. But what happens if a company that owes your company money goes into liquidation - will you be paid? And what can you do to increase the likelihood of recovering your debt?

What is liquidation? 

A business or company that is unable to pay off its debts is considered insolvent and may go into liquidation. A liquidator may be appointed to sell off the assets and pay creditors in an orderly and fair manner. 

Who counts as a creditor? 

You are a creditor if you have provided products, services or loans to a company or business. You may be a creditor if you are a customer who has paid in full for services or products that have not been delivered. You may also be a creditor if you are an employee who is owed wages by the company.

Reporting to creditors 

The appointed liquidator will report to creditors with the following information:

• Information regarding your rights as a creditor
• A report regarding the disposal of assets within three months of appointment
• Any other information or other statements that the creditors may reasonably request

Unfortunately, not all creditors get paid, or you may not receive the entire amount owed, depending on what's left after the sale of assets. 

Debts are settled in a specific order according to law. 

How creditors are paid after sale of assets 

Once a company goes into liquidation, there is an order in which creditors will be paid.

1. Liquidators are paid first.
2. Payment of liquidators is followed by the payment of wages and the settlement of superannuation.
3. Settlement of pending employee leave. 
4. Secured creditors (someone who owns a security interest in the company, like a mortgage) get paid before unsecured creditors:

           o    Banks, for instance, are considered secured creditors as they will hold a fixed or floating interest in the business assets.

      5.    Unsecured creditors (do not have a secured interested in the company assets) will be one of the last groups to be paid before shareholders. 

           o    Examples of unsecured creditors include customers, suppliers and contractors
           o    The ATO (Australian Tax Office) could also be an unsecured creditor where the company owes tax payments.

How can unsecured creditors get paid?

Unsecured creditors have no guarantee of getting paid by a company that has been liquidated. However, you may be able to recover your debts in the form of dividends over some time (if there are funds left over after secured and priority creditors have been paid).

If there are insufficient funds left over, unsecured creditors are then paid on a pro-rata basis. It’s best to contact the liquidator and provide proof of debt and supporting documentation to authenticate your claim.

How to become a secured creditor

You can become a secured creditor by registering your security interest with the Commonwealth Government’s Personal Property Securities Register (PPSR). However, this only applies before a company goes into liquidation. So to avoid not being paid by debtors down the track, it’s a good idea to register your security interests to protect your debt.