WHAT YOU NEED TO KNOW

Taking an interest in the liquidation of a company that owes you money may stand you in good stead to secure a better financial return.

The recent Australian Federal court case of Robinson, in the Matter of ACN 069 895 585 Pty Ltd (formerly known as Waterman Collections Pty Ltd) (in liq) [2013] FCA 706 highlighted the importance of creditors participating fully in the liquidation process rather than sitting on the sidelines and assuming the game is over.
So whether you’re an employee who is owed wages by a company in liquidation or a supplier seeking payment from an outstanding debtor on the brink of external administration, here is an overview of the rights and obligations of creditors in an insolvency.

Types of creditors

If a company owes you money, you are a creditor of that company.
Creditors are divided into two separate categories:

  • Secured
  • Unsecured

The question of who gets paid first when the debtor company becomes insolvent depends on their priority status as a creditor. The ranking or ‘priority’ of creditors will dictate the dividend in a winding up of the company or payable under a Deed of Company Arrangement (in the case of a voluntary administration).
Being aware of the primary differences between the types of creditors will assist creditors in understanding and engaging in insolvency processes for their own benefit.

Secured creditors

A secured creditor is someone who has a security interest (as defined in s 12 of the Personal Property Securities Act 2009), such as a mortgage or a charge, over some or all of the company’s assets, to secure a debt owed by the company.
In the event that a company defaults on its obligations under a security interest, a secured creditor can appoint an independent, qualified receiver to take control of and realise some or all of the secured assets to satisfy the secured creditor’s debt. The assets must be sold at market value (or the best reasonably attainable price).

A secured creditor is entitled to:

  • vote at creditors’ meetings for the amount the company owes them that exceeds the amount they are likely to receive from the realisation of the secured assets;
  • participate in any dividend to unsecured creditors on a similar basis.

Unsecured creditors

Unsecured creditors rank lower in priority than secured creditors as they have no ‘security’ over company assets. Unsecured creditors may include companies that sold goods or services to the company, ie, suppliers and the Australian Taxation Office.
If a company goes into liquidation, once a creditor has lodged a proof of debt, they will need to await the outcome of the liquidator’s investigations. If there are sufficient funds left in the liquidation after payment of liquidator’s fees and costs, and payment to priority creditors (ie, employees and secured creditors), the liquidator will distribute remaining monies to unsecured creditors as a dividend payment.
Each category of creditor is paid in full before the next category is paid. If there are insufficient funds to pay a category in full, the available funds are paid on a pro rata basis (and the next category or categories will be paid nothing). Unfortunately, there is no guarantee that creditors will get paid at all – in certain cases, there will be no money (or only a percentage) left in the pool to satisfy creditor claims.

Priority unsecured creditors

So what happens when an employee loses their job after their employer company becomes insolvent? Facing unemployment and the unlikely payment of outstanding entitlements is a daunting prospect for those who have been cast out after a company enters liquidation.
Employees can, however, take comfort in the fact that they are a special class of unsecured creditors with priority over other unsecured creditors to obtain employment entitlements.
Section 556 of the Corporations Act 2001 (Cth) (Act) lists the priorities for dividends in a liquidation including employee entitlement priorities. Generally, employees of the company have a statutory priority of payment with respect to outstanding entitlements (after payment of the costs and expenses of the liquidation, including liquidator fees) such as (in order of priority):

  • wages and superannuation contributions
  • personal injury compensation (if owing)
  • leave entitlements, ie annual leave/holiday pay, personal leave (sick pay) and long service leave
  • redundancy payments.

The only exception to this rule relates to ’excluded employees’. An excluded employee is someone who in the 12 months prior to the liquidation has been or is a director, spouse of a director or relative of a director. Excluded employees are subject to a priority cap of $2,000 for unpaid wage and superannuation entitlements and $1,500 for leave entitlements. The balance of entitlements will be treated at the same priority level as ordinary unsecured creditors.
Employees enjoy priority over the floating assets of the company (or those assets secured by ‘circulating security interests’) of secured creditors (s 561 of the Act).

Fair Entitlements Guarantee Act 2012

For employees who have lost their jobs when their employer company goes into liquidation, and the company has exhausted its funds or it will take a long time for liquidator to realise assets, the Federal Government also offers the Fair Entitlements Guarantee (FEG) legislative scheme (previously the General Employee Entitlements and Redundancy Scheme or GEERS). These schemes are managed by the Department of Employment (DOE).
Subject to eligibility requirements, the safety net scheme can offer funding relief by payment of leave entitlements, wages, payment in lieu of notice and redundancy entitlements (superannuation is not covered by this scheme).
FEG will operate in relation to employer liquidations and bankruptcies occurring after 5 December 2012 and GEERS will continue to operate in relation to insolvencies prior to 5 December 2012. Pursuant to s 560 of the Act, for any monies paid out by DOE under the GEERS and FEG schemes, DOE are granted the same priority as employees in the liquidation setting.

Liquidation: creditors’ rights generally

Once a company has entered into liquidation, creditors can often feel frustrated, uninformed or ‘out of the loop’ as if they have little control over the insolvency process and decisions that are made by the liquidator.
In a liquidation context, creditors should be aware that they have the right to:

  • submit a proof debt to the liquidator (with invoices and other supporting evidence to prove the existence of the debt)
  • ask the liquidator questions about the status of the liquidation and inform the liquidator about the creditor’s knowledge of the company’s affairs
  • provided they cover the costs, creditors may request that the liquidator call a creditors’ meeting at other times than as specified under the Act
  • vote at creditors’ meetings or appoint special or general proxies to attend and vote on the creditor’s instructions
  • receive written liquidation reports
  • inspect certain books
  • complain to ASIC or the court about the liquidator’s conduct.

Dealing with corporate insolvency as can be a confusing and complex process. As Insurance Australia Limited (IAL) discovered in the Robinson case, providing valuable information and litigation funding assistance and/or being actively involved may well lead to a better result at the end of the external administration process.

For more information on corporate insolvency review the resources below or contact us today.

CORPORATE INSOLVENCY KNOWLEDGE & ARTICLES

DEBT RECOVERY
If a creditor is owed money by a company, there are many ways they can seek to recover it. Directors and companies should be aware of their rights and obligations in the event that debt collection processes are in full swing and the company is exposed to legal action and enforcement.

CORPORATE INSOLVENCY: AN OVERVIEW
A formal insolvency commences when a company is unable to pay its debts, prompting the appointment of an external administrator. Understanding the overall insolvency framework can assist you to lessen any financial and emotional impact as you move through the complex insolvency processes. The three most common types of formal insolvency appointments are Voluntary Administration, Liquidation and Receivership.

CREDITORS’ MEETINGS
When a company goes into liquidation, the Liquidator will use a Creditors’ Meeting to communicate with the creditors about the progress of the liquidation and to seek approval or guidance from creditors. In the case of Creditors Voluntary Liquidation a creditors’ meeting is required to be convened within 11 days of the appointment of a liquidator.

DIRECTOR PENALTY NOTICE
One of the most powerful tools wielded by the Australian Taxation Office is the ability to issue a Director Penalty Notice (DPN) against company directors for certain company debts including PAYGW and SGC. Serious implications flow from non-compliance with the ATO’s requirements it pays to be informed, upfront, lodge company statements on time and to maintain good order in the books.

EMPLOYEE ENTITLEMENTS SAFETY NET
When a Director is contemplating putting their company into liquidation, one of their biggest fears is that their loyal and hardworking staff won’t be paid their entitlements. Fortunately there is a government safety net that protects employee entitlements in these situations.

INSOLVENT TRADING
Insolvent trading occurs when a company is unable to pay its debts and continues to incur further debt. When a company is experiencing a cash flow or liquidity crisis, it is important that its directors and officers consider the company’s ability to pay all of its debts as and when they become due.

LIQUIDATORS’ RECOVERY ACTION
The Corporations Act 2001 (Cth) (Act) permits liquidators to recover certain transactions made within a set period before the commencement of a company’s liquidation. These transactions are known as “voidable transactions”.

CORPORATE TURNAROUND
Get a broad overview of the major steps in turnaround strategy. One of the major drivers for business insolvency is failure to challenge business models and take strategic action early. When businesses started to find themselves in a tight financial position it is vital that an appropriate turnaround strategy is implemented quickly.

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