Company Liquidation

What is company liquidation?

The role of a liquidator is to investigate the financial affairs of an insolvent company. The liquidator is an independent party which creditors rely on to advise them about dividend prospects. Because they are responsible for conducting investigations into the financial affairs of a company, a liquidator must act impartiality, skill and diligence, and avoid placing themselves in a position where personal interests could conflict with professional duties.

The liquidator will:

• Secure and realise all company assets;
• Make all recoveries;
• Distribute resources to creditors;
• Conduct all relevant investigations into the financial affairs of the company;
• Make distributions to creditors (and distribute any surplus to shareholders);
• Inform both creditors and the Australian Securities and Investments Commission (ASIC) of their actions; and
• Arrange the de-registration of the company.

Except for lodging documents and reports required under the Corporations Act, a liquidator is not required to do any work unless there are enough assets to pay their costs.

In most cases, the liquidation of a company terminates the employment of employees. Employees have the right, if there are funds left over after payment of the fees and expenses of the liquidator, to be paid their outstanding entitlements in priority to other unsecured creditors. Priority employee entitlements are grouped into classes and paid in the following order:

1.  Outstanding wages and superannuation
2.  Outstanding leave of absence (including annual leave and sick leave, where applicable, and long service leave)
3.  Retrenchment pay

Each class is paid in full before the next class is paid. If there are insufficient funds to pay a class in full, the available funds are paid on a pro rata basis (and the next class or classes will be paid nothing). The priority claims of directors and their spouses or relatives for the period they are a director, spouse or relative of a director are limited to a maximum of $2,000 for outstanding wages and superannuation and $1,500 for outstanding leave entitlements. Directors and their spouses or relatives are not entitled to any priority retrenchment pay for the period they are a director, spouse or relative of a director. 

Employees may also be entitled to make a claim against the Fair Entitlements Guarantee (FEG). If the liquidator continues to trade the business for a short period to help in the winding up, employee entitlements accrued during this period (on terms agreed with the liquidator) are paid out of available assets as a cost of the winding up and before other outstanding employee entitlements.

Before any amount is paid to you for your outstanding entitlements, you will need to give the liquidator sufficient information to prove your debt. The relevant form is called a ‘proof of debt’, and can be obtained from the liquidator. The liquidator will notify you if there are likely to be funds available for distribution and will call for proofs of debt to be lodged. The liquidator may be able to tell you what the company records state is owed to you. However, as the records of a company in liquidation are often not well maintained, it is important that you keep your pay records or other records of the terms of your employment. 

You may also need these records to help you complete your income tax return and establish your entitlement to FEG. If company records are inadequate and you have insufficient information to justify your claim, it may be rejected. When submitting your claim, ask the liquidator to acknowledge receipt of your claim and advise if any further information is needed. If you have a query regarding the calculation of your claim, or the timing of the payment, discuss this with the liquidator. If the liquidator rejects your claim and you are dissatisfied with the decision, your first step should be to promptly contact the liquidator to see if you can resolve the matter. If you can’t, you have a limited time to appeal to the court. 

The liquidator will notify you of this time in the notice of rejection. It must be at least 14 days after you receive the notice. The court has the power to extend the time to appeal. If you don’t appeal within this time, the liquidator’s decision on your claim is final.

Employees who are owed certain employee entitlement after losing their job because their employer went bankrupt or into liquidation may be able to get financial help from the Australian Government. This help is available through the Fair Entitlements Guarantee (FEG).

Fair Entitlements Guarantee (FEG)

The FEG is a scheme of last resort, intended to assist employees who have lost their job because their employer entered liquidation or bankruptcy. The FEG will operate in relation to claims for assistance for unpaid employee entitlements for all employer insolvency events that occur on or after 5 December 2012. For more information about the FEG visit https://www.employment.gov.au/fair-entitlements-guarantee-feg, call the FEG Hotline on 1300 135 040 or email [email protected].

Most employees require a PAYG Payment Summary (group certificate) to complete and lodge their income tax return. A Separation Certificate may also be required before an employee who loses their job can apply for social security. If a liquidator pays you any employee entitlements, they must provide you with a PAYG Payment Summary recording the entitlements paid and any income tax deducted. Contact the liquidator to find out if they are going to prepare your PAYG Payment Summary for entitlements paid by the company prior to their appointment and, if so, what period it will cover. The liquidator is not obliged to prepare this. If you can’t obtain a PAYG Payment Summary for any period, contact the Australian Taxation Office on 13 28 61 to find out how to meet your obligations. Also contact the liquidator to find out if they are going to prepare your Separation Certificate. Contact Centrelink on 13 10 21 to find out what you should do if you can’t obtain a Separation Certificate.

Call Insolvency Guardian today on 1300 60 70 60 or click here to send us an enquiry.