When a company goes into liquidation, the question every creditor wants answered is simple: am I going to get paid?
The honest answer depends entirely on where you sit in the creditor priority queue. And for most unsecured creditors, that answer is deeply uncomfortable.
Here is what every business owner, supplier, and trade creditor needs to understand about how money is distributed when a company is wound up in Australia.
What Is Creditor Priority in Liquidation?
Creditor priority refers to the order in which creditors are paid from the assets of a company in liquidation. The rules are set out in sections 556 and 560 of the Corporations Act 2001 (Cth) and apply across Australia.
The critical point: not all creditors are created equal. Your position in the queue determines whether you receive anything — or nothing.
The Creditor Priority Waterfall
Think of the distribution process as a waterfall. Money flows down from the highest priority to the lowest. Each tier must be paid in full before the next tier receives anything. If the assets run out halfway down, creditors below that point receive nothing.
1. Secured Creditors (First Priority)
Secured creditors hold a registered security interest over specific company assets — typically under a General Security Agreement (GSA) or a Purchase Money Security Interest (PMSI) registered on the Personal Property Securities Register (PPSR).
Secured creditors are paid first, ahead of everyone else, from the proceeds of their secured assets. If a bank holds a GSA over all company assets and the liquidation proceeds cover the debt, the bank is paid out before any other creditors receive a cent.
What this means for you: If you supply goods to a company without a PMSI registered on the PPSR, you are an unsecured creditor. Your goods become part of the general asset pool the moment the company takes possession of them.
2. Liquidator’s Costs and Expenses
Before any creditor is paid, the liquidator’s fees and the costs of running the liquidation are deducted from the available assets. These are priority payments under s556(1)(a)-(b) of the Corporations Act.
Liquidator fees can be substantial. In a complex liquidation, fees may consume a significant portion of the available assets before creditors see anything.
3. Priority Unsecured Creditors
After secured creditors and liquidator costs, certain unsecured creditors have statutory priority under s556(1)(e)-(h) of the Corporations Act. These are employee entitlements:
- Unpaid wages and salaries (up to four months)
- Unpaid leave entitlements (annual leave, long service leave, sick leave in lieu)
- Retrenchment payments
- Superannuation guarantee contributions
Employee entitlements receive explicit legislative protection precisely because workers have no ability to assess or manage their counterparty risk in the way commercial creditors can.
Where Does the ATO Sit?
This is one of the most commonly misunderstood aspects of creditor priority. The ATO is generally an ordinary unsecured creditor for unpaid company tax debts. However, the ATO holds significant enforcement powers that place it in a different practical position:
- Director Penalty Notices (DPNs) allow the ATO to pursue directors personally for unpaid PAYG withholding and SGC — bypassing the liquidation queue entirely
- The ATO’s ability to pursue directors personally means that even if the company owes the ATO money and the ATO recovers nothing from the liquidation, individual directors may still face personal liability
4. Ordinary Unsecured Creditors
This is where most trade creditors, suppliers, and commercial lenders find themselves. Ordinary unsecured creditors include:
- Trade suppliers and vendors owed money for goods or services
- Landlords owed unpaid rent (beyond the priority period)
- Customers who paid deposits for undelivered goods or services
- Banks with unsecured overdraft facilities
- Related parties owed loans
Ordinary unsecured creditors are paid pari passu — that is, proportionally — from whatever assets remain after secured creditors, liquidation costs, and priority unsecured creditors have been paid.
In practice, ASIC statistics consistently show that unsecured creditors recover less than 10 cents in the dollar in the vast majority of liquidations. The earlier you act, the better your position.
5. Subordinated and Related Party Creditors
Certain creditors are subordinated by operation of law or by agreement. Related party creditors — directors, shareholders, associated entities — may have their claims subordinated or set aside if the liquidator determines they arose from uncommercial transactions or were preferential payments made in the six months before liquidation.
6. Shareholders
Shareholders are last in the queue. They receive nothing until all creditors have been paid in full. In an insolvent liquidation — by definition, one where assets are insufficient to pay all creditors — shareholders receive nothing.
What Can You Actually Recover?
The data is stark. In most insolvent company liquidations, according to ASIC’s published statistics:
- Secured creditors typically recover 70–90 cents in the dollar
- Priority unsecured creditors (employees) typically recover 80–90 cents in the dollar, supplemented in many cases by the Fair Entitlements Guarantee
- Ordinary unsecured creditors typically recover 0–11 cents in the dollar
That figure — 0–11 cents in the dollar — is the reality for most trade creditors when a customer goes into liquidation.
How to Protect Yourself Before Insolvency Happens
The most powerful protection available to trade creditors is not legal action after insolvency — it is security registered before it.
Register a PMSI on the PPSR
If you supply goods on credit, register a Purchase Money Security Interest (PMSI) on the Personal Property Securities Register before delivering goods. A properly registered PMSI elevates your claim above a general secured creditor for those specific goods — and keeps you out of the general unsecured pool.
Include Retention of Title Clauses
A properly drafted Retention of Title (ROT) clause preserves your ownership of goods until payment is received. Combined with a PPSR registration, ROT provides meaningful protection against a customer entering administration before paying you.
Monitor Your Debtors
Watch for warning signs: late payments, requests to defer invoices, ASIC search alerts on key customers, and any change in payment behaviour. Once a company enters voluntary administration, your ability to enforce security or recover goods is immediately constrained by the statutory moratorium. Speed matters.
What to Do When You Learn a Customer Has Gone Into Liquidation
- Immediately register your proof of debt with the liquidator. Missing this deadline can exclude you from any distribution entirely.
- Check your PPSR registration — is it valid and properly perfected? Registration lapses and defects are time-sensitive to resolve.
- Review your contracts — did you include ROT clauses? Is the liquidator treating your goods as company property?
- Assess whether assets have been correctly identified — if you believe the liquidator has undervalued or missed assets, creditors have standing to challenge this.
- Consider whether a preference claim exists — if the company paid you within six months before liquidation in circumstances that suggest you were preferred over other creditors, be aware the liquidator may seek to recover those funds.
Boss Lawyers Can Help
We regularly act for creditors in complex Queensland and Federal Court liquidation proceedings — from proof of debt disputes and liquidator challenges to PPSR enforcement and director liability claims. If a customer has gone into liquidation and you are owed money, get advice early.
1300 267 711 | bosslawyers.com.au | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Frequently Asked Questions
Do I need a lawyer to lodge a proof of debt?
You do not need a lawyer to lodge a basic proof of debt form. However, if your claim is contested, complex, or involves a large amount, legal advice can significantly improve your outcome and ensure your claim is correctly formulated. This is general information only and is not legal advice. Obtain professional advice specific to your circumstances.
How long does a liquidation take before creditors are paid?
Timelines vary widely. Simple liquidations may be completed in 6–12 months. Complex liquidations involving litigation, asset recovery, or disputed claims can take several years. As a creditor, you are entitled to receive updates from the liquidator at prescribed intervals. This is general information only and is not legal advice. Obtain professional advice specific to your circumstances.
Can Boss Lawyers help creditors in liquidation proceedings?
Yes. We regularly act for trade creditors, secured creditors, and creditors’ committees in Queensland and Federal Court proceedings arising from corporate insolvency. Call 1300 267 711 for a confidential consultation. This is general information only and is not legal advice. Obtain professional advice specific to your circumstances.
Related Reading:
Can a Creditor Wind Up a Company That Owes Them Money? | Insolvency Lawyers Brisbane | What Is Liquidation? A Complete Guide for Australian Directors | Proof of Debt: What It Is and How to Lodge One
