Liquidation
What is a liquidation?
Liquidation is the orderly winding up of a company’s affairs. It involves realising the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders.
The two types of liquidation for an insolvent company ar
- court, and
- creditors' voluntary.
A creditors voluntary liquidation is a liquidation initiated by the company. A court liquidation starts as a result of a court order, made after an application to the court, usually by a creditor of the company.
What is the liquidator’s role?
When a company is being liquidated because it is insolvent, the liquidator has a duty to all the company’s creditors. Their role is to:
- collect, protect and realise the company’s assets
- investigate and report to creditors about the company’s affairs, including any unfair preferences which may be recoverable, any uncommercial transactions which may be set aside, and any possible claims against the company’s officers
- enquire into the failure of the company and possible offences by people involved with the company, and report to ASIC
- after payment of the costs of the liquidation, and subject to the rights of any secured creditor, distribute the proceeds of realisation - first to priority creditors, including employees, and then to other unsecured creditors, and
- apply for deregistration of the company on completion of the liquidation.
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.
Will I get paid in a liquidation?
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:
- outstanding wages and superannuation
- outstanding leave of absence (including annual leave and sick leave, where applicable, and long service leave), and
- 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 General Employee Entitlements and Redundancy Scheme - that is, GEERS.
If the liquidator continues to trade the business for a short period to help in the winding up, employee entitlements accruing 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.
How do I get paid in a liquidation?
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 GEERS.
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.
What is the General Employee Entitlements and Redundancy Scheme?
The General Employee Entitlements and Redundancy Scheme (GEERS) is a basic payment scheme designed to assist employees whose employment has been terminated due to the liquidation or bankruptcy of their employer and who are owed certain employee entitlements.
GEERS is administered by the Department of Education, Employment and Workplace Relations (DEEWR), in accordance with the GEERS Operational Arrangements. You may be eligible for assistance under GEERS if you:
- lost your employment because your former employer had a liquidator appointed
- are owed certain employee entitlements, and
- lodge your claim within 12 months of the date you lost your job or the date your former employer went into liquidation, whichever is the latest.
Assistance is not available if:
- your former employer is under the control of an administrator, receiver and manager, or is subject to a deed of company arrangement or a creditors’ trust
- you were not an employee (i.e. you were a contractor, sub-contractor or an agent)
- you were an ‘excluded employee’ (being an employee of the company who is, or was during the 12 months before the appointment of the insolvency practitioner, a director of the company or a spouse or relative of such director), or
- funds will be available from your insolvent employer to pay your outstanding entitlements within 16 weeks of DEEWR receiving your GEERS claim.
You may be eligible to receive assistance under GEERS for the following employee entitlements:
- unpaid and underpaid wages in the three-month period prior to the appointment of the insolvency practitioner (including amounts deducted from your wages, but not paid on; for example voluntary superannuation contributions made by you, but not passed on to your superannuation fund)
- all unpaid annual leave
- all unpaid long service leave
- up to a maximum of 5 weeks unpaid pay in lieu of notice, and
- up to a maximum of 4 weeks redundancy pay for each completed year of service you have with your employer.
GEERS only covers the entitlements you are legally entitled to receive. Your assistance under GEERS will be calculated in accordance with your entitlements under legislation, an award, a statutory agreement or a written contract of employment, or otherwise as confirmed in writing at the time of the appointment of the IP.
For example, you will not necessarily receive redundancy pay of 4 weeks per year of service—the assistance you receive will be based on the redundancy entitlement provided for in your legal instrument.
Employees who earn more than the GEERS maximum annual wage at the date that their employment was terminated will have their GEERS advance calculated as if they earned that limit. The maximum annual wage is indexed annually and available at the GEERS website.
Any GEERS advance may affect your entitlement to a government allowance provided by Centrelink.
Employer superannuation contributions are not covered by GEERS. To pursue your outstanding superannuation entitlements, you may wish to contact the Australian Taxation Office.
Do I receive a payment summary or separation certificate?
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.
More information
GEERS website
ATO website for superannuation
Centrelink website
Return to Employees
ASIC Website: Printed 02/04/2012
