Liquidation is the formal winding up of a company's affairs. A liquidator is appointed — by the creditors, by the court, or automatically at the expiry of a voluntary administration — and takes control of the company's assets. The liquidator's job is to realise those assets and distribute the proceeds to creditors in a legally prescribed order. For unsecured trade creditors, that distribution often returns cents in the dollar — or nothing at all. But taking the right steps quickly can improve your position.
Types of liquidation
There are three main types of company liquidation in Australia:
- Creditors' voluntary liquidation (CVL) — the company's shareholders resolve to wind it up because it is insolvent. A liquidator is appointed by creditors. This is the most common form for insolvent companies.
- Court-ordered (compulsory) liquidation — a court orders the winding up of the company, usually on application by a creditor following an undisputed statutory demand or proof of insolvency.
- Members' voluntary liquidation — the company's shareholders wind it up voluntarily because it is solvent. Creditors are paid in full; this form rarely concerns trade creditors.
Lodging a proof of debt
As an unsecured creditor, you must lodge a proof of debt with the liquidator to participate in any distribution. The liquidator will issue a formal proof of debt form and set a deadline. Your proof of debt must:
- State the amount you are owed, clearly and accurately.
- Describe the basis of the debt — the goods or services supplied, the dates, the invoices.
- Attach supporting documents — invoices, purchase orders, signed agreements, statements of account.
Lodge your proof of debt promptly. Missing a deadline can exclude you from a distribution entirely. If you become aware of the liquidation before receiving formal notice, contact the liquidator directly to obtain the form and deadline.
Priority of creditors
The Corporations Act prescribes the order in which a liquidator distributes the company's assets:
- The liquidator's own fees and the costs of the liquidation.
- Secured creditors (those with a registered PPSR security interest or a fixed charge over specific assets).
- Priority unsecured creditors — primarily employees, for unpaid wages, entitlements and superannuation (up to certain limits).
- Ordinary unsecured creditors — which is where most trade creditors sit.
- Shareholders.
In most insolvent liquidations, the available assets are consumed by the first three categories. Ordinary unsecured creditors are often paid nothing, or a small dividend calculated on whatever remains after higher priorities are satisfied.
Creditors' meetings
The liquidator will call meetings of creditors at key points in the liquidation — typically at the outset to receive the liquidator's report and vote on the conduct of the liquidation, and at the end to receive a final account. Attending these meetings, or appointing a proxy, gives you visibility over the liquidation and allows you to vote on matters that affect the return to creditors.
The committee of creditors, if one is formed, has a more active role in supervising the liquidator's conduct. For larger liquidations where meaningful assets exist, participation in the committee of creditors can be worthwhile.
What else can you do?
Beyond lodging a proof of debt, consider:
- PPSR registration — if you have a registered security interest over goods you supplied, you may be able to recover those goods rather than waiting for a distribution. Check your registration promptly.
- Retention of title — if your terms of trade contain an effective retention-of-title clause, you may have grounds to recover specific goods you supplied. Act quickly — liquidators may dispose of stock.
- Director liability claims — if the company was trading while insolvent (incurring debts it could not pay), the liquidator may bring an insolvent trading claim against the directors. As a creditor, you benefit indirectly if the claim succeeds and recovers funds for the estate.
- Unfair preference payments — if the company paid other creditors preferentially in the period before liquidation, the liquidator may claw back those payments into the estate for distribution among all unsecured creditors.
This guide is general information only. It does not constitute legal or financial advice. Insolvency proceedings involve complex legal and commercial questions — obtain qualified legal advice promptly when a debtor enters liquidation.