Corporate Insolvency FAQ

In a liquidation, does the ATO get paid before other creditors?

No. The ATO’s priority in respect of unremitted PAYG (and certain other taxes) was abolished in 1993 and the ATO now ranks equally with other unsecured creditors (over 20 years later some people are still unaware of this change).

However, the ATO is in a better recovery position in corporate and personal matters compared to other unsecured creditors because of the ATO’s legislative power regarding, among other things, director penalty notices (“DPNs”), statutory garnishees, PAYG withholding and SGC estimates, departure prohibition orders (preventing a tax debtor from leaving the country) and notices to provide information.

What is a Director Penalty Notice (“DPN”)?

A method by which the ATO can impose personal liability on company directors for PAYG withholding and SGC debts without the delay or expense of taking legal action.

For further information, ask us for a copy of our Fact Sheet on DPNs.

Where can I find an insolvency practitioner?

  • At Sheridans.
  • Consult your accountant or lawyer.
  • ASIC’s professional register of registered liquidators.
  • Last resort – Google!

I’m a shareholder of an insolvent company in liquidation. Will I get my share capital back?

Unlikely. Shareholders rank behind creditors in a liquidation. However, you can probably realise a capital loss in due course.

Am I an unsecured creditor?

You may be an unsecured creditor if you have:

  • paid in full for goods or services to be collected or delivered later,
  • paid a deposit, such as in a lay-by agreement or interest-free offer,
  • bought a gift card or voucher and have not used it,
  • returned a product and been issued a credit note,
  • provided services or goods to the company on credit, or
  • made loans to the company.

What is an excluded employee?

An employee who has also been a director of the company, or a relative of a director, at any time in the 12 months before the appointment of an external administrator. Excluded employees are entitled to only limited priority for repayment of their outstanding entitlements.

I am a creditor of a company in liquidation and despite my requests the liquidator will not convene a meeting of creditors.

A liquidator must call a creditors’ meeting if at least one-tenth in value of all the creditors request in writing the liquidator to do so.

What is the minimum amount of a debt upon which a statutory demand (for the purpose of a winding up application) can be based?

$2,000

What kind of creditor am I?

Generally there are two categories of creditor: secured and unsecured. There are also priority (unsecured) creditors (i.e. employees) and occasionally contingent creditors.

How does insolvency affect me if I am a debenture holder?

With debentures, you lend your money to a business, usually for a fixed term. For this reason, debenture holders are usually creditors of a company.

The effect of an external administration is usually a freeze on any payments to you. There is then an orderly realisation of company assets and the distribution of net proceeds to creditors, in the prescribed order of priority.

What is a DOCA?

A Deed Of Company Arrangement (DOCA) is a binding agreement between a company and its creditors governing how the company’s affairs will be dealt with.

As a director, what is my role in assisting an external administrator?

You must provide the external administrator with all records and information in your possession, and if any company property and records are not in your possession, you must tell the administrator where they are. You must also assist by providing a written report about the company’s assets and liabilities.

I’m a shareholder. How does insolvency affect me?

Shareholders rank behind creditors in a liquidation, although in some circumstances they can claim as a creditor. As a shareholder you receive limited information from the external administrators of insolvent companies. If a company is placed into administration or liquidation, shareholders cannot transfer shares in the company without permission from the external administrator or the Court. As a shareholder of an insolvent company, you can realise a capital loss in certain circumstances.

Am I an employee?

In an external administration you are likely to be classified as an employee if you are:

  • engaged by the company under an award, Certified Agreement, Australian Workplace Agreement or a contract of employment, and
  • paid a salary, wages or commission.

Contractors are not employees. They are ordinary unsecured creditors.

What do I do if I believe a company I am dealing with is in financial trouble?

First raise your concerns with the company. If this fails to resolve your concerns, your options include reviewing ongoing trading arrangements, seeking legal advice and lodging a complaint with ASIC.

What is meant by a company under external administration?

This usually means that an independent insolvency practitioner has been appointed to the company as liquidator, voluntary administrator or receiver.

What are my duties as a director?

Generally, in addition to the requirement to ensure compliance with general and specific laws applying to your company’s operations, your primary duty is to the shareholders.

However, if your company is insolvent, or there is a real risk of insolvency, your duties expand to include creditors (including employees).

What do I do if my company is in financial difficulty?

Obtain proper accounting and legal advice as early as possible, as this increases the likelihood of the company surviving.

Is it illegal for a business to fail?

No. It is part of the competitive, free enterprise market economy. What may be illegal is to do nothing, or carry on trading, while the business is failing.

Who can be a director?

Anyone over 18 years who is not disqualified from management.

But anyone becoming a director should have a good understanding of the issues involved with corporate governance, and be fully aware of their responsibilities, duties and exposure to personal liability.

As a creditor of a company, can I make an insolvent trading claim against the company’s directors?

Insolvent trading claims are usually made by the company’s liquidator.

However, in certain circumstances a creditor may pursue civil liability proceedings against directors contravening the insolvent trading provisions. Generally the creditor needs the permission of the liquidator or inactivity by the liquidator.

What’s my role when an administrator has been appointed to my company?

As a company officer you must assist any insolvency practitioner (liquidator, receiver or administrator) appointed; in particular you must provide reports as to affairs, records, information and other assistance, in order to avoid penalties.

What is a receivership?

Receivership is a unique form of administration that has developed historically largely through case law from the law of contract.

There are a number of categories of receivership. The purposes of receivership are varied but a common purpose is to appoint an independent person, known as a receiver or receiver/manager, to collect or make safe income or assets or both, usually for the purpose of realisation or at least protection, so as to benefit a particular party, or parties, or protect a party’s contractual rights.

One of the most common forms of receivership is the private appointment of a receiver by a charge or debenture-holder, the power for which arises from a contractual agreement between a lender or supplier and the company, and whose contractual objective is the repayment of moneys owing to the lender/supplier.

Who can be a liquidator?

In the case of an insolvent entity, if the company is being wound up voluntarily (or goes into liquidation following a voluntary administration) or through the Courts, the liquidator must be a Registered Liquidator.

A Registered Liquidator is a person qualified by registration with ASIC to act as liquidator under the Corporations Act.

For a solvent company, the liquidator need not be a Registered Liquidator if the company is an exempt proprietary company, but in practice a Registered Liquidator is often chosen.

What is a statutory demand?

It is a demand for immediate payment of an outstanding debt by a creditor against a company. If the company fails to comply with the demand to pay, it is presumed to be insolvent and that presumed insolvency may be used as a ground for winding up by the creditor who made the demand, by any other creditor or by any other applicant for winding up.

Where a debt the subject of a demand is in substantial dispute between the company and the creditor, deemed inability to pay debts will not result.

Who is a shadow director?

A shadow director is a person on whose directions and instructions the directors of a company are accustomed to act.

Any such persons who exercise a strong influence over the board of directors, or even a majority of the board, can be classified as directors and can be liable for insolvent trading.

Who appoints liquidators and administrators?

In an Official Liquidation, the liquidator is appointed by the Court, although the applicant can usually nominate a liquidator.

The shareholders appoint the liquidator in a Creditors’ Voluntary Liquidation and usually the directors appoint the administrator in a Voluntary Administration. In both regimes, creditors have the opportunity at the first meeting of creditors to replace the liquidator / administrator with the qualified professional of their choice.

Do lease creditors have any priority in a liquidation?

Lease creditors have as security their goods subject to the relevant lease. If they suffer a shortfall after repossessing and selling their goods, the shortfall is an unsecured claim that has no priority.

What is a preference?

Put simply, a preference is a transaction which has the effect of giving one creditor preference or advantage over other creditors in general.

The transaction must have occurred within 6 months of the company going into liquidation.

The rationale of the Corporations Act preference legislation is to enforce equal treatment of creditors by invalidating transactions that are preferential.

When should I lodge my proof of debt with a liquidator?

As soon as possible. Certainly when you receive notice from a liquidator that a dividend is to be paid, a claim should be submitted immediately. In any event, it is prudent for creditors (and useful for the liquidator’s investigation) to lodge their claims as soon as possible and to obtain acknowledgement of receipt of the claim.

What is the difference between liquidation and bankruptcy?

Companies are liquidated and individuals bankrupted.

Two separate pieces of legislation are involved: liquidations are governed by the Corporations Act and bankruptcies by the Bankruptcy Act. At the finalisation of a liquidation, the company is deregistered, i.e. it ceases to exist, while a bankrupt survives bankruptcy. While a bankrupt loses their assets at the date of bankruptcy, one of the principal aims of the bankruptcy process is to provide a mechanism for the financial rehabilitation of bankrupts.

Will you make sure the directors go to jail?

No. Even if the directors are guilty of a criminal offence, liquidators do not have the power to pursue criminal matters (and you only go to jail for criminal matters). Liquidators are duty bound to report criminal matters to the Australian Federal Police, ASIC and AFSA, but only these organisations, in conjunction with the Department of Public Prosecutions, can pursue and prosecute someone for a criminal offence.