Insolvency and Creditors’ Rights: The Impact on Priority Debts in Australia

When a company enters insolvency in Australia, a pressing question emerges: Who gets paid first? The classification of debts and the hierarchy in which they are repaid are critical for creditors. The Australian legal framework has established clear guidelines regarding this matter, ensuring fairness and clarity. This article sheds light on creditors’ rights and the impact on priority debts during insolvency.

Overview of Priority Debts

Priority debts are those repaid before other unsecured debts in the event of company liquidation. The Corporations Act 2001 sets out the order in which debts are to be repaid.

Secured vs. Unsecured Creditors

Before diving into the nuances of priority, one must understand the difference between secured and unsecured creditors:

Secured Creditors: These creditors have a ‘security interest,’ like a mortgage or charge over some or all of the company’s assets. In insolvency, they are entitled to enforce their security and get repaid from the proceeds.
Unsecured Creditors: They don’t hold any security for the debt owed. Their chances of repayment heavily rely on the leftover funds after secured creditors and priority debts are settled.

The Hierarchy of Priority

In the event of a company’s insolvency, the typical order of debt repayment is:

Liquidation costs: This includes the liquidator’s fees and other related expenses.
Employee Entitlements: Outstanding wages, superannuation, leave entitlements, and redundancy payments are given priority. They are typically paid in this sequence.
Unsecured Creditors: Unsecured creditors are next in line once the above debts are settled.

Creditors’ Rights in Insolvency

Participation in Creditors’ Meetings: Creditors have the right to participate in meetings, vote on resolutions, and get updates on the progress of the liquidation.
Submission of Proof: Creditors must submit a ‘proof of debt’ form to claim their owed amount.
Obligation to Repay: If a creditor has received an unfair preference payment or uncommercial transaction from the company, they might be required to repay it.

Role of the Liquidator

The appointed liquidator has to ensure that assets are fairly distributed among creditors according to the law. They will do the following:

Identify and sell the company’s assets.
Investigate and possibly recover unfair transactions.
Report any misconduct by company officials.
Ensure debts are paid in the correct order of priority.

Impact on Priority Debts during Voluntary Administration

If a company undergoes voluntary administration, the goal is to resolve the company’s future direction promptly. During this process:

A moratorium is placed on most unsecured creditors’ claims, meaning they cannot take action to recover their debts without the administrator’s consent or the court’s permission.
Secured creditors with charges over the whole or substantially the whole of the company’s property have certain rights to enforce their charge.