Managing Debts From Companies In Liquidation: Australian Legal Insights

If a customer, supplier or business partner you’ve been dealing with goes into liquidation, it’s stressful - especially if you’re still waiting to be paid. The good news is there are clear Australian rules about what happens next, who gets paid first, and how you can lodge your claim properly.

In this guide, we break down liquidation under Australian law, the liquidator’s role, how creditor priority works, and the practical steps you should take right now. We’ll also share proactive ways to reduce risk next time - from getting security on the PPSR to tightening your Terms of Trade.

What Does Liquidation Mean In Australia?

Liquidation is the formal process to wind up a company that’s insolvent (it can’t pay its debts when due). It’s governed by the Corporations Act 2001 (Cth) and overseen by ASIC (the corporate regulator). Once liquidation starts, control of the company passes to an independent liquidator.

How Liquidation Starts

• Creditors’ voluntary liquidation (CVL): Directors/shareholders resolve to wind up the company because it can’t pay its debts.
• Court liquidation (compulsory): A court orders the company to be wound up (often after a creditor serves a statutory demand and then applies to court).

Liquidation is different to voluntary administration (VA). In VA, there might be a rescue or deed of company arrangement (DOCA). In liquidation, the company is being wound up and the focus turns to realising assets and distributing funds to creditors.

Who Is The Liquidator And What Do They Do?

The liquidator is a registered insolvency practitioner appointed to take control of the company, investigate its affairs and distribute available funds according to the law.

Core Duties Of A Liquidator

• Secure and realise company assets (bank accounts, equipment, stock, receivables, claims against others).
• Investigate the company’s financial affairs and director conduct.
• Review transactions for possible clawback (for example, unfair preferences or uncommercial transactions).
• Call for and assess proofs of debt from creditors.
• Distribute funds in the statutory order of priority and report to creditors and ASIC.

Expect the liquidator to ask you for information about your debt (invoices, contracts and statements). If you’ve been paid shortly before liquidation, you may also be contacted about potential “voidable transaction” issues - we explain these below.

Secured Vs Unsecured Creditors: Where Do You Stand?

Your status matters. It directly affects your chance of recovery.

Secured Creditors (Including PPSR Security)

Secured creditors hold a security interest over the company’s assets, usually registered on the Personal Property Securities Register (PPSR) under the Personal Property Securities Act 2009 (Cth). Common examples include a General Security Agreement (a charge over all assets) or a Purchase Money Security Interest (PMSI) over specific goods or receivables.

• If you have a properly perfected security (registered correctly and on time), you generally get priority over unsecured creditors in the charged assets.
• A PMSI can give “super-priority” for inventory or equipment supplied on retention of title terms - timing and accuracy of registration are critical.

If you routinely supply on credit, it’s worth considering a General Security Agreement, and making sure you register a security interest on time to protect your position.

Unsecured Creditors

Unsecured creditors don’t hold any security over company assets. This category includes many trade suppliers and service providers. Unsecured creditors get paid after liquidator costs, employee entitlements, and secured creditors - often receiving only cents in the dollar (if anything) depending on available assets.

Other Influences On Priority

• Employee entitlements: Outstanding wages, leave and certain other entitlements have priority and are paid from both unencumbered assets and “circulating assets” ahead of most other claims.
• Set-off: If the company also owes you and you owe the company (for example, mutual running accounts), statutory set-off rules may apply to reduce your net exposure.
• Retention of title: ROT clauses can help, but without a timely PPSR registration they may not defeat other creditors’ claims.

Practical Steps To Manage A Debt When A Company Enters Liquidation

Here’s a clear plan for what to do if a company that owes you money goes into liquidation.

1) Confirm The Appointment And Get The Details

Ask for the liquidator’s formal appointment notice and initial circular to creditors. You’ll find essential information like the company name/ACN, the date of liquidation, and deadlines for lodging claims.

2) Lodge Your Proof Of Debt (With Evidence)

Submit a proof of debt form with supporting documents (contract, purchase orders, delivery dockets, statements, invoices, emails). Be precise about amounts and whether any part is secured. If you hold security, include your PPSR registration details.

Tip: Keep everything consistent and reconcilable. Missing documents or unclear calculations can delay or jeopardise your claim.

3) Clarify Your Status (Secured, Unsecured Or Both)

If you registered a security, engage with the liquidator about how you’ll enforce it and whether they intend to sell the secured assets. If part of your account was secured and part wasn’t, make that split clear.

4) Attend Creditors’ Meetings (Or Review Minutes)

Liquidators may hold meetings or form a committee of inspection. These are useful for staying informed, asking questions and voting on key matters (such as liquidator’s remuneration). If you can’t attend, request copies of minutes and reports.

5) Understand Potential Clawback Risks

Payments you received shortly before liquidation might be reviewed as potential “unfair preferences” or other voidable transactions. If the liquidator claims a payment was an unfair preference, they may ask you to repay it to the pool for all creditors. Get advice early if you receive such a claim.

6) Keep Records And Stay Responsive

Maintain a tidy file of all communications and documents. Respond to the liquidator’s requests promptly - it can speed up adjudication of your claim and may improve the likelihood and timing of any dividend.

Priority Of Payments And Likely Returns

Funds are distributed in a strict order set by the Corporations Act. In broad terms, the following priorities apply to the assets available in liquidation:

• Liquidation costs and expenses (including the liquidator’s remuneration and certain trading/realisation costs).
• Employee entitlements (wages, leave, and in some cases redundancy and superannuation-related amounts) - often paid ahead of other claims from “circulating assets”.
• Secured creditors (to the extent of their security and in accordance with PPSA priority rules).
• Unsecured creditors (share in any residual funds on a pro rata basis).

The likelihood of a dividend varies widely. In many liquidations, unsecured returns are low or nil, so it’s important to secure your position up front where possible.

Watch For Set-Off And Mutual Dealings

If you and the company owe each other money, statutory set-off may reduce your net exposure. Clear set-off clauses in your contracts can also help manage mutual dealings and reduce dispute risk.

Personal Guarantees And Director Liability

Sometimes you can claim against a director or related entity if you have a signed personal guarantee or deed of indemnity. It’s common to include a guarantee in your credit application package. If you use guarantees, make sure they’re properly drafted - see more on personal guarantees in Australia and, if needed, consider a formal Deed of Guarantee and Indemnity.

Protecting Yourself For Next Time: Contracts, Security And Risk Management

While you can’t prevent every insolvency event, there are practical steps you can take to improve your position and reduce future bad-debt risk.

Use Strong, Written Terms

• Terms of Trade: Clear payment terms, interest on late payments, default triggers, suspension rights, retention of title, and recovery costs clauses set expectations and support enforcement. If you sell or supply on account, put robust Terms of Trade in place.
• Credit Application: Incorporate acceptance of your terms, authority to conduct credit checks, and obtain guarantees where appropriate. Consider pairing a credit application with Credit Application Terms.
• Assignment & Novation Clauses: If your customer sells its business, the contract may need to be assigned or novated. Understand how assignment of contracts works so you’re not left unsecured with a new entity.

Get Security (And Register It Correctly)

• General Security Agreements (GSA): A GSA can give you security over all present and after-acquired property (subject to exceptions). Pair your GSA with a timely PPSR registration.
• PMSIs and ROT: If you supply inventory/equipment on retention of title, register a PMSI on the PPSR within the required timeframes to preserve priority.
• Registration Process: Perfect your interest by lodging the correct collateral classes and details. If you’re new to this, our team can help you register a security interest properly from day one.

Consider Guarantees Where Appropriate

Personal or related-entity guarantees can provide a fallback if the company can’t pay. They’re not a replacement for security, but they can broaden recovery options - especially for new customers or higher credit limits.

Operational Controls And Early Warning Signs

• Watch for increased days outstanding, returned payments or unusual payment patterns.
• Reduce exposure by tightening limits, requesting deposits, or moving to cash-on-delivery where risk is rising.
• Keep your customer data, orders and deliveries well-documented - it’s much easier to prove your debt if liquidation occurs.

If You Need To Act Before Liquidation

If a debtor is trading but not paying and you’re concerned about solvency, consider escalation steps early. You might suspend supply under your contract, negotiate payment plans, or take formal action (including a statutory demand) after getting advice on risks such as preference exposure and ongoing trading losses. Having appropriate security in place and the right contract settings makes these decisions more straightforward.

Key Takeaways

• Liquidation in Australia is a formal wind-up under the Corporations Act; an independent liquidator takes control and distributes funds according to strict priorities.
• Your recovery prospects depend heavily on whether you’re a secured creditor with a correctly perfected PPSR registration, or an unsecured creditor.
• Act quickly: lodge a complete proof of debt, engage with the liquidator, attend meetings, and stay across deadlines and reports.
• Expect the liquidator to review pre-liquidation payments for potential clawback (for example, unfair preferences) - seek advice if contacted about these.
• Protect yourself for the future with strong Terms of Trade, a General Security Agreement (and timely PPSR registrations), and appropriate guarantees.
• Operational vigilance and good records make proving your claim easier and help you respond quickly if a customer’s financial position deteriorates.

If you would like a consultation on managing debts when a company goes into liquidation, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.