Who Gets Paid First In Liquidation? Priority Of Claims In Australia

If you run a small business or startup, “liquidation” is one of those words you hope you never have to deal with. But if a customer, supplier, lender, or even your own company ends up in liquidation, one question usually comes up fast:

Who gets paid first in liquidation in Australia?

The order matters because it affects how much (if anything) is left for your business at the end. If you’re owed money by a company that’s collapsed, you’ll want to know where you sit in the queue. If your own business is under pressure, understanding the priority rules can help you make better decisions early (including how you structure your contracts, your finance, and your security interests).

Below is a practical, business-focused guide to the liquidation “waterfall” in Australia: what liquidation is, who gets priority, how secured debts work, and what you can do to protect your position before things go bad.

What Does Liquidation Mean For A Business?

Liquidation is a formal insolvency process where a company’s assets are collected, sold, and distributed to creditors. At the end of the process, the company is usually deregistered and stops existing.

In a liquidation, the liquidator’s job is broadly to:

• take control of the company and its assets;
• investigate the company’s affairs (including potential voidable transactions);
• sell assets and recover money owed to the company (where possible);
• pay creditors in the order set by law; and
• finalise the company’s affairs and apply to have it deregistered.

It’s worth keeping in mind: liquidation is not a negotiation where everyone “splits what’s left.” There is a legally defined priority order, and some creditors will be paid before others even if everyone is owed money.

So, Who Gets Paid First In Liquidation In Australia?

When people ask who gets paid first in liquidation in Australia, they’re usually trying to understand the priority order (often called the “waterfall”).

While the exact order can depend on the facts (including what assets exist, what is secured, and whether the assets are “circulating”), the general priority works like this:

1. Costs of the liquidation (the liquidator’s costs and expenses, typically paid out of the available assets - and in some cases costs of preserving/realising particular assets may be paid out of the proceeds of those assets)
2. Secured creditors (paid from the assets covered by their security, subject to important exceptions - especially for circulating assets)
3. Employee entitlements (certain entitlements have priority, and for circulating assets they can be paid ahead of a circulating secured creditor)
4. Unsecured creditors (suppliers, landlords for some claims, customers, etc.)
5. Shareholders (usually last, and often receive nothing)

That list sounds simple, but the detail is where outcomes are decided. The big “swing factors” are usually:

• whether there are secured assets (and whether security is valid/perfected);
• whether the company has employees and unpaid entitlements;
• whether there are circulating assets (like receivables) and whether employee priority applies to them ahead of a circulating security interest; and
• whether the liquidator can recover assets through claims (like unfair preferences or uncommercial transactions).

How Secured Creditors Change The Queue

In many liquidations, the biggest practical question is not “secured vs unsecured” in theory. It’s whether a secured creditor has enforceable rights over key assets in practice - and what assets their security actually covers.

Secured creditors are creditors who have security over some or all of the company’s property. Common examples include:

• a bank with security over business assets under a general security agreement;
• a lender with security over specific equipment;
• a financier with security over vehicles or plant; or
• a supplier with retention of title arrangements (depending on how they’re documented and enforced).

What Is The PPSR And Why Does It Matter?

In Australia, security interests in personal property are commonly managed through the Personal Property Securities Register (PPSR). If you supply goods on credit, finance equipment, or lend money to a company, your ability to get paid ahead of others can depend heavily on whether your interest is properly registered.

If your business is taking security, it’s often tied to a General Security Agreement. That document is commonly used when a lender wants security over broad categories of assets (not just one item).

On the other side, if you’re about to buy assets or take over a business relationship, doing a PPSR check can help you see whether someone else already has a registered interest that could take priority.

Circulating Assets And Why Employees Can Still Come First

Even where there is a secured creditor, Australian law can require certain employee entitlements to be paid in priority out of “circulating assets” (previously known as floating charge assets). In other words, if a secured creditor’s security interest is a circulating security interest (or covers circulating assets), employee priority can apply to those circulating assets before the secured creditor is paid from them.

Circulating assets often include:

• cash;
• accounts receivable (invoices owed to the company);
• stock/inventory sold in the ordinary course of business; and
• other assets that the company can deal with freely in day-to-day trading.

Practically, this means a secured creditor might not be able to take everything if the secured property includes circulating assets and there are unpaid priority employee claims.

Employee Entitlements: Where Do They Sit In Liquidation?

If your business is a creditor of a company in liquidation, it can feel frustrating to see employees paid ahead of you. But from a policy point of view, this is designed to protect workers who may otherwise lose wages and entitlements.

In liquidation, certain employee entitlements are generally given priority (particularly from circulating assets), including items like:

• unpaid wages;
• superannuation (often a major point of contention, and can be complex);
• accrued annual leave;
• accrued long service leave; and
• some redundancy-related entitlements (depending on circumstances).

It’s also worth noting that government schemes (like the Fair Entitlements Guarantee) may involve separate eligibility rules and caps - which is different from the statutory priority rules in liquidation itself.

If you employ staff in your own business, it’s worth reviewing how entitlements are calculated and documented, because employee claims become highly relevant if insolvency risk increases. For example, your payroll practices should align with the rules around annual leave payments.

Also keep in mind: if your business is heading into distress, employee liabilities are not something you can “leave for later.” They can sit very high in the priority order, and directors can face serious issues if they mishandle employee entitlements or trade while insolvent.

Where Do Unsecured Creditors Sit (And Why They Often Miss Out)?

Unsecured creditors are creditors who have no security interest over the company’s assets. This group often includes:

• trade suppliers (unpaid invoices);
• service providers (marketing, software, contractors);
• landlords (for certain claims, although landlords may also have bonds or guarantees);
• customers with deposits or refunds owed; and
• business partners with contractual claims (if not secured).

If you’re an unsecured creditor, you’re typically paid only after:

• the costs of the liquidation are paid out of the available assets;
• secured creditors are paid from the assets covered by their security (subject to employee priority on circulating assets); and
• priority employee claims are dealt with (especially from circulating assets).

That’s why, in many liquidations, unsecured creditors receive only a small percentage of what they’re owed (or nothing at all). The company simply runs out of assets before it gets to the unsecured layer.

What About The ATO?

Many business owners assume the Australian Taxation Office (ATO) is always first in line. In modern Australian insolvency, that’s not generally correct in the way people mean it.

Depending on the type of debt and the circumstances, the ATO may be:

• a secured creditor (in limited situations where security exists);
• a priority creditor for specific amounts in specific contexts; or
• an unsecured creditor (often alongside trade creditors).

The detail can be technical and fact-specific. If tax debts are a major issue (or you’re considering a payment plan versus insolvency options), you should get tailored advice from a registered tax agent/accountant as well as legal advice - Sprintlaw can help with the legal side, but we don’t provide tax advice.

What About Shareholders, Directors, And Related Parties?

If you’re a founder, it’s important to separate two roles you might hold:

• Shareholder (owner of shares in the company); and
• Creditor (someone the company owes money to, for example via a loan).

Shareholders Are Usually Last

Shareholders are generally at the very bottom of the priority order. If there’s anything left after all creditors are paid, shareholders may receive a distribution. In practice, in an insolvent liquidation, that’s uncommon.

Director Loans And Related Party Claims

Founders often fund early operations by lending money to the business. This can be recorded as a director loan. If the company goes into liquidation, a director who is owed money is still a creditor (subject to the terms of the loan and any security), but related party claims can be scrutinised closely.

If you’ve put money into your company (or you’re considering doing so), it helps to understand director loans and how they should be documented. Poor documentation can create disputes later about whether the funds were a loan, capital contribution, or something else.

Also be aware: liquidators can investigate certain transactions (especially those benefiting related parties) and seek to recover them if they fall within clawback provisions.

How Can You Protect Your Business If A Customer Or Supplier Goes Into Liquidation?

If you’re reading this because another business is in trouble (or you suspect they might be), your goal is usually to reduce your exposure and improve your recovery prospects.

Here are practical steps that often make a real difference for small businesses and startups.

1. Tighten Up Your Trading Terms (Before There’s A Problem)

Your contracts and terms can’t override the liquidation priority rules, but they can reduce the chance you become an unsecured creditor in the first place.

Depending on your business model, you may want:

• shorter payment terms (or milestone payments);
• upfront deposits (structured carefully);
• late payment clauses and clear enforcement triggers; and
• retention of title (if you supply goods).

If you operate on standard terms with customers or clients, it may be worth having properly drafted Terms of Trade so you’re not relying on informal emails and assumptions when things go sideways.

2. Consider Whether You Need Security (And Register It)

If you’re extending significant credit (for example, supplying expensive equipment or large quantities of goods), consider whether you can take security. If security is part of your arrangement, registration and timing can be crucial.

Even if you’re not “a finance business,” security interests can come up in ordinary trade supply and leasing arrangements. This is where understanding the PPSR helps you move from “unsecured and last” to “secured and earlier in the queue” (while keeping in mind employee priority rules on circulating assets).

3. Watch For Warning Signs And Act Early

From a practical standpoint, if you wait until the customer is already in liquidation, your options shrink.

Common red flags include:

• habitual late payment or payment excuses;
• requests to stretch payment terms significantly;
• partial payments with no clear plan;
• sudden management turnover;
• stock or project delays that don’t make commercial sense; and
• rumours of restructuring or “newco” arrangements.

If you spot these, you might decide to:

• stop providing further credit until arrears are cleared;
• move to payment in advance;
• renegotiate a staged delivery schedule;
• request personal guarantees (with proper advice); or
• seek legal advice on recovery and risk management options.

4. If You’re Buying A Business Or Assets, Do Due Diligence

If you’re acquiring assets from a distressed business, you need to be careful about existing security interests and the structure of the transaction. A PPSR check is often part of that diligence.

If you’re buying the business itself (or significant assets), the documents matter a lot. A well-drafted Business Sale Agreement can help allocate risk around liabilities, asset title, and what happens if something isn’t as represented.

This is also a common point where small business owners get caught: assuming “I paid for it, so I own it,” when in fact a secured creditor may still have a claim.

5. If Your Own Business Is Under Pressure, Get Advice Before It Becomes A Crisis

If you’re worried your own business could be heading toward insolvency, the earlier you deal with it, the more options you have.

This is not just about “business survival.” It’s also about managing director duties and risk. Decisions you make under pressure (for example, which creditors you pay, and when) can have legal consequences later.

If you have staff, review your employment documentation and risk exposure. Having fit-for-purpose Employment Contract documentation in place won’t eliminate insolvency risk, but it can reduce disputes and confusion around entitlements during a stressful period.

Key Takeaways

• If you’re asking who gets paid first in liquidation in Australia, the practical reality is that liquidation costs, secured creditor rights (over their secured assets), and priority employee entitlements usually sit ahead of most trade creditors.
• Secured creditors are generally paid from their secured assets, but employee claims can still take priority over circulating assets ahead of a circulating security interest.
• Unsecured creditors (like many suppliers and service providers) are often paid later in the queue and may receive little or nothing depending on what assets remain.
• Founders and shareholders are usually last, unless they are also creditors (for example, via properly documented loans or security arrangements).
• You can often improve your position by tightening your terms, considering security and PPSR registration, and acting early when warning signs appear.
• If your business is facing distress, getting advice early can help you manage legal risk and preserve more options than waiting until liquidation is inevitable.

If you’d like help protecting your business from insolvency risk (or advice on liquidation-related contracts, security interests, or business sale issues), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.