Bankruptcy Liquidation
Termination of Employment 

Bankruptcy Liquidation

What does it mean when someone becomes “bankrupt”?

When a person is declared “bankrupt” under the Bankruptcy Act, it means that they are unable to pay their debts. The person declared bankrupt is then released from most, but not all, of their debts.

Declaring bankruptcy is not to be considered an easy-way-out for people who simply cannot pay their debts. One of the main consequences of bankruptcy is that the bankrupt will then find it difficult to obtain a loan. Credit reporting agencies keep records of who has been declared bankrupt, and so it will be difficult for a bankrupt to obtain a loan, such as for a home or a new business venture.

What does it mean when a company goes into “liquidation”?

When a company is “insolvent”, it is unable to pay its debts when they are due for payment. “Liquidation” is one of the legal processes that may result. Other processes include “voluntary administration” and “receivership”.

When a company is insolvent and put into liquidation, a liquidator is appointed to wind up the company and to sell the company’s assets. The proceeds from selling the assets are then distributed amongst the “creditors”, those who are owed money by the company.

“Secured creditors”, those secured by property such as when a bank holds a mortgage over land, are ranked higher than “unsecured creditors”, those without such security. If there are only funds available to satisfy the debts owed to the secured creditors, the unsecured creditors will not receive anything. If there are enough funds for all the creditors, which would be rare, any leftover funds are then paid out to the company’s shareholders.


So what does it mean when a business goes into bankruptcy or liquidation?

When a business goes into bankruptcy or liquidation, some creditors may not receive what they are owed. If the proceeds from selling the business’s assets are not enough to pay all creditors, some will lose out.

The employees of the business will often lose out. One of the debts that a business will usually be released from in such circumstances is the obligation to pay employees their outstanding entitlements or wages. That’s because the outstanding entitlements or wages are usually unsecured debts.

However, generally, employees are considered priority unsecured creditors.

This means the following will paid to employees before the unsecured creditors are paid:

  • wages and superannuation;
  • if applicable, compensation for personal injury;
  • leave entitlements such as annual leave, sick leave and long service leave and
  • redundancy pay;

Some employees are limited to the benefit of priority unsecured creditors, such as those who were, in their last 12 months leading up to liquidation, a director of the company or related to a director of the company. For these employees, there is a cap of $2,000 for their wages and superannuation entitlements and $1,500 for their leave entitlements.

My employer is now bankrupt or going into liquidation, and so I’ve lost my job without my entitlements or wages being fully paid. Can’t I do something to regain my entitlements or wages?

You should keep up to date with the liquidation or bankruptcy. You will be informed by the bankruptcy trustee or the liquidator of all important developments and how much money you may be owed once the process is finalised.

You can also make a claim under the “Fair Entitlements Guarantee”. The Fair Entitlements Guarantee is a scheme created by the national government. It provides financial assistance to employees who lost their job due to the bankruptcy or liquidation of their employer.

Under the scheme, an employee may regain their unpaid wages of up to 13 weeks, their unpaid annual leave, payment in lieu of notice of up to 5 weeks, and redundancy pay of up to 4 weeks per full year of service.

Note that not all entitlements can be covered by the Fair Entitlements Guarantee. For example, unpaid Superannuation Guarantee Contributions aren’t covered by the scheme.

Your Fair Entitlements Guarantee claim must be lodged within 12 months of either the date you lost your job or the date your employer became bankrupt or was put into liquidation.