Bankruptcy & Liquidation

We explain what happens if a business goes into liquidation and how to recover your entitlements if the business is unable to pay you.

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”?
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 be 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.

Employees who were directors of the company, or relatives of a director, in the lead-up to the liquidation get only a limited priority, capped at a much lower amount. Ask the liquidator how your claim is ranked.

If the business became a small business (fewer than 15 employees) only because of job losses in the six months before it went into liquidation or bankruptcy, the usual small business exemption from redundancy pay does not apply (s 121 of the Fair Work Act 2009 (Cth)).

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?
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 (FEG), run by the Commonwealth Department of Employment and Workplace Relations. It is a safety net for employees who lost their job because their employer went into liquidation or bankruptcy and who cannot recover their entitlements any other way. It applies whether your employer was a company or an individual, so it can help WA state system employees of a bankrupt sole trader too.

FEG may cover unpaid wages (up to 13 weeks), annual leave, long service leave, pay in lieu of notice (capped at 5 weeks) and redundancy pay (capped at 4 weeks for each full year of service). To be eligible you generally need to have been an employee (not a contractor), and an Australian citizen or permanent or special category visa holder when your employment ended.

Not all entitlements are covered. For example, unpaid superannuation guarantee contributions are not covered by FEG; report unpaid super to the Australian Taxation Office.

Your FEG claim must be lodged within 12 months of whichever is later: the date your employment ended, or the date your employer went into liquidation or bankruptcy. Lodge as early as you can.

If you are unsure what you are owed, or the liquidator disputes your entitlements, contact us for a free discussion.