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Hypotheticals #4

Updated: Dec 10, 2020

QUESTION

What dictates the ranking of Creditors in a Court Liquidation?


ANSWER

Under section 555 of the Corporations Act, all debts and claims proved in the winding-up of a company rank equally except where the Act provides otherwise. If the property of the wound-up company is insufficient to meet the debts and claims in full, they must be paid proportionately.


Section 556 provides an order of priority in which debts and claims are to be paid.

The following hypothetical illustrates how section 556 operates to rank debts and claims in the winding up of a company.


Elliot and his wife Jennifer ran a homeware company. The company went into liquidation following a statutory demand issued by a supplier in the amount of $20,500 (which was unsecured). The costs to bring the application and obtain the winding-up order amounted to $3,500.


Mr Wax was appointed liquidator and determined that the business should carry on in an attempt to sell existing stock. Expenses in the amount of $15,000 were incurred in order to carry on the business. Mr Wax’s remuneration was $20,000.


The only claims Mr Wax received were from former employees of the business:

  1. Sophia, the sales manager, made a claim for:

  2. $3,000 of unpaid salary;

  3. $8,000 for unpaid superannuation; and

  4. $15,000 for un-used long service leave.

  5. Jennifer, Elliot’s wife and office assistant, made a claim for

  6. $1,500 of unpaid salary; and

  7. $4,000 for unpaid superannuation.

Pursuant to section 556, the debts and claims would be paid in the following order:

  1. $15,000 expenses incurred by Mr Wax to carry on the business (s556(1)(a));

  2. $3,500 costs incurred by the supplier to obtain the wind-up order (s556(1)(b));

  3. $20,000 being Mr Wax’s remuneration (s556(1)(de));

  4. $11,000 owed to Sophia for unpaid salary and superannuation and $2,000 owed to Jennifer towards her claim of $5,500 for unpaid salary and superannuation (s556(1)(e)(i));

Note: Jennifer is an excluded employee and may not be paid more than $2,000 under s556(1)(e)(i). The remaining $3,500 will be paid out of the balance without priority if funds allow.

  1. $15,000 owed to Sophie for un-used long service leave (s556(1)(g)(iv)).

  2. $20,500 owed to the supplier and $3,500 paid to Jennifer for the remainder of her claim.


Article written by Jessica Hutchinson | Solicitor

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