What Is Liquidation in Australia? A Guide for Directors, Creditors and Employees
When a company is no longer able to pay its debts and there is no realistic prospect of recovery, liquidation may be the only viable path forward. But what is liquidation in Australia, and what does it mean for directors, employees, and creditors? In this article, we break down how liquidation works, who gets paid first, and what to expect during the process.
What Does Liquidation Mean in Australia?
Liquidation is a formal process under the Corporations Act 2001 (Cth) where a company’s assets are sold (or “liquidated”) and the proceeds are used to repay its debts. The company then ceases trading and is ultimately deregistered. There are two main types of liquidation:
Voluntary liquidation, where the company’s members or creditors vote to wind up the company; and
Court-ordered liquidation, where a court orders the company to be wound up, usually on the application of a creditor.
A registered liquidator is appointed to take control of the company, sell its assets, distribute funds to creditors, and ensure the company is properly closed down.
What Happens When a Company Goes Into Liquidation in Australia?
When a company enters liquidation:
The liquidator takes control of the company’s operations.
Directors lose their powers and must assist the liquidator.
The company stops trading, unless the liquidator decides otherwise.
All business assets are identified, collected, and sold.
Proceeds are distributed to creditors in a strict order of priority (see below).
The company is eventually deregistered and ceases to exist.
For businesses considering other options before winding up, small business restructuring may be worth exploring.
What Happens to Directors in Liquidation?
Once a company goes into liquidation, its directors are no longer in control. While directors are not personally liable for company debts in most cases, there are exceptions. Directors can face personal liability if:
They provided personal guarantees on company loans or credit accounts.
They traded while insolvent (in breach of section 588G of the Corporations Act).
They failed to comply with obligations such as keeping proper records or reporting to the liquidator.
In some cases, the liquidator may pursue claims against directors for insolvent trading. For more information, see our article on Insolvent Trading FAQs.
What Happens to Employees When a Company Goes Into Liquidation?
Employees are often among those hit hardest when a company is wound up. Once liquidation begins:
Employment is usually terminated immediately.
Employees may be entitled to unpaid wages, annual leave, long service leave, and redundancy pay.
These entitlements are treated as priority claims, which means employees are generally paid before unsecured creditors.
If the company does not have enough assets to pay these entitlements, employees may be eligible for assistance through the Fair Entitlements Guarantee (FEG) scheme.
Who Gets Paid First in Liquidation in Australia?
When a company’s assets are liquidated, the funds are distributed in a specific order, set out in the Corporations Act:
Costs and expenses of the liquidation, including the liquidator’s fees.
Employee entitlements, including wages, leave, and superannuation.
Secured creditors, such as banks with registered security interests.
Unsecured creditors, such as suppliers and trade creditors.
Shareholders, if any surplus remains (which is rare in insolvent liquidations).
Creditors must submit a formal proof of debt to participate in any distribution.
Alternatives to Liquidation
Before proceeding with liquidation, company directors should seek advice on whether alternatives are available. These may include:
Voluntary Administration, which allows a company to restructure and avoid liquidation. See our guide for Queensland businesses on Understanding Voluntary Administration.
Small Business Restructuring, which enables eligible companies to propose a payment plan to creditors while continuing to trade.
Each option has its own eligibility criteria and risks, so getting early legal advice is essential.
How Gear & Co Lawyers Can Assist with Liquidation in Australia
At Gear & Co Lawyers, we specialise in insolvency and commercial litigation. Our team regularly advises directors, creditors, and insolvency practitioners on all aspects of liquidation, from winding up applications to recovering outstanding debts. We provide tailored, practical advice that helps clients navigate the legal process with confidence.
Whether you’re a director trying to understand your obligations or a creditor seeking repayment, we can assist you in managing risk and making informed decisions. Contact Gear & Co Lawyers on (07) 3709 2547 or email info@gearandco.com to discuss your options.
While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed. This publication is intended to provide only general information on matters of interest. It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice. You should seek legal or other professional advice which is specific to your circumstances.
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