Employee Entitlements and Liquidation
I am often asked what priority employee entitlements receive in a company liquidation or bankruptcy.
Liquidation
In a company liquidation, the starting point is section 556 of the Corporations Act. Employee claims generally rank ahead of ordinary unsecured creditors, but after certain liquidation costs, expenses and other priority claims.
Employee priority claims commonly include wages and superannuation, injury compensation, leave entitlements and retrenchment payments. Excluded employees are subject to statutory limits.
Section 561 can give certain employee claims priority over circulating assets, but it does not give employees priority over all secured assets. The distinction between circulating and non-circulating assets can therefore be important.
Bankruptcy
Employee entitlements can also arise where the bankrupt was an employer, such as a sole trader or partner. The starting point is section 109 of the Bankruptcy Act.
FEG
If there are insufficient assets to pay employee entitlements, eligible employees may be able to claim through the Fair Entitlements Guarantee. FEG is subject to eligibility requirements, time limits and caps. FEG does not cover unpaid superannuation.
