What Happens to Employees When a Company Goes Into Liquidation in Australia

Employees Become Creditors — But Priority Creditors

When a company goes into liquidation, all relationships change. Contracts of employment are terminated. Employees become creditors of the company — people owed money, rather than people working for it. But unlike trade creditors and suppliers, employees have a higher claim on the company's remaining assets.

Under s556 of the Corporations Act, employee entitlements sit in the priority creditor class. This means the liquidator pays out employees (up to the statutory caps) before unsecured creditors receive anything.

Priority status matters — but it doesn't guarantee recovery. If there are insufficient assets to cover even the priority claims, employees may still receive cents in the dollar or nothing at all. This is where the Fair Entitlements Guarantee comes in.

The Priority Waterfall: Who Gets Paid First

In a company liquidation, the order of distribution from available assets is:

1. Secured creditors (with security over specific assets)
2. Costs of the liquidation itself (liquidator's fees, legal costs)
3. Employee entitlements (priority claims under s556)
4. Unsecured creditors (trade creditors, suppliers, ATO for some debts)
5. Shareholders (only if anything remains after all creditors are paid)

In most small business liquidations, there is little or nothing left for unsecured creditors by the time employees and liquidation costs are settled. Shareholders almost never receive a distribution.

What Employees Can Claim

The entitlements employees can claim as priority creditors include:

• Unpaid wages — up to 13 weeks of unpaid wages
• Annual leave — all accrued but untaken annual leave
• Long service leave — accrued long service leave entitlements
• Pay in lieu of notice — up to 5 weeks depending on length of service and age
• Redundancy pay — up to 4 weeks per year of service (subject to service duration thresholds)

To be included in the liquidator's distribution, employees must lodge a proof of debt with the liquidator. This is a formal document setting out the amount claimed and the basis for it. Employees should do this as soon as possible after being notified of the liquidation.

The Fair Entitlements Guarantee (FEG)

If the company's assets are insufficient to cover employee priority claims — which is common — employees can apply to the Fair Entitlements Guarantee scheme, a federal government safety net administered by the Department of Employment and Workplace Relations.

FEG covers:

• Unpaid wages (up to 13 weeks)
• Annual leave
• Long service leave
• Pay in lieu of notice (up to 5 weeks)
• Redundancy pay (up to 4 weeks per year of service)

FEG payments are capped at the relevant maximum weekly wage rate — very high earners may not recover their full entitlements. Applications are made online. The government then becomes a creditor of the insolvent company for the amounts it pays out (subrogation), but practically this recovers little given the company is being wound up.

FEG does not cover superannuation. Unpaid super is handled through a separate pathway.

What Happens to Unpaid Superannuation

Unpaid superannuation guarantee amounts are treated differently in a liquidation. The ATO acts as a creditor for unpaid super and has priority status — but super does not follow the same employee priority pathway as wages and leave.

In practice, employees often recover little or none of their unpaid super through the liquidation itself. The assets simply aren't there. However, there is an additional avenue: director personal liability.

Under the Director Penalty Notice (DPN) regime, directors can be made personally liable for unpaid PAYG withholding and superannuation guarantee charge. The ATO can issue a DPN requiring payment directly from the director. If the company failed to lodge BAS or SGC statements on time, the director penalty becomes "lockdown" — the director cannot escape liability even by placing the company into administration.

Director Personal Liability for Wages and Super

Beyond the DPN regime, directors may face personal liability for employee claims in other ways:

• Insolvent trading — if the director allowed the company to continue trading while insolvent, the liquidator can sue them personally for the debts incurred (including wages) during that period
• Breach of director duties — failing to ensure employees are paid their legal entitlements can form part of a broader breach of duty claim
• Wage theft provisions — intentional underpayment of wages is now a criminal offence under the Fair Work Act, with penalties applying to individual directors and officers

Directors who are aware their company is struggling to meet payroll should seek advice immediately. Continuing to underpay or defer wages while the company trades is not a sustainable position.

What Employees Should Do

If your employer has gone into liquidation or you believe they may be about to:

• Contact the liquidator as soon as they are appointed to register as a creditor
• Gather documentation — payslips, employment contract, leave records, any correspondence about unpaid amounts
• Lodge a proof of debt with the liquidator as early as possible
• Apply to FEG if the company's assets are insufficient — you don't need to wait for the liquidation to finish
• Report unpaid super to the ATO using their online tools
• Seek advice from Fair Work Australia or a workplace lawyer if you believe the employer was deliberately avoiding obligations