Employee Entitlements and Priority Payments in a Company Liquidation: Where Workers Rank 

When a company is placed into liquidation in Victoria, employees have priority over ordinary unsecured creditors for certain unpaid employment entitlements. The section 556 priority provisions of the Corporations Act 2001 (Cth) establish the order in which wages, superannuation contributions, leave entitlements and retrenchment payments are paid. Where the company has circulating assets, section 561 circulating assets may also place eligible employee claims ahead of a secured creditor’s circulating security interest. 

For employees, directors, business owners and creditors, the amount recovered depends on the nature of the claim, the assets available to the liquidator, and the security interests affecting those assets. The priority between employees and secured creditors is particularly important where the company’s principal assets comprise cash, inventory, or receivables. 

If the liquidation cannot meet the employee claims, the FEG scheme may provide eligible employees with financial assistance for unpaid wages, annual leave, long service leave, payment in lieu of notice and redundancy. Unpaid employer superannuation contributions are not covered by FEG and must be addressed through separate recovery processes. Additional complexity arises where the company operates as trustee of a trading trust, because the assets available for distribution may depend on the scope and value of the company’s right of indemnity. 

How Are Employee Entitlements Prioritised When a Company is Liquidated? 

The priority framework is principally contained in sections 556 and 561 of the Corporations Act 2001 (Cth). Section 556 determines the order in which unsecured debts and claims are paid from property available to the liquidator. The section 556 priority covers specified employee claims, including wages and superannuation contribution amounts, injury compensation, leave entitlements and retrenchment payments. These claims rank behind the costs and expenses of the liquidation but ahead of ordinary unsecured debts. 

Not all employee entitlements occupy the same position. Wages and superannuation contribution amounts fall within section 556(1)(e), injury compensation within section 556(1)(f), leave entitlements within section 556(1)(g), and retrenchment payments within section 556(1)(h). If the available assets are insufficient to pay creditors within the same priority category, those claims ordinarily share proportionately rather than one employee being paid ahead of another. 

Section 561 becomes relevant when the company’s property available to unsecured creditors cannot meet certain priority employee claims. Section 561 circulating assets rule permits wages, leave entitlements and retrenchment payments to be paid from assets subject to a circulating security interest before the secured party is paid from those assets. Circulating assets commonly include inventory, receivables, and cash proceeds. Importantly, section 561 does not elevate every employee-related claim over every secured creditor. Its operation depends on the statutory category of the claim, the nature of the security interest, and whether the relevant property is a circulating asset. 

The treatment of trust assets was considered by the Victorian Court of Appeal in Commonwealth v Byrnes and Hewitt as Receivers and Managers of Amerind Pty Ltd [2018] VSCA 41. The Court held that the statutory priority regime applied to proceeds generated through an insolvent corporate trustee’s right of indemnity. That conclusion was upheld by the High Court in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20. The High Court confirmed that proceeds obtained through a trustee company’s right of exoneration may be distributed under the statutory priority regime, while remaining available only for liabilities incurred in the performance of the relevant trust. 

Separately, the Fair Entitlements Guarantee Act 2012 (Cth) establishes the FEG scheme. Subject to eligibility requirements and statutory limits, it may advance certain unpaid wages, leave, notice, and redundancy entitlements when the employer’s liquidation cannot fund them. Superannuation contributions are not an entitlement advanced under that Act. 

What Determines Where Employee Claims Rank in a Company Liquidation? 

Employee priority depends on more than whether the claimant worked for the company. The liquidator must classify each entitlement, identify the available asset pool, and determine whether secured interests or trust arrangements affect distribution. Sections 556 and 561 of the Corporations Act 2001 (Cth) provide the starting point. 

Which employee entitlements receive statutory priority? 

The first issue is whether the claim falls within a category protected by the section 556 priority regime. Section 556 separately addresses wages and superannuation contribution amounts, injury compensation, leave entitlements and retrenchment payments. These claims rank behind the costs of the liquidation but ahead of ordinary unsecured debts. 

Not every amount connected with employment automatically receives priority. Bonuses, contractor invoices, damages claims and unusual remuneration arrangements may require closer examination. Liquidators commonly assess employment contracts, payroll records, awards, enterprise agreements, termination documents, and superannuation records. Where employees within the same category cannot be paid in full, they share proportionately. 

When do employees rank ahead of a secured creditor? 

A secured creditor will ordinarily be paid from assets covered by its security before unsecured creditors. Section 561 modifies that position where the company’s unencumbered assets are insufficient to meet specified employee claims and property subject to a circulating security interest is available. 

Under the section 561 circulating assets rule, qualifying wages, leave and retrenchment claims may be paid from circulating assets before the secured creditor. These assets can include inventory, trade receivables, and certain cash proceeds. The result depends on the asset, the security interest and the source of the realised funds. Employee priority does not generally extend to non-circulating assets merely because they are secured. Creditors comparing a proposed restructuring with liquidation should also consider their creditor rights in voluntary administration, including how employee priorities may affect returns under a DOCA. 

How are claims treated when the company operated a trading trust? 

Where the company acted as trustee, the liquidator must distinguish company property from trust property. A corporate trustee may have a right of indemnity against trust assets for liabilities properly incurred in administering the trust. 

In Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20, the High Court confirmed that statutory employee priorities may apply to proceeds obtained through a corporate trustee’s right of exoneration. However, those proceeds remain available only for liabilities incurred in relation to the relevant trust. Employee claims may therefore depend on whether the employment liability arose from operating that trust business. 

What happens when the liquidation cannot pay employees in full? 

The FEG scheme, established under the Fair Entitlements Guarantee Act 2012 (Cth), may advance eligible claims for unpaid wages, annual leave, long service leave, payment in lieu of notice and redundancy, subject to statutory limits. 

FEG does not cover unpaid employer superannuation contributions. As a result, unpaid wages and superannuation can follow different recovery pathways. Where FEG pays an advance, the Commonwealth assumes the employee’s recovery rights to that extent and participates in the liquidation according to the applicable priority. 

What Disputes Commonly Arise Over Employee Entitlements in a Company Liquidation? 

Disputes most often arise because the legal character of a payment, the source of available funds, or the company’s operating structure is unclear. The practical question is rarely whether employees have priority in principle. It is whether a particular claimant, entitlement, and asset fall within the statutory priority regime. 

One recurring issue is whether a claimant was legally an employee, rather than an independent contractor, director, or officeholder. The description used in an agreement is not decisive. Payment arrangements, control over the work, delegation rights, equipment, taxation records, and the substance of the relationship may all affect the outcome. A genuine employee may receive priority under section 556, while a contractor will rank as an ordinary unsecured creditor. Claims by directors and their relatives may also be subject to statutory limits. 

Disputes also arise when employee proofs of debt do not match payroll records. Common areas of disagreement include accrued annual leave, long service leave, commissions, notice, redundancy, and the termination date. Awards, enterprise agreements, and employment contracts may produce different calculations, especially where remuneration includes bonuses or variable components. Payslips, rosters, leave records, bank statements, and termination correspondence are often critical to the liquidator’s assessment. 

The classification of assets can be equally significant. Whether receivables, inventory or cash proceeds fall within the section 561 circulating assets regime may determine whether qualifying employee claims are paid before a secured creditor. This requires close examination of security documents, Personal Property Securities Register registrations, bank accounts, and the path by which sale proceeds were generated. 

Further complexity arises where the company operated through one or more trading trusts. Employees may have worked across trust and non-trust businesses while payroll was processed through a single account. The liquidator must then identify which business incurred each employment liability, the scope of the trustee’s right of indemnity and which assets are available to meet the claim. Trust deeds, accounting records, employment arrangements, and labour cost allocations can become decisive. 

These issues should be analysed before distributions, secured creditor recoveries or FEG scheme claims are treated as settled. Where concerns instead relate to independence, conflicts or material failures affecting recoveries, creditors may need advice about appointing or removing a liquidator. Dissatisfaction alone is insufficient, so the available evidence and likely benefit to creditors should be assessed before action is taken. 

What Should Employees, Directors and Creditors Preserve Before a Priority Dispute Arises? 

Priority disputes are often determined by documents created before liquidation, not explanations given after it begins. Employees should preserve employment contracts, payslips, rosters, leave records, commission calculations, superannuation statements, termination correspondence, and bank records. These materials help establish both the amount claimed and whether it falls within the section 556 priority regime. 

Directors and business owners should ensure payroll, accounting and trust records remain accessible to the liquidator. Missing records can delay adjudication, increase professional costs, and create disputes about whether liabilities arose in the company’s own business or through a trading trust. Where employees worked across multiple entities or trusts, contemporaneous records showing which business received their labour can be particularly important. 

Secured creditors should review their security documents, Personal Property Securities Register registrations, and the character of the assets from which repayment is sought. The distinction between circulating and non-circulating assets can determine whether qualifying employee claims are paid first under section 561 circulating assets. Tracing the source of cash proceeds may therefore be as important as identifying the original asset. 

Employees should also lodge proofs of debt promptly and consider FEG scheme eligibility without assuming that every employment-related amount is covered. Unpaid wages and superannuation may require different claims and supporting evidence. 

Before pursuing or resisting a priority position, parties should identify the claimant’s legal status, classify each entitlement, and map the available assets against relevant securities and trust rights. An early, evidence-based assessment can prevent an incorrect recovery strategy and clarify whether the dispute concerns valuation, legal characterisation, asset ownership, or statutory ranking. 

Frequently Asked Questions  

Where should employees and creditors seek advice about priority payments in liquidation? 

Employee claims receive significant statutory protection in a company liquidation, but priority does not guarantee full payment. The result depends on how each entitlement is classified, which assets are available, whether those assets are circulating, and whether secured interests or trading trust arrangements affect the distribution. 

Employees, directors, and creditors should obtain advice early where records are incomplete, claims are disputed, or the liquidator’s proposed treatment may materially affect recovery. Pentana Stanton Lawyers advises on corporate insolvency matters, including employee priority claims, secured creditor disputes and issues involving insolvent corporate trustees. To discuss the legal and commercial position in your circumstances, book a confidential consultation. 

This article is general information only and not legal advice. For advice specific to your circumstances, please contact our team.