Insolvency and creditors

If you are owed money by a company or individual - because you have provided goods or services, or made loans to the company - then you are a creditor.

There are generally two categories of creditor: secured, and unsecured.

Employees owed money for wages and other entitlements are also creditors, however they receive a priority to unsecured creditors and are entitled to be paid before them, if there is sufficient money available.

A secured creditor is someone who has security - such as a mortgage - over assets to secure a debt owed. An unsecured creditor is someone who does not have security over an asset.

When a company is unable to pay its debts when they are due, it is considered to be insolvent. It may then be placed into external administration by its directors, by its creditors or by the courts. A table summarising the key features of the different types of formal corporate administrations is available here

In Australia, the majority of the external administrators are Professional Members of ARITA . It is their role to collect, protect and realise the company’s assets, investigate and report to creditors about the company’s affairs, and enquire into the failure of the company and possible offences.

The distribution of money to repay debts will depend on whether you are a secured or unsecured creditor, or an employee, and whether the company has been placed into voluntary administration, receivership or liquidation. Please see the specific ASIC information sheets, listed below for further details.

An administrator is entitled to be paid for necessary work that is properly performed, once these fees have been approved by a creditors’ committee, creditors or a court. They are also entitled to be reimbursed for out-of-pocket costs or disbursements. When seeking approval for their fees, an external administrator must provide a detailed report to creditors.

ARITA, ASIC and AFSA provide a range of information sheets for further information.