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.
To find out more, please read the ASIC information sheets:
Creditors of companies facing financial distress can find out more about their entitlements at the Australian Securities and Investments Commission’s (ASIC) website. ASIC has created a dedicated section including a number of FAQs and fact sheets for creditors. You can access it here http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/
The Australian Competition and Consumer Commission also has information for creditors of insolvent companies here https://www.accc.gov.au/consumers/consumer-protection/when-a-business-goes-bust