When a business that owes you money becomes insolvent, the recovery process changes fundamentally. The debt does not disappear — but your right to pursue it directly is suspended, and recovery depends on the type of insolvency process and your position as a creditor.
The main insolvency processes in Australia
- Voluntary administration (VA): A company in financial difficulty appoints an administrator — a registered insolvency practitioner — to take control and assess options. The process is governed by the Corporations Act 2001 (Cth). During VA, creditors generally cannot commence or continue legal action against the company without the court's leave. The outcome may be a Deed of Company Arrangement (DOCA), a return to director control, or liquidation.
- Liquidation: The company is wound up and ceases to trade. A liquidator is appointed to collect assets, pay creditors in a legally prescribed order of priority, and ultimately dissolve the company. This may be creditor-initiated (through a court winding-up order) or voluntary.
- Receivership: A receiver is appointed by a secured creditor (typically a bank) to take control of specific assets or the whole business to recover the secured debt. Receivership primarily benefits secured creditors — unsecured creditors generally receive little or nothing from a receivership.
What to do as a creditor
- File a proof of debt. The administrator or liquidator will write to known creditors and issue a proof of debt form. Complete and return this form with supporting documents (invoices, statements, contracts) by the deadline specified. This is how you formally register your claim.
- Attend creditors' meetings. You have the right to attend and vote at creditors' meetings. Your vote carries weight proportional to the value of your debt. These meetings make significant decisions — such as whether to accept a DOCA.
- Understand dividend expectations. Creditors are paid in a statutory order of priority. Secured creditors are paid first. Employee entitlements rank next. Unsecured creditors — most trade creditors — share in whatever is left. In many liquidations, unsecured creditors receive little or nothing. Set expectations accordingly.
Secured vs unsecured creditors
If you supplied goods under a retention of title clause and registered your interest on the Personal Property Securities Register (PPSR) before the insolvency, you may be a secured creditor in respect of those goods — with a much stronger recovery position. See our article on what the PPSR is and why creditors should register on it.
Contacting the insolvency practitioner
The practitioner's contact details will be included in the notice you receive. Contact them promptly, provide complete documentation, and keep records of all correspondence. Merion can assist you in collating debt documentation where we hold the account.
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