Dividends: The process for paying creditors in a liquidation

Winding up a company cannot be finalised until dividends are distributed in accordance with statutory time limits and investigations to admit or reject proofs of debt are completed.

Dividends are the conclusion to most external administrations. Winding up a company cannot be finalised until dividends are distributed in accordance with statutory time limits and investigations to admit or reject proofs of debt are completed.

The Corporations Act 2001 sets the minimum period to pay a dividend. If there are no complications, a corporate insolvency dividend will take about one month to distribute.

If there is a complexity in relation to the admissibility of proofs of debt, the payment of the dividend can be delayed, particularly if a creditor applies to the court for a review of the liquidator’s decision to reject their proof of debt.

Dividends in detail
When there are funds to distribute, the payment of a dividend is often the only tangible output from a winding up.

A liquidator withholds sufficient monies to complete the winding up. They also determine the most appropriate time to pay dividends when considering any further anticipated realisations and the costs related to paying a dividend.

Dividends must be declared in accordance with the requirements of the Corporations Act, and be paid to creditors in order of their priority.

Steps in paying dividends
The four basic steps required to pay dividends are:

  1. call for proofs of debt—every known creditor must have the opportunity to lodge a proof of debt and participate in the dividend
  2. admit proofs of debt—verify that the debt is proper and has been ‘proved’ to the liquidator’s satisfaction
  3. reject proofs of debt—to ensure only legitimate creditors participate in the dividend
  4. pay the dividend—the liquidator distributes the cheques.
  1. Call for proofs of debt
    All creditors must be given the opportunity to lodge their claim in the form of a proof of debt. A proof of debt is a formal document used to prove that a debt exists and it sets out the amount of the debt. Without sufficient proof that the debt exists, it will not be admitted for the stated amount or possibly it may not be admitted at all.

Proofs of debt are a prescribed form under the Corporations Act. A liquidator may not admit claims that are insufficiently detailed on the correct form, which may result in a creditor being excluded from a dividend.

Creditors can lodge proofs of debt at any stage in an administration. They do not need to wait until a dividend is called, and only need to submit one. Creditors should ensure that their claim has been lodged and appears in any list of proofs of debt received. If creditors are in any doubt that their claim has been lodged, they should contact the liquidator’s office.

Periods for calling for proofs of debt
The liquidator must formally notify all known, or potential, creditors of the intended dividend and request that proofs of debt be lodged by a certain time.

The Corporations Act states that creditors must be given at least 21 days to lodge proofs of debt.

Definite periods to lodge proofs of debt are important to expedite dividend payments or to ensure dividends are not challenged while cheques are being drawn. The cut-off date for proofs of debt is final and the provisions of the Corporations Act set out the creditors’ and liquidator’s rights if a proof of debt is not lodged in time.

Notices to be issued for calling for proofs of debt
To notify creditors in accordance with the Corporations Act, two notices must be issued:

  1. an advertisement on ASIC’s website to notify the public
  2. a Corporations Form 547 or 548 must be posted to creditors that have not lodged a proof of debt.

Dates for payment of dividends
Dividends cannot be paid until the proofs of debt cut-off date has passed and all proofs of debt have been admitted or rejected. That is, cheques will not be drawn within that period.

The notice period from the initial notice calling for proofs of debt to the intended payment date must not be longer than two months. However, payment may be made after the intended payment date due to complications in the dividend process, typically due to the admittance and rejection process.

If the dividend date is postponed, the liquidator may need to re-advertise the notice with a new intended date.

Non-lodgement of proof of debt
Creditors that miss the proof of debt cut-off date can lodge a proof of debt for the next dividend distribution, and they will be paid the first dividend they missed out on (a catch-up dividend), as well as the upcoming dividend. If there are insufficient funds to pay a second dividend (a second dividend is never declared), creditors will not receive a dividend at all. Therefore, it is imperative that creditors lodge their proofs of debt before the cut-off date.

  1. Admitting proofs of debt
    Creditors have the burden to prove the existence and amount of their debt. The liquidator does not need to disprove a debt.

The liquidator assesses the creditors’ supporting evidence and determines the validity and amount of the debt. If the liquidator believes that all or part of the debt is not sufficient, they will seek further clarification and material from the creditor. Without further information, the liquidator may reject the proof of debt in full or in part. The liquidator is not required to locate sufficient information.

Creditors should attach copies (not originals) of all appropriate documents to their proof of debt.

Liquidators must review proofs of debt within 14 days of the lodgement date and decide to admit or reject the claim or seek further information. The Australian Securities and Investments Commission (ASIC) can grant an extension to the review period.

  1. Rejecting proofs of debt
    If a proof of debt is rejected because a creditor does not provide sufficient evidence, a liquidator will provide a notice outlining the reasons for rejecting the proof of debt and will set a deadline for appeal.

Appeals against decisions
Creditors’ rights are set out in regulation 5.6.54 of the Corporations Regulation. Creditors can have the court review the liquidator’s decision to reject their proof of debt, but have a limited time to apply for adjudication. A liquidator can amend their decision to reject a proof of debt when sufficient information is given if it is still within the required timeframe.

The court may allow an application for adjudication after the time limited period expires, but creditors should not rely on it being granted.

Creditors have the burden to prove to the court that the claim should be admitted in the liquidation. Creditors must show that the decision to reject the proof of debt was incorrect based on the information provided to the liquidator.

Revoking a decision to admit or reject
A liquidator can reverse their admittance or rejection of a proof of debt.

When a liquidator reverses their initial decision to reject a proof of debt, they must give the affected creditor notice of the new decision and, if appropriate, adjust the dividend to be paid or, if necessary pay a catch-up dividend.

  1. Pay the dividends
    Dividends are paid after the proof of debt lodgement date expires, after all the proofs of debt have all been admitted or rejected, and after any appeals on rejections have been heard in court. The liquidator will forward a cheque to the creditor.

If dividend cheques are not banked within a reasonable period, or if creditors cannot be located, the liquidator will hold monies for six months following payment, and then forwarded these monies to ASIC. The creditor must then request the money from ASIC.

Priorities in the payment of dividends
Subject to specific priorities, all creditors will rank equally in a winding up and will be paid ‘pro-rata’ dividends.

The Corporations Act gives the greatest priority to employees. Entitlements due to employees must be paid in full before payments to non-priority creditors.

The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 3.11.2017