Consumer prepayment on retailer insolvency

What happens to your gift voucher or the deposit you’ve paid when a retailer goes bust? What happens if your Christmas savings scheme collapses? Under existing law, your money is unlikely to be protected and you may not get it back.

In a consultation opening today, the Law Commission of England and Wales asks whether greater protection is needed for consumers who stand to lose money. Consumers are often unaware of the legal position, and do not realise that their prepayments are at risk.

An analysis of 20 major high-street retailer insolvencies undertaken by the Commission shows that the losses to customers are often low. Gift vouchers tend to be issued in relatively small amounts and administrators may honour them during a period of trading in administration. The customers who stand to lose most are those who have paid significant deposits for large items such as furniture or kitchens, particularly if they have paid by cash or cheque.

If consumers have paid by credit or debit card, they may be entitled to a refund from their card issuer, but many card-holders do not know about or understand these benefits. As a first step, the Law Commission is proposing that more should be done to ensure consumers are aware of these protections and know how to use them.

Additionally, retailers may take active steps to protect consumer payments through mechanisms such as trust accounts or insurance. However, these options can be impractical or prohibitively expensive, and in its consultation the Commission is asking:

• could it be made easier for retailers to use trusts to protect prepayments, and
• how can retailers persuade insurers that insuring consumer prepayments is a viable market?

The Commission hopes that retailers who issue vouchers will undertake voluntary steps to protect consumers and asks whether the costs of regulating all voucher schemes would outweigh the benefits. However, in the case of schemes that are marketed as “suitable for savings”, the Commission asks whether it should be an offence to market such schemes without adequate protection in place.

To protect consumers who have advanced substantial deposits, the Commission is proposing that a limited preferential status be given on insolvency to cash deposits over £100 made in the three months before insolvency, when a retailer is likely to have known their business was in trouble. Additionally, it proposes new, simpler rules governing the transfer of ownership to make it easier for administrators to provide customers with their goods.

The Commission is also seeking views on proposals for a new statutory scheme allowing businesses to register a “consumer charge”, giving a voluntary priority to a specified group of creditors and making them more likely to receive a payment from the insolvent company.

Stephen Lewis, Law Commissioner for commercial and common law, said today:

“We have analysed 20 household names that have entered administration in the last eight years leaving some customers’ prepayments unprotected. Customers can lose significant deposits, and it tends to be the less well-off who suffer most. There is a strong case for offering all prepaying consumers a greater degree of protection. We are proposing a range of practical and affordable measures retailers could choose to take to protect their customers’ prepayments.”

The consultation is open from 18 June to 17 September. The consultation paper and a summary are available on lawcom.gov.uk.

Notes for editors
1. The Law Commission is a non-political independent body, set up by Parliament in 1965 to keep all the law of England and Wales under review, and to recommend reform where it is needed.
2. For more details on this project, visit lawcom.gov.uk.
3. For all press queries please contact:
Phil Hodgson, Head of External Relations:  020 3334 3305
Jackie Samuel:  020 3334 3648
Email:  communications@lawcommission.gsi.gov.uk