Protect yourself from traders going bust
January 2009, updated April 2010
In the current economic climate the words liquidation, examinership, receivership and administration seem to appear more often.
Whether it is a company closing down or speculation about this happening, these words are of concern to everyone involved - traders, suppliers, creditors, staff and consumers.
The following information has been compiled by the National Consumer Agency as a general guide for consumers. As each situation is likely to have unique features, no single guidance can be applied in all cases.
The guide sets out general principles only. Consumer should bear this in mind, and should act promptly in all cases.
In general, consumers may be at greater risk of suffering a loss if they have handed over money for goods or services that haven't yet been delivered to them when a trader goes out of business.
There are three main ways in which consumers hand over money on the promise of receiving goods or a service in the future:
- When they pay in full for a product to be collected/delivered at a later date,
- When they pay a deposit to secure a product or its delivery at a later date
- When they buy gift vouchers/cards
In each case, the consumer will be considered an "unsecured creditor" if the company is placed under the protection of the court by way of liquidation, examinership or receivership.
Types of creditor
Essentially a "creditor" is someone to whom the company owes money. There are three types of creditor:
- Preferential
- Secured
- Unsecured
Preferential creditors are those whose claims rank highest in terms of getting paid by a company under the protection of the courts. These would include tax authorities, and employees to whom wages are due.
A secured creditor is someone to whom the company owes money and who has either a fixed or a floating charge over the assets of the business. Most often these are banks and other lending institutions that may have granted sizable loans to the business from the outset.
Unsecured creditors, as the name suggests, rank behind other creditors who may hold some form of security against the business and more often than not they receive little or none of the money owing to them.
A company in financial difficulties can follow a range of options:
Liquidation
A liquidator has the task of winding up a company, realising or "liquidating" the company's assets and distributing those assets in accordance with law.
In such cases, unsecured creditors sit on a list of those to whom money is owed.
The law prescribes the order in which available money may be paid out and only if all secured creditors (these will usually include banks with secured loans etc) are reimbursed can any remaining money then be distributed to unsecured creditors.
In the majority of cases, unsecured creditors receive little or none of the money outstanding to them.
Examinership / administration
An examiner is appointed by the court (Companies Act 1990) for the purpose of examining the situation, affairs and prospects of the company.
Consumers who find themselves affected by an examinership may still receive goods or services for which they have contracted if the company continues to trade through the examinership, but this process puts all parties dealing with the business on notice of its financial difficulties and unless a remedy to the financial difficulties of the business can be identified, the next step would often be the petition for liquidation (see above).
Administration is the UK's version of examinership. There are a number of differences between administration and examinership, but the effects for the consumer are broadly the same.
Receivership
A receiver is appointed to a business to protect the interests of a secured creditor.
Their task is to secure the assets of a company wherein a creditor company would have inserted this facility when the two parties originally contracted.
Typically, lending institutions would avail of this mechanism to secure large loans. The status of consumers in a receivership would be similar to that in an examinership, with the same warning applying regarding the likelihood of a subsequent petition for liquidation.
In each of these three cases the trading status of the company in question will depend on the circumstances surrounding the appointment of the relevant officer.
Some businesses may continue trading as normal, while others may immediately begin the process of winding up. Similarly, it is the decision of the relevant officer as to how to proceed should a company be composed of a chain of stores - some stores in the chain may continue to trade while others may be closed promptly.
If some stores do remain trading, vouchers and credit notes might not be honoured, as consumers presenting these are regarded as unsecured creditors.
What to do
So what can consumers do to protect themselves from being affected by a company's closure? Here are a few tips:
- If your card provider offers a chargeback facility, pay by credit card or by debit card. This may allow you to recover money paid to a trader who has gone out of business. Not all card issuers operate chargeback schemes, and not all credit or debit card products may be included in the scheme, so always check with your provider first. If the business is ultimately liquidated, voucher holders should register with the appointed liquidator as unsecured creditors.
- Ask the trader how long delivery will take and, if you are happy with this timeframe, get them to put this in writing before you place a deposit. If the delivery fails to take place on time, give the trader the opportunity to agree a new, reasonable and final delivery time. If they will not agree to this or this new deadline is not met, you should look for your deposit back. Remember, if the company enters any of the processes listed above, you may not be able to pursue it for the return of your deposit, as each of the processes has the effect of protecting the business from being sued by creditors. In such cases, you are likely to have to deal with any examiner/receiver or liquidator appointed
- Consider the contract seriously before paying a large deposit on goods that will take a long time to be delivered
- Think carefully before deciding to pay the full amount in advance and do not pay in full for items if there is a long delivery period involved
- If you have paid for expensive items, don't ask the retailer to hold or store them for you for indefinite periods. (Occasionally consumers have asked retailers to store items as part of the deal, particularly in cases where they are in the process of buying or changing their house or apartment)
- When goods are delivered, check immediately for possible faults and that the goods are in fact the items you paid for. If you need to return them, decide if you still want the goods you had ordered or, if delivery will take another long period of time, whether you want a refund of your deposit
- Find out if the company is a subsidiary or a standalone company. You can get this information from the Companies Registration Office. If a subsidiary company goes out of business, you may still be able to make a claim against their parent company
- Don't hold on to credit notes or gift vouchers for too long. Remember that the only opportunity to get your money back in respect of credit notes or gift vouchers will be as an "unsecured creditor" - the last in an often long line of those owed money by the company.
If you have paid money over to a trader who goes out of business before your goods are delivered, what can you do?
- Check the company's website and also the website of the liquidator, examiner or receiver to get the latest news on the company's situation. Contact the official appointed to look after the company's affairs for further details
- A retailer is always responsible for putting things right if a fault occurs with something they sold you. However, if a company is closing down or has already closed down, you may not be able to deal directly with the retailer. In a case where you have been given a guarantee by the manufacturer, you would have the right to make a claim against the manufacturer if the goods were found to be faulty
- If you paid for goods by credit or debit card, check with your card provider if you can reverse the transaction using the "chargeback" facility
- If the business that has gone into liquidation was a subsidiary of a larger company, it may be possible to claim directly from the parent company
- If a retailer's supplier goes out of business, rather than the retailer itself, the consumer - whose contract is with the retailer - should be able to seek redress from the retailer
Information on the liquidator/examiner/receiver for the company can be obtained by contacting the Companies Registration Office (CRO) on 01 804 5200/1, or lo-call 1890 220 226.
Visit the CRO website