The Law Commission recently completed its project considering whether greater protection is required on retailer or service provider insolvencies for consumers who have paid deposits or purchased gift vouchers pre-insolvency.
The report was commissioned by the Department for Business, Innovation and Skills (now the Department for Business, Energy and Industrial Strategy) and laid before Parliament on 13 July 2016. In it the Law Commission suggests greater protection for consumers and increased awareness of consumer options.
Large, high-profile retailer insolvencies are often highlighted in the media, including the well-known Farepak liquidation, in which 114,000 consumers saving for Christmas hampers and goods lost £37m, and the HMV insolvency, where consumers held £6.5m worth of unused gift vouchers when it went bust. This year alone has seen the failure of BHS, Austin Reed, Brantano and Lowcostholidays, amongst other household names.
There is currently no obligation for companies in liquidation or administration to honour gift cards or vouchers and generally no protection for prepayments (deposits or savings schemes). Each insolvency scenario will be different and Administrators may honour prepayments in some circumstances to preserve the best return: Austin Reed cancelled gift cards but in the BHS and Borders administrations, consumers were able to redeem their gift cards if they spent twice the face value amount of the card on purchases.
In many cases customers are left out of pocket and, particularly in the case of deposits or savings schemes, these can be substantial amounts (sofas, kitchens, cars, season tickets, holidays, weddings…). The demise of Lowcostholidays caused issues for both holidaymakers abroad who were asked to settle hotel bills directly, as well as for customers who had paid deposits for holidays not yet taken and were not ATOL protected.
The Law Commission analysed 20 major high street retailer insolvencies and subsequently produced its report, Consumer Prepayments on Retailer Insolvency. It raised concerns over a lack of awareness of consumer rights on insolvency and the vulnerability of consumer prepayments, particularly in the twilight period before collapse, where it highlighted the possibility that businesses would make a last effort to trade out of distress by taking unprotected prepayments from consumers who were not aware of the credit risk.
The Law Commission’s broad recommendations are:
- Preferential status (below employees but above floating charge holders) for consumers who have made a cash prepayment of £250 or more within 6 months of a retailer collapsing (where a chargeback option is not available).
- Raising consumer awareness – card issuers and insolvency practitioners should do more to tell consumers about existing chargeback and other credit or debit card schemes where refunds can be obtained for goods or services not provided.
- Statutory protection in sectors that are particularly high risk for consumers. Saving schemes should offer increased protection, for example Christmas savings should be ring-fenced through a trust arrangement, or protected through insurance.
- Changes to the rules on transfer of ownership of goods to consumers.
One proposal the Commission considered but rejected was providing mandatory protection for small losses such as gift vouchers or small deposits, as this would be costly and disproportionate.
Whilst many have been positive about the proposals, questions have been raised by contributors, including R3, as to the practical difficulty of implementing certain of the Commission’s proposals and the impact on floating charge holders and other unsecured creditors (such as ordinary trade creditors or HMRC) in changing the current order of priority and the equal footing principle of “pari passu” .
It remains to be seen what action Parliament will take on the back of this report.