Law Commission: Consumer Prepayments on Retailer Insolvency

Consumers should be given higher priority when retailers go bust, the Law Commission has recommended.

In a report published this week, Consumer Prepayments on Retailer Insolvency, the Commission said consumers’ chances of gaining a refund on cash deposits when retailers become insolvent can be “hit and miss”. It recommended that consumers paying a deposit of £250 or more be moved up the priority list of creditors.

Stephen Lewis, Law Commissioner for commercial and common law, says: “The high street has seen a number of big-name retailers go under in the last decade: Comet, HMV, World of Leather, MFI and Habitat, to name a few. It’s a problem that’s not going away and we believe that consumers should have better protection in the more serious cases where larger sums are involved.”

The Commission is also recommending that banks do more to tell customers about protections for card transactions, such as the “chargeback” scheme where the bank will refund credit or debit card transactions made to a retailer that then goes bankrupt.

However, the Commission’s recommendations came under fire from insolvency and restructuring trade body R3 president Andrew Tate, who described them as a “mixed bag”.

“While there are welcome recommendations on consumer guidance and vouchers, some proposals would be difficult to implement in practice and could have unintended side-effects,” he said.

“The proposal to improve the position of some consumers with deposits in the order of priority of insolvency repayments is especially controversial. Improving the position of one set of creditors could also make it more difficult to rescue businesses.

“This would be the first major change to the order of priority of payments in insolvency proceedings in over a decade and may discourage lending to retailers, particularly those in distress. Banks and other finance providers will be wary of providing certain forms of rescue finance if there is a risk that a large chunk of a retailer’s assets will have to be used to repay deposits if it becomes insolvent. The retailer’s ordinary trade creditors would lose out, too, which could put them in financial difficulty.”

Tate said consumer protections already existed, particularly for those who pay by credit card. Moreover, the proposals would be difficult to implement in practice, he said. “With thousands of deposit holders, it might be difficult for an administrator or liquidator to establish who qualifies for a preferential payment and who doesn’t, for example.”