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Law change will protect consumers if retailers go bust

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Written by: Emma Lunn
27/07/2020
Consumers who have prepaid for goods will be better protected if a retailer goes insolvent, under new Law Commission proposals.

The commission’s proposals will make it fairer for consumers and reduce the risk of them missing out if the company they have bought goods from becomes insolvent before goods are delivered.

Under current rules, if a company falls into administration, goods paid for in advance still in its possession may be considered as assets belonging to the business.

These goods can then be held by the company’s administrators and used to pay off the firm’s debts, potentially leaving consumers out of pocket.

Consumer affairs minister Paul Scully has asked the Law Commission to consult on draft legislation to update the law that establishes when consumers legally own goods for which they have paid.

This is known as the transfer of ownership, and the law in this area has remained largely unchanged since 1893.

Scully said: “With more and more people prepaying for goods online, it is so important our laws are up to date to reduce the risk of customers losing out if a business unfortunately becomes insolvent.

“This consultation will look at how the law can be brought into the 21st century, providing clarity for those managing insolvencies and better protection for consumers.”

The law change would apply to scenarios where, for example, a person may have prepaid for a pair of blinds tailored to fit their windows.

If the company they have ordered from goes out of business before they have received the blinds, insolvency practitioners may label them as assets of the business, and use the proceeds to pay back creditors in the insolvency.

The proposals would also support those shopping online where goods are not immediately handed over at the point of sale, unlike when shopping in store.

In 2020, about 20% of all retail sales take place online and require prepayment. The past few months have seen internet sales jump from 19.9% of all retail sales in January 2020 to 32.8% in May 2020.

The Law Commission recommends that legislation should include a list of events and circumstances which would be sufficient to transfer ownership to the consumer. For example, goods having been manufactured to the consumer’s own specifications, such as a sofa, or goods having been labelled with the consumer’s name.

Professor Sarah Green, law commissioner, said: “The current transfer of ownership rules are shrouded in complex language which consumers can find difficult to understand.

“We believe it is time for the rules to be modernised so that consumers have clarity on their rights of ownership, especially in an insolvency situation.”

The changes would build on the recent Corporate Insolvency and Governance Bill, which made permanent additions to the UK insolvency regime.

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