We are yet to see the true impact of Christmas trading in the retail industry although HMV is already a victim of the tough conditions for retailers. Additionally, Boots has announced a fall in sales and the launch of a “transformational costs management program” to save more than $1 billion and Next has confirmed that profits in store have fallen and although online sales are up, the uncertainty about the UK economy after Brexit makes forecasting difficult. Only one thing is clear – consumers remain at risk in the event of a retail business entering administration.

There has been much talk of late about the failing UK high street, the change in consumer habits and how retailers are having to adapt and change their traditional business models to meet the evolving needs of consumers. However, what protections do consumers actually have if they have ordered and paid for goods online or paid a deposit but the business then fails?

Dealing with the administrators: on-line purchases and gift cards

If goods are ordered on-line but have not been delivered, it will often be the insolvency practitioner who will decide whether to fulfil the order and deliver the ordered item, even if it has been paid for. This is because whilst a consumer may think that they have bought and paid for an item and they have an email confirming the order and payment, the law on ownership is not as clear as consumers may expect. The position is still determined by the Sale of Goods Act 1979, which, when enacted, did not envisage the significant rise of on-line transactions and the mechanics of them.

In the scenario outlined above, it is likely that the retailer would still own the item purchased because under current law, the buyer only becomes the owner if the specific goods ordered were “identified and agreed upon at the time the contract is made” and the specific goods were in a deliverable state. Would the average consumer understand what this means? Probably not. They think they have bought the item but the reality is that when an order is placed on-line there is likely to be a warehouse full of like for like items. Therefore, the specific goods have not been ascertained and identified and therefore even though the consumer has paid for them, ownership remains with the retailer.

Recently the Government responded to a Law Commission report looking at consumer pre-payments in retailer insolvency, acknowledging that changes to the Sale of Goods Act 1979 are sensible and are more important given the rise in internet sales. The Government confirmed that further consultation will take place with a view to changing the law at a suitable moment but until then, whether a consumer receives goods they have paid for is likely to remain in the hands of the administrator.

Equally, gift cards purchased prior to a business entering administration are unlikely to be honoured unless the administrator agrees to it. The Government also confirmed in its response that it would not be introducing any measures to regulate gift vouchers.

As many consumers found out when House of Fraser went into administration, they may be left out of pocket with no goods and a gift card worth little or nothing. Whilst they can submit a claim in the administration, as an unsecured creditor they are unlikely to see any return. Notwithstanding that consumers appear to lose out, an administrator may still honour the transaction or gift card to preserve the goodwill in the business if he is seeking to sell it – but this is not a legal right or something which consumers can insist on.

The Law Commission had proposed that in certain circumstances, pre-paying customers should be elevated to a more secure position in the event of insolvency and paid ahead of other unsecured creditors and floating charge holders. However, the Government will not be introducing measures to effect that.

So, if the administrators will not honour an order, vouchers or gift card, what can the consumer do?

Claims under s75 of the Consumer Credit Act 1974

For larger purchases (over £100 and up to £30,000) where payment has been made by credit card, consumers can recover payment from the credit card company under s75 of the Consumer Credit Act 1974 (“s75 Claim”) if the goods are not delivered. In addition, s75 claims may also cover any consequential losses over and above the costs of the actual goods ordered but not received.

There are some cases where consumers cannot make a s75 Claim, most notably:

(a) if the goods purchased total over £100 but individually the items are worth less than £100;

(b) S75 Claims do not cover situations where payment is made through an intermediary such as PayPal or through Amazon where the consumer is buying the goods through the intermediary rather than directly from the retailer. Nevertheless, in those cases the consumer may well be able to reclaim payment from, for example, PayPal which has its own buyer protection policy;

(c) unfortunately, s75 does not apply to payments made by debit card. However, if part of the payment has been made by debit card, provided over £100 has been paid for on credit card then the full payment can be claimed, such as where the consumer pays the deposit by credit card but the balance on debit card.

Gift cards purchased on credit card can also be refunded under s75 if the value of the card is over £100. Note however that if the gift card had been purchased through an intermediary – such as a supermarket – then a s75 claim may not be possible and instead consumers may have to rely on making a claim through their card issuer under the chargeback regime (see further below).

Chargeback claims

In cases where s75 does not apply, consumers can try to recover payment from their card issuer under the chargeback regime. In this instance, the card issuer requests payment from the retailer’s bank, but unlike a s75 claim, there is no legal right to a refund and therefore no guarantee of repayment.

There is a time limit on making a claim and consumers will need to check with their card provider for the specific conditions for making a claim, but it should be fairly easy for an individual buying a relatively low value item on-line to make a claim should the retailer fail.

A chargeback claim could also prove useful for credit card claims where the value of the goods purchased are less than £100 and s75 does not apply.

Consumers are not always aware of their rights to make s75 or chargeback claims but insolvency practitioners are expected to make consumers aware of their ability to claim by, for example, publishing details on the retailer’s website and on the retailer’s social media accounts.

Christmas savings accounts

The other common scenario where consumers can lose out (sometimes significantly) is Christmas savings clubs, where consumers put aside money each month to spend at Christmas on goods and vouchers. However, whilst this is a form of “saving”, these companies are not regulated in the same way as bank savings accounts, unless the company engages in other regulated activities. So more often than not, consumers will have no protection if the company enters insolvency.

The most well-known example of this is the scheme operated by Farepak which entered administration in 2006, leaving consumers out of pocket with no means of paying for Christmas or recovering the payments which they had made. In that case, consumers did see some of their money returned to them through a Charity fund set up by the Government and ex-gratia payments from Lloyds Banking Group. However, the legal position is unchanged and should another Christmas savings club fail, consumers will be in the same boat and have no protection.

Given the perception that these schemes operate as a savings scheme, the Government announced in its response to the Law Commission report that it intends to grant power to the Secretary of State to require businesses to protect consumer pre-payments in sectors which pose a risk. Such protections will include a requirement the company put in place insurance, a bond or a trust account as appropriate. Initially it is expected that any such legislation will be aimed at the Christmas savings market, but other at risk consumer sectors may also be affected.

There are a number of voluntary protection schemes in place, such as the CPA, but companies can leave the scheme when they choose and therefore they offer little comfort to consumers.

At present, consumers who are paying into Christmas savings clubs therefore have no protection unless the club has opted to provide voluntary protection (albeit that it could be withdrawn) or the consumer can claim under the chargeback regime or make an s75 Claim.

Conclusions

Where a consumer buys and pays for a £30 pair of trousers on line from a retailer which enters administration before the goods are delivered, if the administrator is not prepared to deliver the item the consumer should be able to recover under the chargeback regime or through the PayPal scheme. If not, then they can submit a claim in the administration.

For those paying over £100 for an item, the message is (1) to pay by credit card direct with the retailer to guarantee a refund and (2) for those paying through intermediaries, such as PayPal, to check the terms and level of protection.

For those buying gift cards – perhaps it would be better to buy a gift or give cash given the lack of protection a gift card has. For the keen savers using Christmas savings clubs, the message must be that the money is perhaps safer in your bank account until additional protection is put in place.