Parliament to consider preferential creditor status for consumers in insolvency

Parliament to consider preferential creditor status for consumers in insolvency

A recent report by the Law Commission recommended that consumers jump up the insolvency hierarchy. Russell Hill, partner, and Matt Ford, trainee, in the restructuring and insolvency group of Squire Patton Boggs, consider the potential impact of the report.

What is the background to the report?

Consumers could be set to jump up the insolvency hierarchy if Parliament backs the latest Law Commission recommendations.

The Law Commission’s report, Consumer Prepayments on Retailer Insolvency, recommends, among other things, that consumers who prepay for goods or services over £250 in the six months prior to a formal insolvency process should be paid out as preferential creditors instead of unsecured creditors.

The report was commissioned by the Department for Business, Innovation and Skills (recently renamed the Department for Business, Energy and Industrial Strategy) and laid before Parliament on 13 July 2016.

The recommendations have been welcomed by consumer rights groups, however questions remain over their wider impact.

What were the recommendations?

The Law Commission recommends that consumers move up the insolvency distribution hierarchy to become preferential creditors if they meet the following criteria:

  • the person is a consumer under section 2(3) of the Consumer Rights Act 2015
  • there is a prepayment by the consumer, ie money been paid to an insolvent business and goods or services not received
  • the prepayment by the consumer amounted to £250 or more in the six months prior to the insolvency, and
  • the consumer did not use a payment method which offers a chargeback remedy, such as a credit card

The Law Commission initially suggested that the threshold amount be £100 in the three months prior to the insolvency. However, following the consultation process, the final report recommended that a larger amount over a longer period would provide a fairer level of protection for consumers.

What is the position under current legislation?

Under current insolvency legislation consumers are generally unsecured creditors. This means they are last in the queue for any distribution of the insolvent estate. Despite the introduction of the prescribed part concept, in which an amount of floating charge realisations are ring-fenced to provide some distribution to unsecured creditors, in most situations consumers lose out heavily.

By way of example, in the liquidation of Zavvi, unsecured creditors received 25.9 pence in the pound. This was a positive result when compared to the liquidation of Blockbuster which paid out 14 pence in the pound and JJB Sport where the number of unsecured creditors and the cost

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