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SHOULD CONSUMERS BE GIVEN PREFERENTIAL CREDITOR STATUS?

On 13 July 2016, the Law Commission laid its report, Consumer Prepayments on Retailer Insolvency, before Parliament.

Under the current insolvency regime, when a retailer becomes insolvent, a hierarchy of creditors set out in legislation determines who should be paid from any remaining assets with each category of creditor being paid in full before distribution to the next category. The majority of consumers are unsecured creditors and rank behind fixed charge holders, preferential creditors and floating charge holders meaning that they are unlikely to receive any money from a distribution of the remaining assets. Recent cases suggest that whilst consumer debt can be as high as £212million they are paid as little as 0.14 pence in the pound (JJB Sports).

However, not all consumers will benefit from the proposed change and they must meet the following criteria before they can move up the list:-

  1. They must fall within the definition of a consumer as set out in section 2(3) of the Consumer Rights Act 2015; an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”.
  2. They have to have made a prepayment for goods and services not received;
  3. The prepayment must have been for a sum of not less than £250 made within the six months prior to insolvency; and
  4. They must not have used a payment method from which they cannot reclaim their prepayment, i.e. a credit card.

This will undoubtedly affect the position of other creditors and many insolvency practitioners have raised their concerns. Whilst beneficial to vulnerable creditors it potentially increases costs and time in dealing with distribution following insolvency. The topic has been considered many times before and for now we await the Government’s response.

If you would like Geoffrey Leaver to advise you on any insolvency related matter please contact Neena Jakhu on 01908 689373 or njakhu@geoffreyleaver.com