Who should pay out when companies fail?

by , Principal Policy Adviser Money 29 June 2011
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With Dolphin and Möben calling in the administrators and Habitat in trouble, the high street’s ‘doing another Woolworths’. Many have paid for goods they may not receive, so who should pay out when a company fails?

Sign saying 'business closed'

If you’ve paid a deposit by cash to a company that’s gone into administration, chances are you can kiss your dosh goodbye. Unless there’s a kitchen with your name on it in their warehouse, you’ll probably have to stake your claim alongside other unsecured creditors, with little chance of getting your money back.

The same goes for anyone who’s paid by cheque (suggesting that the mighty cheque isn’t quite as good as every seems to think…?)

Is this fair? Probably not, but the alternatives aren’t any better. Forcing retailers to shoulder the burden of business failure insurance would be a false economy, paradoxically forcing many more of them out of business. This in turn would raise the cost of insurance, leading to more failures. And so on.

The answer: get a credit card

If you paid by credit card and the retailer didn’t deliver, you could put in a claim to your credit card company under section 75 of the Consumer Credit Act.

Even if you only paid the deposit on your card and the rest another way, you could put in a claim for the full amount – section 75 is based on the cost of the item, not the amount paid on the card. Section 75 even allows you to choose between putting a claim into the retailer and claiming against your card provider.

And yet, someone wrote to me a while ago telling me off for encouraging consumers to put in a claim to their credit card provider under section 75 – it’s not fair on the banks, he said. Instead, he continued, we should pursue the retailer, either as a company if they’re still trading, or the liquidators and management if they’re not.

Nonsense. Credit card providers sign up to the terms of the Consumer Credit Act when they decide to enter the credit card market. And section 75 is, in effect, an insurance policy against things going wrong.

We pay for this protection

All of us are paying for this insurance through the high APRs we pay and the transaction fees imposed on retailers, which in turn is passed on to us in higher prices.

If you had an accident in your car, your first thought wouldn’t be whether you’ll hurt Sheila, Churchill or the Admiral’s feelings by putting in a claim. Given the choice between losing my deposit and getting my credit card provider to shell out, there’s no contest.

If you’ve already been affected by a company failure, credit card users can breathe a sigh of relief. And if you paid by debit card, you may still be ok – you can put in a chargeback claim.

If you paid by cash or cheque, Dolphin’s competitor Bathstore may be your only hope, as it has offered to knock any lost Dolphin deposit off the price of one of its own bathrooms. It’s not fair, but I can’t think of a better system.

16 comments

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dean

Ooh I can! :-)

In my opinion, personal assets of shareholders and/or company owners should be plundered in order to pay their suppliers and customers.

A company failing is often the result of people taking too much money out of it, especially in times of trouble. I base this opinion on my Dad’s business.
He retires next month and he feels regret for not having taken some money out and spent it on himself and the family. I then pointed out to him that all the people in his business (lots of his customers and suppliers) have all gone bust and his is still in profit.

Were these people who paid themselves massive salaries, had E class Mercs as company cars, bought all their shirts/suits/ties on expenses etc etc????

The answer was yes.

In my opinion, this is a factor the influences a lenders desire to lend to small business.
“What will you do with that money we lend you sir?”
“Well, it’s iPads for all directors and upgrades to 7 series from a 5 series, in other words, spaff it all up the wall” :-)

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Phil

Shareholders are as much victims of a collapse as anyone else, any money invested in the company is lost and who is to compensate them? Many shareholders are ordinary citizens, not mega-rich individuals, and I can’t why their should have their savings and homes plundered to compensate customers.

What would happen in the case of a company like John Lewis where the employees are the shareholders or come to that Railtrack whose 10,000 staff all held shares in the company?

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richard

Phil – Surely shareholders are there to “share” in the losses as well as the profits of a company? It makes no difference how rich they are – They decide to risk their savings in the hope of profit. – there cannot be “compensation” if they lose it all – that’s the risk they take – otherwise they stuff their money in a savings account which has a safe but low return.

Totally different from customers or suppliers – customers pay for an item – they expect the item or money back. Suppliers have already paid for the supplies they deliver – they expect those supplies to be paid for or their supplies back.

If John Lewis goes bankrupt the employees will find their shares worthless – Just as Railtrack staff will
unless the administrators decide to pay out a portion. That’s what shares are all about.

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Phil

“Surely shareholders are there to “share” in the losses as well as the profits of a company? It makes no difference how rich they are – They decide to risk their savings in the hope of profit. – there cannot be “compensation” if they lose it all”

Exactly, so why should they be expected to compensate customers?

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richard

Phil

That is the risk you take AS a share holder – you put your money into the firm – to be used as the company decides – If it makes a profit – you gain money – If it makes a loss – you lose money.

It the firm goes broke – the money you put in goes broke too – Customers are often preferential creditors – so any money left in the company goes to pay back any customer who is owed money or goods by the company. Any money you put into a company will be used as the need arises including the customers debit.

If you don’t know this I suggest you never become a shareholder in anything except certain blue chip companies.

Shareholding is not a guaranteed profit maker – the income rises or falls mirroring the fortunes of the firm – it can be zero – But a shareholder is not forced to put extra money above the initial investment to re-pay customers – but every penny invested can be lost entirely/

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richard

Hmm…
All I know is in 1971 when a business I was subcontracted to went into voluntary bankruptcy they used my equipment as assets for the bankruptcy – I had put in £22,000 worth of equipment (the price of a house at the time) and received nothing in return (first wage bill was due a week after the bankruptcy). The administrators seized all of this though it didn’t yet belong to them. As you can imagine a £22,000 unexpected deficit is devastating – I was faced with bankruptcy too.

My Bank Manager saved the day by supporting me with a large loan but it was a near run thing – Eventually after eight months I received 12.5% on the balance owed – but nothing on the wages owed. It took five years of very hard work to pay back that £22,000 loan and get my income into balance. I never took that type of risk again..

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Nevalti

I have a related question….. I recently paid £1,039.98 for goods from ‘CameraBox’ who promptly ceased trading. ‘CameraBox’ accepted my Credit Card payment and the very next day confirmed that they will NOT be providing the camera.

I have not yet paid the Credit Card bill for it but the Credit Card company I used tell me that I should pay them the £1,039.98 even though the goods will obviously never be delivered.

IF they are jointly liable, is there any good reason why I should pay them and then struggle to get my money back?

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richard

I can only say that when I had a non delivery of an item that I had paid for (I always settle credit card bills at the end of the month), I informed First Direct after 21 days and a few phone calls to the company – First Direct reimbursed the £327 bill with no problems.

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jayjay

businesses should not be allowed to trade on borrowed money for more than 1year . an overdraft could be allocated to bridge the gaps of impending paymentsbut the company or trader should always have a contingecy fund in place for at least 3 months for trading and personal home utility bills etc besides.also banks who lend money unwisely and beyond the capabilities of the company or person involved should also be held responsible ( genuine crisis loans for unseen events such as death or injuries and other dilemascould be allowed. if large sums of money are being borrowed then the bussiness is not working or too much money is being used personally in which case the events need sorting

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richard

Can’t be done – A business borrows money to expand – so is a long term plan. To expect a 100% return (profit) in a year is very rarely feasible. Five year terms are more usual – If they have a contingency fund to cover their loan – most businesses will opt to use the contingency fund instead as it is far cheaper. They may have a working capital – but that is usually included in the loan plan

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Rinni

I have recently completed a bathroom installation with Dolphin Bathrooms in the house where my tenants are living and the experience has been horrendous. There was no project management at all and the organisation was shambolic! As a result of 2 and half months of continuous installation problems my tenants demand a compensation for the inconveniences caused. As I am paying morgage on the house I can not efford to reduce their rent. The front garden was ruined by 2 heavy turtle bags which were left there for two months and now the whole front needs to be resurfaced. What can be done? Any advice?

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Gampur

I recently paid a deposit to Dolphin Bathrooms on my Mastercard. When I called up to make a claim under Section 75, I was told that they were monitoring the situation as they understood a rescue package was being put together for Dolphin. Is there a time-scale for being able to claim, and is it right that I need to wait for my card issuer to see what is happening with Dolphin before they’ll issue the paperwork.
Thanks for any advice.

Hi Gampur. It comes down to whether Dolphin are currently in breach of contract. If you’ve had to wait an unreasonable amount of time for your bathroom to be fitted, I’d argue that they have breached their contract with you.

If that’s the case, then section 75 kicks in (regardless of the liquidity status of Dolphin) and responsibility lies with both the retailer and your card provider equally – it’s up to you who you pursue. I don’t think it’s acceptable for your card company to refuse to process your s75 claim – it’s the breach of contract that matters, not the future of Dolphin.

I’d encourage you to write to your card provider, reiterating that you are putting in a s75 claim. Also add in something along the lines of ‘If you are unwilling or unable to process this claim under section 75 immediately, please treat this letter as a formal complaint and deal with it through your formal complaints procedure. Furthermore, if you are unable to uphold my complaint, please send me a final reponse now, so I can take the matter to the Financial Ombudsman Service (FOS) immediately, rather than waiting for the stautory 8 week period to expire.’

You can then take the matter to the FOS and ask it to rule in your favour.

We have a guide on putting in a complaint: http://www.which.co.uk/consumer-rights/making-a-complaint/how-to-complain-about-financial-services/

Also, here are some section 75 template letters that may be of use: http://www.which.co.uk/consumer-rights/sale-of-goods/your-rights-when-paying-by-credit-card/section-75-sample-letters/

Good luck!

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Richard

My girlfriend and I have received our Kitchen through Moben just before they’ve gone into administration. This means while we have received the goods (I’m hoping it’s all there) we won’t receive the service part of our contract, as in it being fitted or our 10 Year Guarantee. I’m wondering where we stand as far as claiming through the Visa Chargeback scheme as we have paid the deposit through one Visa debit card and the final amount through another.

We have read online that the Administrators intend to contact everyone in our position and arrange to complete the fitting, can we reject this offer under the circumstances stating we want our money back? The other option is that Moben’s self employed fitter contacted me in reference to fitting the kitchen at further cost and I therefore wonder if there is way to claim this cost back, if chargeback scheme won’t apply.

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Damn Young

Just abolish the concept of limited companies, and insolvency. Force directors to be 100% liable for all debts which they arranged. They have their pension funds, and homes, which should be taken. Individuals should pay their debts, even if it means hardship for a lifetime. My former limited company employer claimed to be insolvent, and didn’t pay me a large amount of money owed. Then with the help of some crooked insolvency practitioners, swapped the company for a new one, and contiued trading under exactly the same name. They left behind the empty shell of the original company, and its unpaid creditors.

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jontycampbell

Their liability insurance should pay.

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