Law change proposed to protect consumers in event of insolvencies

Under the existing rules, if a company becomes insolvent, goods paid for in advance that are 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, largely unchanged since 1893, that establishes when consumers legally own goods for which they have pre-paid.

"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," said Mr Scully.

"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."

According to the government, the law change would apply to scenarios where, for example, a person may have pre-paid 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, around 20 per cent of all retail sales take place online and require prepayment. The last few months have seen internet sales jump from 19.9 per cent of all retail sales in January 2020 to 32.8 per cent per cent in May 2020.

The Law Commission recommended that, in that situation, 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.

"The current transfer of ownership rules are shrouded in complex language which consumers can find difficult to understand," said Law Commissioner, Professor Sarah Green.

"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, as well as containing a series of measures to amend insolvency and company law to support business to address the challenges resulting from the impact of coronavirus. The bill received royal assent on 25 June 2020.