Your rights when a business goes bust

In recent years we've seen an increase in the number of high-profile consumer-facing businesses going bust - gourmet take-home brand Providoor, stationery brand Kikki-K (both now trading after being sold by the administrator) and volume builder Porter Davis, to name just a few.

These recent collapses have highlighted the vulnerability consumers face when businesses falter.

So, what rights do consumers have when businesses fail? What happens to unspent gift vouchers and uncollected, paid-for goods?

Unfortunately, in these situations, consumers will find themselves labelled as unsecured creditors, raising concerns about their rights and entitlements, if any.

Understanding your rights as a consumer

When a business goes into administration or liquidation, consumers who have made purchases or placed orders may find themselves in a precarious position.

As unsecured creditors, they are typically at the bottom of the list when it comes to recovering their funds.

From the liquidator or administrator's perspective, your $1000 table or $200 gift voucher may pale into insignificance when compared to the overall debt of the business, which might be over $1 million.

Unlike secured creditors, such as banks or suppliers with collateral, unsecured creditors have virtually no recourse to reclaim their money or goods when a business fails.

This means that in most cases, consumers may not receive any refund for their purchases or deposits.

What happens when the failed business is sold?

Sometimes, an administration will lead to the sale of the business so that it can continue trading with new owners.

In this case, the new business owners will ordinarily choose which liabilities of the old business they will take on. For example, the new owners will choose whether to honour outstanding gift vouchers.

Alternatively, they may honour them with some conditions (eg: spend an equivalent amount to the amount redeemed in store on the gift voucher transaction).

How to protect yourself

Whilst unfortunately there aren't many options for consumers in the event of a business collapse, here are some practical steps you can take to protect yourself:

1. Pay on delivery

When it comes to larger items such as furniture, offer to pay a deposit first then the balance on delivery.

This means, if the business goes under before you receive your item, you will only forfeit your deposit and not the full amount.

2. Spend your vouchers

A simple tip- spend your vouchers soon after receiving them.

Whilst the Australian Consumer Law ensures vouchers must carry a minimum three-year expiry, it is advisable to spend your voucher as soon as you are able to avoid being stuck with a worthless voucher if things go pear-shaped down the track.

3. Ask your bank to reverse the payment

If you paid with a credit card, debit card or through a secure payment provider such as PayPal, your bank may be able to get your money back by reversing the payment.

This is known as a 'chargeback'. There are time restraints and other limitations on chargebacks, so contact your bank as soon as possible to find out if this is an option. Depending on your bank, this may only be possible shortly after the purchase.

4. Register as a creditor

There is a chance you may receive something back if you register as an unsecured creditor, so it may be worth doing this in the event you can at least recover part of what you paid.

It's important to note that even if you do register, there are no guarantees and, in many cases, unsecured creditors won't be able to recover what they've paid.

5. Document everything

Keep records of all transactions, including receipts, order confirmations, and communications with the business.

6. Stay informed

If you hear of a business collapse, be sure to monitor news and updates about the business's financial situation and any developments related to potential refunds or reimbursements.

Check the administrator's announcements, or the announcements of the new owner who has purchased the failed business, and follow any instructions provided.

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