How to deal with a bankrupt firm
When Wrapit, the wedding gift company, fell into financial difficulties summer 2008, it left more than 4,000 newlyweds without gifts from friends and family. KPMG, Wrapit’s administrators, eventually revealed that only 800 couples would get some of their gifts.
The demise of Wrapit no doubt brings back memories of the collapse of Farepak, the Christmas hamper company, in 2006, which left more than 150,000 customers facing a miserable festive season. Two years on, the liquidators of Farepak had only just started court proceedings to secure funds for its customers and agents.
Such high-profile collapses raise questions about the safety of paying for goods and services before you receive them, and it’s a problem that will intensify as the recession threat grows and more companies go under.
According to credit checking company Experian, there was a 17.5% increase in the number of businesses that failed in the first six months of 2008 compared with the same period of 2007. It says 10,512 businesses, small and large, collapsed in the first half of this year.
Other notable failures include the demise of Dolcis, a 144-year-old shoe retailer, which blamed tougher trading conditions, as well as two budget airlines, Zoom and Silverjet, which were grounded in summer 2008 due to the increased cost of fuel.
"Insolvencies are currently running at their highest level since the final quarter of 2006 and all the indications are that the credit squeeze is taking hold across more industry sectors," says Tony Pullen, managing director of Experian’s business information division.
He says the sectors that are worst hit include hotels and leisure, telecommunications and the retail trade, which are struggling to cope with inflation and falling consumer confidence.
Of course, you’re only at risk should a company fold before your purchased goods or services are delivered.
However, the exact stage of your order can also make a difference. For example, if you have paid for a television and it is in the warehouse addressed to you as the company folds, it would be obliged to send the TV to you.
However, if your order is a few days behind, you’ll have to join the queue of other ‘unsecured creditors’, says Sandra Bayne, an associate at law firmThomas Eggar. If you are the victim of a company going into administration or liquidation, she explains, you do have rights, but not many.
"Once insolvency proceedings begin, all customers owed goods are known as unsecured creditors, but unfortunately the majority of cases end with no payments made to them," she says. "The money received from the sale of assets is used to pay the court costs and the creditors that hold security over the assets of the company, such as the banks. But each company is different and the outcome will depend entirely on the circumstances."
Bayne urges all customers of bankrupt companies to contact Companies House to find out the identity of the administrator or liquidator and register your claim with them. "You will be given information about any assets that the company has got, and whether or not you will be paid," she says.
Getting your money back can be difficult. However, if you bought your goods with your credit card, you could be entitled to additional protection. Any goods that cost between £100 and £30,000 are covered under section 75 of the 1974 Consumer Credit Act, which says the credit card company is just as liable to rectify any problem as is a supplier.
A similar scheme also exists with some Visa debit cards. Jemma Smith, spokesperson for the UK payment’s association APACs, explains: "This scheme is available on some of the Visa group’s debit cards if goods are damaged, don’t arrive, or if the company goes under."
You must make your claim within 120 days of the transaction. Each application is assessed separately and, although the scheme is not enshrined in law, the Financial Ombudsman Service has deemed it an example of good practice, and it is widely accepted in the banking industry.
However, Frank Shepherd, a spokesperson for Consumer Direct, warns that the Visa chargeback scheme does not apply to all Visa debit cards. "Read the terms and conditions of your card carefully, as there’s no guarantee you will be offered this protection," he warns. Shepherd also says that Switch or Maestro cards do not offer any protection.
Choosing the right policy
In some cases, you can increase your protection with the right insurance policy.
Chris Pitts, a spokesperson for Ecclesiastical Insurance, has seen an increase in claims for wedding expenses, as florists, car hire firms, wedding dress shops and reception venues go bust. "As couples pay deposits up to a year in advance, not only could they lose their deposit, they would have to arrange new suppliers at short notice," he says. "But a good wedding insurance policy would allow customers to claim under the failure of suppliers condition."
Most wedding insurance policies would cover you should the photographer, flowers or cake not arrive because the suppliers go bankrupt, but unfortunately the majority of policies do not cover the failure of gift companies.
"That’s because it’s not the bride and groom that use the service, it’s their guests," explains Pitts. "And as gifts will not have been physically received, the couple themselves will not have lost anything."
However, following Wrapit’s demise, more wedding insurance policies - including Ecclesiastical and M&S Money - have added gift list companies to their ‘failure of suppliers’ conditions.
Whether you’re going on honeymoon, or planning a holiday, and you are forced to cancel your trip, your travel insurance policy should pay out. So you would be excused for thinking that it would cover you if your hotel or airline went bust - unfortunately, this isn’t the case.
As the credit crunch continues to bite, this is becoming a growing risk. Figures from the Civil Aviation Authority show that 25 ATOL (Air Travel Organisers Licence) tour operators failed in the 12 months to April 2008. According to Paul McClean, a director at International Passenger Protection, 20 airlines also failed in the first six months of 2008.
The good news is that, if you book a flight or package holiday through an ATOL tour operator, you will be covered - you’ll either get a full refund or, if you’re already on holiday, the scheme will pay for you to get home.
However, if you book your trip direct, this cover won’t apply and you could be caught short. This could affect a growing number of holidaymakers. Research by uSwitch found that, as more and more British holidaymakers book their own holidays online, the percentage of those covered by the ATOL scheme has shrunk from 98% in 1999 to 61% today.
"Most standard travel insurance policies don’t include scheduled airline failure in the terms and conditions either," says McClean. "So if you were to pre-book your flight direct with the airline and it went under, very few travellers understand that their trip would simply not be covered."
Likewise, if you booked your hotel direct, you wouldn’t be covered. The only exception is the ABTASure Travel Insurance Policy, but this is only available from travel agents that are members of the Association of British Travel Agents.
It pays to remember the protection provided by the Consumer Credit Act - and, if you pay by credit card, you should be able to claim, although you might have to pay to get home first.
There will always be a risk associated with paying for goods and services before you receive them. While a company collapse is out of your hands, you can control the bank cards you use and insurance you buy. A few simple precautions before you hand over your card will minimise how much you might be out of pocket should a business go bust.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.