Customer refunds if insolvent

[FinlayG]

I run an online business that is struggling massively at the moment. We import and sell goods from stock and also take pre-orders if not in stock and the customer is willing to wait.

We have have some debts that we are struggling to service and if sales don't pick up we may become insolvent. I am concerned if this happens, customers who are waiting for orders will lose their money. Most of them pay via credit card, debit card or PayPal, however, if they do a chargeback and the funds are not available to refund from our account, what happens here?

 

[eteb3]

On the face of it, the customer loses the money and becomes a creditor who has to prove in the insolvency.

But if bought on credit card, the card company will have to reimburse them if the purchase was over ?£100 (check the figure). I assume that applies to PayPal “pay in 3” (bc it’s a form of credit) and may also apply to Pp in every case

 

[Frank the Insurance guy]

I assume this is a Limited Company? if so, then as per @eteb3 above.

However, if sole trader, then you are personally liable.

 

[John Martin]

I bought a mattress some years ago that had a 10 year warranty. Before 5 years was up the mattress was sagging badly and was impossible to sleep on comfortably. I contacted the company who partly tried to remedy the situation, but it wasn't satisfactory so I asked for a full replacement. The following week I received a generic email saying the company was in receivership.

Fortunately I'd paid by credit card (Barclycard) so I contacted them to ask for my money back. Barclaycard messed me around for months on end and tried to wriggle out of paying up, even though the mattress company had accepted fault. However, after some persistence they gave me a full refund.

What I will say though is, I've had a to claim on a few previous occasions and Barclaycard were very good and paid without issue. This last time though they seemed to be making it more difficult and taking much longer to respond. I suspect they are dealing with more claims than ever, some legit, some not, so they are taking a harder line. If that's the case, some of your customers may not get their money back.

 

[Lisa Thomas]

The customer deposits will rank as unsecured creditors in the insolvency. They might be able to claw their money back from the bank.

For more info watch my video here: https://youtu.be/xfZMSzpzRu8?si=oWBbHSwgrMbX5BiF

 

[DontAsk]

Shouldn't you be keeping customer deposits in a separate account, not used for day-to-day business funding?

 

[eteb3]

Shouldn't you be keeping customer deposits in a separate account, not used for day-to-day business funding?

That would only be needed (and perhaps not even then) if they are funds to be held on trust.

Almost certainly the deposit is a part-payment on the contract of sale. Although contract and trust are not entirely mutually exclusive, they very nearly are. As there’s (almost certainly) no trust, segregating the funds to protect them would be futile.

 

[Lisa Thomas]

Shouldn't you be keeping customer deposits in a separate account, not used for day-to-day business funding?

Yes - the directors are at risk of a misfeasance claim being brought against them in insolvency proceedings and/or being reported to the Insolvency Services for misconduct who could fine and/or disqualify them.

 

[DontAsk]

Conflicting answers here, so is there a difference between "pre orders" paid in full and "deposits" that might be partial payment?

 

[eteb3]

is there a difference between "pre orders" paid in full and "deposits" that might be partial payment?

No: in both cases the money passing from purchaser to vendor would be part or all of the purchase price. That makes the purchaser an unsecured creditor (because they can claim damages for non-performance by the vendor). As far as I understand it, the amount prepaid (whether whole or part) would be at the disposal of the liquidator.

A true “deposit” is a mere security given by the purchaser for the purchaser completing their side of the transaction - ie, to pay the purchase price once the item is ready. As a contract of security it’s alongside and not part of the contract of sale. (So, very strictly, the vendor could insist on full payment of the purchase price, and only once it’s received in full would they return the deposit - as if purchaser had put up their wedding ring as security.)

With a true deposit, the vendor has only a security interest in the £, and so I think (but would be glad if @Lisa Thomas confims) the funds are not accessible to the liquidator. I don’t see why they would need to be segregated if full records are kept, because there is still no trust. But you wouldn’t want it disappearing into an overdraft, or the funds have been used by the vendor as its own property (by reducing its debt to the bank).

 

[eteb3]

Hmmm, but do I recall security interests in intangibles always take effect in equity, not in law? In which case there is a trust, and the funds should be segregated.

Any which way, I’d be interested to know the basis for the misfeasance claim suggested above.

 

[eteb3]

Feels like I've hijacked this thread, sorry.

But this came up on a van leasing thread, and is a timely illustration:

you mention paying a depoist, this is not the case, it is called an initial payment and forms part of the total lease cost and is not refundable at the end, just something to be mindfull of as some people think its refundable at the end of the term.