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Insolvency explained
A company may become insolvent if it is unable to pay its debts when they are due. In some circumstances, an insolvent company may continue to trade, for example, under the supervision of an administrator appointed by the company. In other circumstances, the company's financial situation may not allow for this, meaning it needs to cease trading immediately and undergo liquidation.
How consumers and creditors are affected when a company goes bust depends on what situation the company is in after it becomes insolvent.
An insolvent company can be put into:
- voluntary administration: a voluntary administrator is usually appointed by the company's directors to take full control of the company in an attempt to save it - if the company cannot be saved, the next step is often liquidation
- receivership: a receiver can be appointed by a secured creditor during voluntary administration and liquidation to protect the interests and assets of the company's secured creditor(s)
- liquidation: a liquidator is appointed by the company's shareholders, secured creditors or a court, to take control of the company, wind up its affairs in an orderly way and fairly distribute assets to creditors.
Note: Insolvency procedures applying to a person rather than a company are 'bankruptcy' and 'personal insolvency agreements'. For more information, visit the Australian Financial Security Authority (AFSA) website.
How insolvency affects consumers
When you pay in advance for products and services, you may be at risk of losing this money if the company becomes insolvent.
You may have:
- paid in full for products or services to be collected or delivered later
- paid a deposit, such as in a lay-by agreement or interest-free offer
- bought a gift card or voucher
- returned a product and been issued a credit note.
During the voluntary administration and/or receivership period, some companies continue trading while others immediately start winding up. You may still receive products or services you have paid for if the company continues to trade - however, you may not be able to redeem gift cards and vouchers, or credit notes.
After a company enters administration or goes into liquidation, you can no longer commence or continue legal action against it unless you obtain permission from the Supreme Court (which is only given in limited circumstances).
Consumers’ options when a company becomes insolvent
When a company becomes insolvent, you may have the option of either claiming your products or trying to get your money back. There are different processes for each claim.
Claiming your product
In some instances, you may be able to claim your products if:
- you have a contract to purchase them, and
- you have paid for them in full, or you pay the liquidator the balance of what you owe, and
- the contract is not a lay-by agreement.
If the liquidator releases your products, you may have to collect them yourself or organise delivery even if your contract states that the company will deliver them to you.
Getting your money back
There are two ways you can try to get your money back.
Request a chargeback
If you paid with a credit card, or a debit card and selected the 'credit' option, contact your card provider and request a chargeback as soon as possible, as time limits apply (time limits vary depending on the card). This effectively reverses the credit card charge, and is similar to a refund.
For more information, view Chargebacks.
Register as an unsecured creditor
If you did not pay with a credit card, or you are unable to claim the products, you can register with the administrator or liquidator as an unsecured creditor.
Note: The Corporations Act 2001 sets the order in which a trader's creditors are paid. Unsecured creditors are last in line, after secured creditors (such as banks), the costs of the administration, and employee entitlements. Often there are little or no funds remaining for unsecured creditors.
To find out who the administrator or liquidator is, contact the Australian Securities and Investment Commission (ASIC). You can also find out through newspapers or on the company's website.
If you ordered a vehicle
If a licensed car dealer fails to supply a car, motorbike or commercial vehicle, you can make a claim to the Motor Car Traders Guarantee Fund.
If your product needs to be repaired or replaced
If the product came with a written warranty, and you are still within the warranty period, contact the manufacturer directly. For more information, view Store or manufacturer responsibility.
If there is no written warranty or the product is out of warranty, you can still request a chargeback or submit a claim as an unsecured creditor if the product was faulty at or close to the time of purchase.