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.
Administration, receivership and liquidation
A company may become insolvent if it is unable to pay its debts when they are due.
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 during voluntary administration and liquidation to protect the interests and assets of the company’s secured creditor/s; or
- 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, see the Australian Financial Services Authority.
How insolvency affects consumers
When you pay in advance for goods and services, you may be at risk of losing this money if the company becomes insolvent.
You may have:
- paid in full for goods 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; or
- returned a product and been issued a credit note.
To recover your money, you will need to register with the administrator or liquidator as an ‘unsecured creditor’.
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 no funds remaining for unsecured creditors.
Your rights as an unsecured creditor
During the voluntary administration and/or receivership period, some companies continue trading while others immediately start winding up. You may still receive goods 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).
How to claim from an insolvent company
Step 1: Request a chargeback
If you paid with a credit card or a debit card and selected ‘credit’, contact your card provider and request a ‘chargeback’ as soon as possible, as there are time limits (depending on the card). This effectively reverses the credit card charge, and is similar to a refund. A chargeback can take up to one year to be finalised. For more information visit our credit card chargeback page.
Step 2: Register as an unsecured creditor
If you did not pay with a credit card (or while you are waiting for a chargeback to be processed) you can register with the administrator or liquidator as an unsecured creditor. The insolvency process will determine whether you receive the goods, a partial or full refund, or nothing.
Administration notices often appear in newspapers or on the company’s website. To find out who the administrator or liquidator is, contact the Australian Securities and Investments Commission (ASIC).
If you used a travel agent
If you paid for travel arrangements using a licensed travel agent before 1 July 2014 and your travel insurance does not cover the loss, you can make a claim to the Travel Compensation Fund. Issues with bookings made after the 1 July 2014 should be referred to Consumer Protection.
If your product needs to be repaired or replaced
If the product does not meet the consumer guarantees of matching its description or being of acceptable quality you can seek a remedy from the manufacturer directly. If the product comes with a written warranty and you are still within the warranty period, you should also contact the manufacturer directly.
As a last resort you can submit a claim as an unsecured creditor of the trader if the product was faulty at or close to the time of purchase.
Protect your money:
- use a credit card or debit card (and select ‘credit’) to buy high-value items so you can request a chargeback (depending on your card provider’s policy);
- keep all significant receipts and written warranties so you can prove your purchase;
- opt for full payment on delivery, rather than paying the full amount in advance;
- avoid paying excessive deposits and high interim payments for goods or services you have ordered;
- use gift cards, vouchers and credit notes as soon as possible; and
- check if the business is registered, using the Australian Securities and Investments Commission's (ASIC) business name search.
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