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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.
A company may become insolvent if it is unable to pay its debts when they are due.
An insolvent company can be put into:
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.
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:
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.
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).
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.
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 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.