Trading standards leaflets

Insolvency

The first indication you may have that a business is no longer trading is when you find the premises closed during what would be normal trading hours, the telephone has been disconnected, your letters are returned undelivered, or the website is no longer accessible and you are unable to complain about non delivery of goods, faulty goods or bad service. The business may have ceased trading because it is insolvent, which means that it is unable to pay its debts or it has more debts than assets (anything of value).

The Insolvency Act 1986 lays down the legal framework for all such insolvencies. The Insolvency Service, the official receiver and licensed insolvency practitioners (usually qualified accountants) administer the law.

In the guide
Categories of insolvent businesses
The business has ceased trading - what should I do?
Companies - liquidation
Sole traders - bankruptcy
Is my money protected?

Categories of insolvent businesses
There are two categories of insolvent businesses that you may have to deal with:

1. Individuals running a business as a sole trader or a partnership, who may become bankrupt. Individuals may be able to avoid bankruptcy by setting up an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO). You can get advice on IVAs and DROs from Citizens Advice
2. Companies which may be placed in Administration, undertake Company Voluntary Arrangements (CVAs), enter into Administrative Receivership, or be placed into Compulsory Liquidation or Creditors Voluntary Liquidation (CVL)

Not every insolvent trader is made bankrupt or goes into liquidation. There are different stages to the process and other legal arrangements can be made. Some companies may also cease to trade without being insolvent. However, when it does happen, you may lose your money or not get work finished or goods delivered. The situation is likely to be uncertain for quite a long time. If you have paid for goods or services or have a claim for faulty goods, or if you have supplied goods or services to the company, you will be called an 'unsecured creditor'. You come at the end of the line for payment, if there is any money left after all the expenses of winding up the company have been met and certain creditors such as government departments, called 'preferential creditors', have been paid.

The business has ceased trading - what should I do?
When you find out that a company is no longer trading, you may have very few facts. You should email or write a letter to the company, delivered to the business address and the registered office address. You may be able to find the address using the search function on the Companies House website. Even if the premises are empty, you should notify the company of your claim and exactly what you believe you are entitled to.

 The Electronic Commerce Regulations 2002 specify the rules that apply to traders who use electronic means, such as the internet, to promote and sell their goods and services. A trader is required to:

• Give their name and a geographical address
• Provide contact details including an email address for quick and accessible contact
• Provide details of any trade body, authorisation scheme or regulatory professional body to which they belong
• If a company, the company's registration number should also be given
• Give their VAT registration number
• Price the goods and services for sale clearly
• Clearly set out the steps which the consumer must follow to conclude the purchase (the process must allow for the consumer to stop the order if a mistake has been made)
• Set out their terms and conditions clearly

If you bought goods or services from a trader online and that trader complies with the above regulations, you should have the means to contact them for information on their trading status.

Ask around locally for information and if you find out who the solicitor or accountant for the trader is email, write or telephone them too as they may be keeping details of claims.

It is not always easy to find out whether insolvency procedures have been started. You can ask the local Official Receiver's office, check the local press and the London Gazette for notices and contact the County Court to find out if proceedings have been started.

The vital information you need is whether the official receiver is dealing with the matter or an insolvency practitioner. You will need their contact details so you can make a claim.

Records of company liquidations are held at Companies House, Crown Way, Maindy, Cardiff, CF4 3UX, Tel: 0303 1234 500. You can check the Companies House register for details of the insolvency process and the insolvency practitioner. You can carry out a search of the disqualified directors register on the Companies House website.

Records of individual insolvencies are held on the individual insolvency register, which is administered by the Insolvency Service and is searchable online. You can also search the register in person at the local Official Receiver's office.

Companies - liquidation
The information below applies to limited companies that are registered at Companies House.

There is likely to be a delay before anything happens but in due course there should be a notice in the local press if it is a local trader who has gone bankrupt. The London Gazette carries notices to creditors about creditors' meetings for specified companies. Creditors can attend and you should go if you can. An insolvency practitioner may be appointed at the meeting or an administrative receiver may be appointed to act for one big creditor or a group. A receiver does not wind up the company but is appointed to collect money owed to the company or to raise money from the company to pay the creditors.

A receiver may trade in the company's name, sell assets (anything of value), sell the company or make other arrangements.

If these fail to save the company a liquidator is appointed who is a licensed insolvency practitioner.

The insolvency practitioner takes over full responsibility for winding up the company, selling assets (anything of value), dealing with claims and making all other arrangements. A consumer who is owed money or has any claim must write to the liquidator. Your claim is against the limited company not against the individual directors, so you will get no money if the company has no assets (anything of value).

Sole traders - bankruptcy
If the trader is a sole trader (a business owned by one person and not registered at Companies House) and is to be made bankrupt, the official receiver will take control. If the trader has enough assets (anything of value) to meet costs, a creditors meeting may be called and an insolvency practitioner appointed. They act as the trustee and deal with everything to do with the bankruptcy. You should write to the official receiver (or insolvency practitioner) to make your claim, obtain information or raise any other issues about the trader's business practices. You will not normally be able to take legal action for any money you are owed, and if the person has no assets (anything of value) you will not be paid. However, in both cases, practical, helpful arrangements to resolve the problems may be made by the insolvency practitioner or the official receiver, if there is a chance to do so, and money is available.

Points to note
The insolvency practitioner must invite all creditors to the creditors' meeting and eventually report to them but has no duty to act as a general advisor to them.

The insolvency practitioner may sell the assets (anything of value) of the company to another company or, perhaps to a group of employees who can form a new company and go on to trade without taking responsibility for the debts and liabilities of the previous business.

A director can form a new company under a different name and continue trading without taking responsibility for the liabilities of the old one.

Consumers have no special protection in insolvency law.

The insolvency practitioner must report wrongful trading to BIS (Department for Business, Innovation and Skills), if he or she believes there is evidence of 'wrongful trading' by the directors. This is a technical term in the Insolvency Act 1986. The Insolvency Service initially investigates instances of wrongful trading by directors and then Court proceedings are brought by the Secretary of State for BIS. A person can be disqualified from acting as a director for a period specified in the disqualification order. This is not likely to help individual consumers to get their money.

Sometimes a company may shut down when your goods are in the workshop or are about to be delivered. If your goods can be specifically identified - 'ascertained' - you should be able to claim them. You should inform the insolvency practitioner and anyone else who may have any claim on the goods straight away.

Is my money protected?
You could have a claim against the finance provider under Section 75 of the Consumer Credit Act 1974 if the trader is in breach of contract or there has been a misrepresentation. This could include supplying faulty goods, non-delivery of goods or making false claims about goods. This equal liability only applies if the price of the goods is more than £100 and less than £30,000. In the event of a legal claim, you could sue the finance provider. If the claim exceeds £30,000 and is less than £60,260, you may be able to claim against the finance company under section 75A of the Consumer Credit Act 1974 if the finance was arranged specifically to buy those goods. This entitled you to pursue the finance provider but only if the original trader has become insolvent and you have taken reasonable steps to pursue them.

If you use a debit card to purchase goods or if you use a credit card and the price of the goods is less that £100 (your rights under Section 75 of the Consumer Credit Act 1974 would not apply), you may be able to take advantage of the chargeback scheme. Chargeback is the term used by card providers for reclaiming a card payment from the trader's bank. If you can evidence a breach of contract - goods are not delivered, are faulty or the trader has ceased trading for example - you can ask your card provider to attempt to recover the payment. Check with your card provider as to how the scheme rules apply to your card, whether Internet transactions are covered and what the time limit is for making a claim.

Never pay in cash in advance for anything if possible.

Consider buying from a trader which offers an insurance backed guarantee or warranty, but check the terms and conditions beforehand. For more information see the 'Guarantees and warranties' leaflet.

Please note
This leaflet is not an authoritative interpretation of the law and is intended only for guidance. Any legislation referred to, while still current, may have been amended from the form in which it was originally enacted.

For further information please contact the Citizens Advice consumer service, which provides free, confidential and impartial advice on consumer issues. Visit www.adviceguide.org.uk or call the Citizens Advice consumer helpline on 08454 04 05 06.

Relevant legislation
Consumer Credit Act 1974
Insolvency Act 1986
Electronic Commerce (EC Directive) Regulations 2002

Last reviewed/updated: April 2013

© 2013 itsa Ltd on behalf of the Trading Standards Institute.