Transfer of ownership in insolvency: Law Commission consultation on consumers’ rights

13 January 2021

The Law Commission has published a draft Bill to govern when ownership of goods transfers from the retailer to the consumer, a question which is very relevant to the insolvency and restructuring profession, as insolvency practitioners often find they have to deal with situations where goods sold by a company which has since entered insolvency have been purchased or part-paid, but have not yet been sent to the buyer. However, we have significant concerns around the draft Bill, which does not take the practicalities of such situations into account, and could lead to much lower returns for other types of creditor.

Background to the draft Bill

In 2014, the Government asked the Law Commission to look at the protections afforded to consumer prepayments, in the wake of high-profile insolvency cases and what the Government describes as "the accompanying public concern about consumer protection in the case of insolvency". The Law Commission's subsequent consultation (our submission to it can be found here) resulted in a report in July 2016, to which the Government in turn responded at the end of 2018.

We understand why the Government would want to enhance protection for consumers in the event of insolvency, but the potential unintended consequences of these enhancements could in fact complicate insolvency procedures and burden other creditors of the insolvent estate with the costs of administering those protections. It is also highly likely that it will be (commercially and administratively) simpler to provide protections for some categories of consumer creditors, such as those who have paid substantial deposits for the purchase of merchandise, than for others, such as holders of (typically low-denomination) gift vouchers.

Our post on gift cards, vouchers, and deposits in insolvency lays out the current position for consumers affected by the insolvency of a company from which they had pre-purchased, in part or in full, a product or service, as well as the main conclusions of the Government's response to the Law Commission's report.

The final recommendation from the Law Commission in its July 2016 report - that rules around when exactly a buyer assumes ownership of goods should be clarified and amended - was accepted by the Government, and is an area which is being moved forward.

Last year, the Law Commission launched a fresh consultation, "Consumer sales contracts: transfer of ownership", to examine the issue; it closed at the end of last October, and the Law Commission is currently analysing responses.

Alongside the consultation, the Law Commission published the draft Bill containing provisions to amend the Consumer Rights Act 2015, to "create transfer of ownership rules that apply specifically to contracts of sale between consumers and retailers".

Consultation on transfer of ownership of goods

The central question the consultation sought to address is when ownership of a product passes to a purchaser. If a prepayment is made for a product which is to be made to order, is not currently available, or which has been left with the retailer to be altered, but, between making a prepayment and receiving the final product, the retailer enters an insolvency process, who owns the product - the purchaser, or the estate of the insolvent company? As the Law Commission says, the rules governing such situations depend on "complex and technical transfer of ownership rules which have remained largely unchanged since the late 19th century".

We have serious concerns about the draft Bill, which are laid out in our response to the concurrent consultation and our answers to the Law Commission's specific questions. The proposals greatly increase the number of scenarios under which consumers can claim for part-paid or pre-paid products, in the case of retailer insolvency.

The Law Commission is proposing to transfer ownership of goods to consumers at the point where the sales contract is made, in the case of goods which are identified and agreed on at the point of purchase - such as a physical product in a bricks-and-mortar shop, or a one-off, already existing product in an online store.

For goods which are not identified and agreed on at the point when the sales contract is agreed - such as items bought online with a generic description - the Law Commission suggests that ownership to the purchaser should transfer at numerous different points, depending on the item in question, including when items are "labelled with the consumer's name in a way that is intended by the trader to be permanent", when "alteration of the goods to a specification agreed between the trader and the consumer is completed", or when "manufacture is completed, if the goods are to be manufactured for the consumer to a specification agreed between the trader and the consumer", among others.

Notably, the draft Bill does not address the cost implications of implementing the proposals - costs which will fall on all creditors of the insolvent company, and which we flagged as a potential issue back in 2015. These costs include training costs for insolvency practitioners and their staff, so that they fully understand their new duties to customers when appointed to the administration or liquidation of an insolvent retailer.

While this cost would be significant in and of itself, it would only be part of the story: when acting as administrator or liquidator, the insolvency practitioner who is the office holder will very often retain the services of a portion of the insolvent company's staff, in order to prepare the business for a sale, or to wind down the business in an orderly way. These retained staff would also require training in the new rules, which the office holders would have to provide in every instance when appointed to a company which sold goods to the public - adding in significant costs to the insolvency process.

Handling goods which were due to be sent to purchasers - from identifying them, to storing them, to finishing them (in the case of goods requiring customisation or alteration, or which were unfinished at the point that the company entered an insolvency procedure), to shipping them to the purchaser - would entail further, very hefty layers of cost and extra administration. In the case of part-paid goods, where the purchaser had not completed payment, the office holder would be forced to act as a chaser of consumer debts - opening up a whole new can of worms for the insolvency and restructuring profession, and surely not something intended by the Law Commission.

In addition, implementation of the Bill in its current form would cause an inevitable and sizeable rise in consumer queries to any insolvent retailer, necessitating more outlay from the office holder to handle the volume of messages, and to respond to each one. In the circumstances of an insolvency, where resources are by definition extremely limited, allocating sufficient staff to deal with inbound calls and emails would divert funds from other parts of the insolvency process. If customers thought their queries were not being handled in a satisfactory way, the damage to the reputation of the retailer could be huge - and could in turn hurt or scupper entirely its chances of rescue or sale, through impaired goodwill.

The proposed new rules are likely to present practical difficulties for insolvency practitioners in every scenario when they are trying to establish where ownership of the remaining property lies. We recommend that the Law Commission consider further the additional costs which would be created by the draft Bill's provisions, as they would cause detriment to the body of creditors as a whole. We hope that the Law Commission will listen to our members' concerns, and that practical solutions and proposals can be found, which strike a considered balance between the rights of consumers and the rights of all other creditors, from staff to suppliers.