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Consumers and Failed Businesses

The rights of a consumer relating to faulty goods and services under the Australian Consumer Law and under the law generally change when a business fails.

Businesses are owned either by a sole trader or partnership, or by a company. For more information about different business structures, see Business Information, Owning a business.

A claim by a consumer for faulty goods or services, or other breaches of the ACL is made against the owner of the business – it is not possible to sue just a business name. To check the owner of the business, a consumer can search ASIC's Business Names register.

If the business is run by a sole trader or partnership, and the business owner or owners are made bankrupt, a consumer with a claim cannot take legal action or keep the legal action going against the business owner or owners. However, if the sole trader or partnership merely shuts up shop and no formal steps are taken by the owners to finalise the business, a consumer still has the right to take legal action against the business owners.

If the business is run by a company, and a voluntary administrator or liquidator is appointed to the company, any legal action against the company by a consumer is automatically stayed and cannot proceed without the permission of the Court [Corporations Act 2001 (Cth) s 440D when an administrator is appointed or s 471B when a liquidator is appointed].

A consumer is considered to be an unsecured creditor and instead will need to contact the administrator or liquidator to lodge a proof of debt form.

Unsecured creditors may take some time to get paid, and if there are insufficient assets available to pay higher ranked creditors such as employees and the costs of the liquidation, there may be nothing left to pay a claim by an unsecured creditor. Liquidators may also need to take legal proceedings against third parties such as other businesses or directors, which may take some time to resolve and delay finalisation of the liquidation.

Sometimes it appears as though the company is continuing to trade yet consumers are informed that their unsecured claims (including gift cards) will not be paid.

This may be because either there is a receiver appointed (a receiver works for a secured lender) or the company is in administration and looking at other options to continue the business.

If the business is run by a company that merely shuts up shop and no formal steps are taken to finalise the company, a consumer still has the right to take action against the company for any claims. The difficulty for a consumer in this case is that it is usually costly and complex to compel the company to pay an unsatisfied judgment, and there may be no money available. For further information about enforcing a judgment debt see Debt, For Creditors, Judgment.

Other options for Consumers

Pursuing the Manufacturer

If the problem relates to faulty goods supplied by a business that is no longer operating, a consumer can take action against the manufacturer instead [Competition and Consumer Act 2010 (Cth) Schedule 2 Australian Consumer Law s 272].

Be aware that if the business supplying the goods branded under its own name and is also the importer, the business can be deemed to be the manufacturer [Competition and Consumer Act 2010 (Cth) Schedule 2 Australian Consumer Law s 272]. In that case, the consumer must deal with the liquidator.

Goods Paid for on Credit Card but Not Received

If a credit card was used to pay for goods, but the goods were not received, consumers can ask their credit provider to ‘chargeback’ the amount paid. This applies whether or not the business is still operating.

Consumers should lodge a request as soon as they are aware that there is a problem with the business – there may be a limited time in which to make a request for a chargeback. Further information about how to request a chargeback can be obtained from the credit card provider or bank.

Consumers and Failed Businesses  :  Last Revised: Thu Dec 15th 2016
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.