What rights do consumers have when businesses go bust?

Book lovers in Australia were thrown for a loop this month after learning that one of Australia’s largest online book retailers, Booktopia, was entering voluntary administration. Many are concerned that the company will not be honouring orders or issuing refunds. We spoke with Professor Michael Adams about what voluntary administration and insolvency means for a business, and how this affects consumers.

Under Australian law, consumer rights are protected, but these rights become unstable when a company enters insolvency. As Professor Adams puts it, “if you’re just a person, you’re bankrupt. [In the] corporate world – you’re insolvent.” Voluntary administration, which Booktopia has entered, is the process by which a company appoints an external administrator to look into company finances and decide the next course of action.

For consumers (meaning individuals, not businesses), this places them in a position as an unsecured creditor. When debts are resolved, Professor Adams explains, the liquidated assets and remaining money is divided between creditors. At the top of the hierarchy are the secured creditors, who hold a security interest in a portion of the company. Then there are the unsecured creditors – these are individuals who have purchased goods or services that cannot be fulfilled due to the company entering insolvency. Before the unsecured creditors can be paid, first the debts must be settled, and then secured creditors are paid. Anything left over goes to the unsecured creditors as “cents to the dollar.”

While this news is a disappointment for many, Professor Adams says he believes there is a good chance that another company could take over. “I think the administrators really will be looking for somebody to buy the business, to merge it with their existing business, and they will do their very best to settle those debts.”