by Jeff Shute20.10.22

While liquidation or bankruptcy is an outcome faced by many business owners, there are certain factors that need to be considered that are unique to the industry the business is in. This is no different for retail businesses, and subsequently the business owner and other stakeholders, working their way through the insolvency process. Here is everything you need to know about liquidation and bankruptcy when your business is in retail.

Why retail businesses are feeling the heat of bankruptcy

Retail businesses have historically been very adept at pivoting with the changes of consumer behaviour and expectation; from being able to take shopping from a bricks and mortar experience to a largely online one, to changing to more sustainable practices as their industry comes under fire for wastage, retail is a survivor. However, the major risk with having a retail business is that you are typically providing a product that lands in the ‘wants’ rather than the ‘needs’ category. With that, when events like spikes in interest rates and general rise in cost of living occur, retail is one of the first cut backs people and business customers and clients will make. 

dditionally, when the general cost of a product has risen, it makes the cost of running a business increase and becomes less sustainable.

Recently, this has been the case, and many retail businesses (who are also struggling with employee acquisition and retention) are feeling the pinch, some to the point of insolvency. 

What happens to consumers when a retail business becomes insolvent?

If your retail business is insolvent (it can no longer pay its owing debts), a lot of the focus is on what you need to do as the business owner on the legal front. However, with retail there is an additional consideration: what happens to your customers who have already purchased your product when your company is placed into liquidation or as a sole trader you go bankrupt? 

The main ways insolvency affects them is:

  • The product doesn’t meet consumer guarantees

  • The warranty period has not ended. 

The very best thing you can do is be upfront and communicate to them the situation. Unless someone takes over the company or business, the warranty and any other consumer guarantees may become void at the time of a formal insolvency appointment, as the business no longer exists. 

If you owe consumers

This instances in which consumers are owed money are:

  • When they have paid in full your product, and have not received it

  • When they have paid a deposit 

  • When they have a credit note, valid gift card or valid voucher for your product

If consumers are one of the people who are owed money, it will be important for them to understand who gets paid, in priority. The Corporations Act 2001 and the Bankruptcy Act 1966 set out the order of priority of payment of debts in a formal insolvency appointment. The Australian Securities and Investment Commission (ASIC) has also published some wonderful reliable resources which outlining the order in which insolvent business debts must be paid. 

Consumers (as well as retail staff members) tend to be classed as ‘unsecured creditors’, which are less prioritised than secured creditors (banks and major suppliers). This means they could only get some, or none, of their money back.

In order to be eligible to potentially receive full or partial repayment, an unsecured creditor, including consumers, will need to register their claims with the liquidator and/or bankruptcy trustee prior to any dividend being paid. 

Are you a retail business owner and want to learn more about what you need to do for your business, your staff and your consumers? Talk to Shaw Gidley today and we can guide you through your first steps.