CONSUMERS Association of Singapore (Case) president Yeo Guat Kwang ('Refund spa packages, Case urges company'; last Friday) suggested that money paid for packages is held by the company in trust for the consumer until the services for which pre-payment is received are rendered and that there is thus an obligation to refund the customers of the group's spa chain.
He is mistaken.
First, it is unlikely that a trust was intended. Trusteeship is an onerous burden not lightly presumed and the duty to segregate trust funds from one's operating funds is not usually commercially viable when running a business.
Second, the suggestion that a different company within a group of companies is obliged to meet the obligations of the now insolvent company comes up against the legal principle that different companies are regarded as separate legal entities from one another.
The fact that Company A (now insolvent) is liable does not mean that Company B is likewise liable.
Mr Yeo suggests that treating consumers as unsecured creditors does not protect them from business failures or unethical business practices.
The former protection is costly and worth operating to in certain instances. For example, bank customers enjoy a deposit insurance up to a certain value so as to ensure the proper functioning of banks, which are crucial to commerce.
It is difficult to justify doing so for spas and bookstores. Business failure is always unfortunate and unsecured creditors always get the short end of the stick but unless there was fraud employed in the running of the business, the losses must lie where they fall.
If the insolvent company was run fraudulently, then there will be legal liability but that is exceptional. Such liability does, however, ensure proper protection of creditors from the distinct concern over unethical business practices.
Finally, none of this is peculiar to Singapore. In insolvency, the payment of any particular group of persons ahead of others diminishes the assets available for distribution among the other unsecured creditors.
It is not self-evident that consumers are necessarily more deserving than other unsecured creditors.
Consumers should therefore take care when they purchase stored-value cards or packages. It is rarely sensible to do so without a discount and it is never advisable to pay a sum one is not prepared to lose entirely whatever the discount since all businesses risk failure.
Associate Professor Kelvin F.K. Low
Associate Dean (External Relations)
School of Law
Singapore Management University
