Consumers in this category should be given limited preferential status (ranking below employees' preferential claims but above floating charge holders), it says.

The recommendation is one of five changes suggested by the Law Commission, which was commissioned by the Department for Business, Innovation and Skills (BIS), to look at whether greater protection is needed for consumers who lose deposits or gift vouchers when retailers or other service providers become insolvent.

Stephen Lewis, Law Commissioner for commercial and common law, said: ‘Getting a refund on your deposit depends very much on how you paid, and on commercial decisions made by the accountants dealing with the bankrupt business.

‘It can be a hit-and-miss affair, and it’s often the most vulnerable consumers who lose out.

‘The high street has seen a number of big-name retailers go under in the last decade: Comet, HMV, World of Leather, MFI and Habitat, to name a few. It’s a problem that’s not going away and we believe that consumers should have better protection in the more serious cases where larger sums are involved.’

Home furnishings retailer Paul Simon held £2.4m in customer deposits when it went into administration in April 2014, the Law Commission found.

Other proposals include regulating Christmas and similar savings schemes, which the Law Commission says pose a particular risk to vulnerable consumers, and introducing a general power for government to require prepayment protection in sectors which pose a particular risk to consumers.

When Farepak collapsed in 2006 it owed £37m to around 100,000 savers – an average of £400 each. The Commission is recommending that schemes marketed as being suitable for savings must make sure their savers’ funds are protected.

However the Law Commission stopped short of extending this protection to pre-bought gift vouchers, despite hearing evidence that when, for example, Comet collapsed, unused gift vouchers worth £4.7m remained in circulation.

Instead, it is advocating giving consumers more information about obtaining a refund through their debit or credit card issuer, saying there should be greater awareness of the ‘chargeback’ scheme.

The Law Commission concluded that providing mandatory protection for small losses would be costly and disproportionate but calls for statutory protections in sectors where the risk to prepaying customers is particularly high. It also wants to see changes to the rules on when consumers acquire ownership of goods.

The recommendations have been described as a ‘mixed bag’ by Andrew Tate, president of UK insolvency and restructuring trade body R3, who says some proposals would be difficult to implement in practice and could have unintended side-effects. He describes the proposal to improve the position of some consumers with deposits in the order of priority of insolvency repayments as ‘especially controversial’.

‘This would be the first major change to the order of priority of payments in insolvency proceedings in over a decade and may discourage lending to retailers, particularly those in distress.

‘Banks and other finance providers will be wary of providing certain forms of rescue finance if there is a risk that a large chunk of a retailer’s assets will have to be used to repay deposits if it becomes insolvent. The retailer’s ordinary trade creditors would lose out, too, which could put them in financial difficulty,’ Tate said.

With thousands of deposit holders in some case of insolvency, Tate said it might be difficult for an administrator or liquidator to establish who qualifies for a preferential payment and who does not. However, he welcomed the Law Commission’s recommendation not to introduce new regulations covering vouchers, and said: ‘Whether or not a retailer should continue to accept vouchers should be a commercial decision for the administrators or liquidators based on the facts of each individual case.’

The Law Commission report, Consumer Prepayments on Retailer Insolvency, is here.