I would still not be surprised if they put a debit of the amount refunded/compensated to you onto the vendor's account. It would then be whether the vendor has the appropriate information recorded to match your purchase+refund to a particular phone/IMEI and get it blocked. You might be right and PayPal have taken the hit but we've all heard horror stories over the years of user's accounts being debited after a buyer has been refunded; why should it be any different with a business vendor! Personally, I wouldn't take the risk of selling it and getting into yet more grief months down the line. Still, glad you got your money back
The explicitly stated to me that they wouldn't issue a refund without proof of the phone being received by the seller because the seller might then take action against them. They told me that when I was arguing with them about their policy not being in line with UK consumer rights. If they wouldn't do it then why would they do it now? I get what you're saying but I am positive this won't happen based on all of my communication with both parties over the last few weeks. Like I said this is a settlement from PayPal, it is not a refund and they have not taken ownership of the phone, they have simply paid a financial settlement to end the dispute. If this had been a refund then you are absolutely right that they would debit the seller's account, but that's not what this is.
