When a retail company announces it is insolvent and entering into voluntary administration or liquidation, many loyal customers may be left unsure about their right to redeem gift cards, and rely on lay-bys and prepaid deposits at company stores. The effect that an insolvency event will have on items such as gift cards is largely dependant on the situation of the company.
When an Insolvency Practitioner (IP) (such as an Administrator or Liquidator) is appointed over a company, the objective is to review and manage the company’s assets and finances to generate the best result for both the company and its creditors. In cases of administration, the objective is to salvage the business to the extent possible, whilst in liquidation the objection is to wind up the company’s affairs and generate the best return for its creditors.
Can You Recover from the Administration?
As above, an IP’s role is to manage the affairs of the companies to achieve the best return possible for creditors. IPs must be pragmatic in their approach to dealing with the company’s assets and liabilities so as to create the largest asset pool possible for finalising the company’s affairs and distributing to creditors. For this reason, Administrators who continue to trade are often reluctant to honour gift cards, as this would serve only to reduce the company’s stock level or cash reserves, whilst providing little benefit to the company. For the same reasons, Liquidators often won’t provide refunds for gift cards, as there are either no funds to do so or it would diminish the asset pool available to creditors.
In situations of insolvency, gift card holders are generally classified as unsecured creditors. People often think of gift cards as having some monetary value, but when consumers purchase a gift card, they are in effect purchasing a set of terms and conditions that will allow them to acquire an amount of goods or services from a retailer. Rarely do these terms and conditions provide security for the money paid, and thus they effectively operate as an unsecured loan to the retailer.
Other Options for Recovery
While some gift cards may no longer be redeemable at any store, there are other options to recover some or all of the value of the card:
Where gift cards were purchased using a credit card, consumers may be able to recover the purchase price by applying to their bank for a credit card ‘chargeback’. This is a process whereby the gift card purchaser’s bank, on the gift card holder’s behalf, can apply to have the credit card transaction reversed. This can occur where goods or services have been paid for, but not supplied.
Gift card holders should contact their bank as soon as they are aware of the company entering insolvency to avoid any time limits on making a claim.
New Terms and Conditions
If the company continues to operate during external administration, the Administrators may announce that they will continue to honour transactions such as gift cards or lay-bys. This may also come with additional conditions on the use of the gift card. For example, they may require an additional dollar be spent for every dollar used on the gift card.
Lodging a Proof of Debt (POD)
When a liquidator has finalised the affairs of a company, any residual funds will be distributed to company creditors in the order prescribed by the Corporations Act 2001 (Cth). The priority of payments is as follows:
1. Liquidation and legal fees;
2. Secured Creditors;
3. Priority Unsecured Creditors (such as employees owed unpaid wages and super); and finally
4. Unsecured Creditors.
Lodging a proof of debt with the Liquidator will ensure that your interest is recorded, you are kept up to date with any developments and you may receive a distribution if there are available funds.
When a retail company enters into external administration, consumers need to be proactive in contacting their banks or the IP managing the company to avoid losing out on any value that may be recoverable from their unused gift cards.