In recent years, we have seen the increase of retail businesses going under; Dick Smith, Pumpkin Patch, Payless Shoes and the latest casualty, Toys R Us Australia, to name a few.
You do not have to look far to see the outrage across social media from consumers who have lost their right to use their gift cards.
Common phrases used by (understandably) angry consumers include:
‘That is illegal’
‘I am going to the ACCC, that is my money, they have to pay it back to me’
‘The Administrators can’t just take my money and not give me my goods’
‘It is against the terms and conditions of the gift card’
For many, this ordeal will be their first encounter with an insolvent entity and understanding insolvency law, the order of priorities, and the role of Insolvency Practitioners (‘IP’) can seem unfair and complex.
So what is the current law in relation to gift cards?
The payment by a consumer to a retailer in exchange for a gift card is effectively an unsecured loan from the consumer to the retailer.
If the retailer collapses, gift card holders will ordinarily be classified as unsecured creditors of the Company, alongside the Australian Taxation Office, unsecured lenders and trade creditors.
Section 556 of the Corporations Act 2001 (Cth) (‘the Act’) mandates an order of priorities for creditor claims. In a liquidation, unsecured creditors are ranked below a number of other creditors including secured creditors and employees for outstanding wages, annual leave entitlements and superannuation.
In most cases involving the insolvency of a large retail Company, the IP is required, amongst other things, to determine the best strategy for realising the assets of the Company, in a way which will provide the best return to creditors, whilst adhering to the priorities set out in the Act.
The same principles for gift cards also apply to lay-bys and deposits paid in advance by consumers for goods or services.
Why can’t the Insolvency Practitioner just honour my gift card?
- If the IP is continuing to trade the business, honouring the gift card would effectively reduce the stock level of the Company and provide no additional increase to realisable assets.
- If the IP is not trading, providing a refund to the gift holder would either:
(a) be impossible, if there are no funds available to refund; or
(b) reduce the balance of funds available to the IP to distribute.
In both of the above scenarios, honouring or refunding the value of the gift card would provide a priority to the gift card holders at the expense of other creditors, such as employees.
Are there any other options?
Before conceding the gift card is worthless, consumers should consider the following options:
- Conditions placed by the IP
In many insolvencies, including the recent Voluntary Administration of Toys r Us, the IP may allow consumers to use their gift cards on certain conditions, which would provide some return to the Company in exchange for honouring the card. For example, requiring an additional dollar to be spent for every dollar redeemed on the gift card.
- Chargebacks
If the gift card was purchased via a credit card, the purchaser may be able to apply for a ‘chargeback’ from their bank.
In this instance, gift card holders should contact their credit card provider immediately after becoming aware of the retailer’s insolvency to assess if this option is available, as there are generally time limits on making a claim.
- Lodging a claim with the IP
If the gift card holder has no success with the options above, they should contact the IP, complete a proof of debt and be recorded as one of the unsecured creditors of the Company. This will ensure they remain up to date with all developments including the likelihood of receiving a distribution.
Is the law likely to ever change?
There has been discussion amongst consumer groups and government bodies regarding changing the law in favour of consumers. Ideas which have been brandished include the creation of trust accounts for receipting gift card payments, changing the order of priorities in favour of gift card holders, or even making directors personally liable for the value of the gift cards. However, it appears, that at least currently, there is a resounding argument against any change that gives gift card holders greater priority over other ordinary creditors or employees.
With that in mind, it may be wise to reconsider the purchase of a gift card in future in exchange for something more tangible like cash or goods. If you or one of your clients requires assistance in dealing with an insolvent Company, contact us on 1800 246 801.
Article written by Mel Purcell, Senior Manager SV Partners Brisbane
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