A report has just been issued in the UK by the Law Commission on the question of whether there should be greater protection for consumers who lose deposits or gift vouchers when retailers or other service providers go into insolvency.
Dick Smith Electronics
This mirrors a Senate Committee inquiry in Australia into gift vouchers that has arisen out of unredeemed cards issued by Dick Smith Electronics before its financial collapse and insolvency. The UK report – Consumer Prepayments on Retailer Insolvency, of 14 July 2016 – mentions the DSE insolvency, referring to
“suggestions that the company’s lead creditors intentionally let the struggling retailer trade through Christmas in order to wait for the “max cash point” at which to pull the plug”.
It also refers to DSE offering
“its gift vouchers with an additional 10% bonus throughout December 2015, encouraging additional purchases of vouchers which, at the time of writing (July 2016), it does not seem will be honoured. Speculation about the company’s solvency had already been publicised in the weeks before Christmas”.
The UK background
UK insolvency history includes the 2006 collapse of the Farepak Christmas savings club, involving high level public outrage over year-long paid and saved-for Christmas hampers and gifts that did not materialize, with the firm’s financiers also involved in the financial and political fallout. More recently, unused gift vouchers worth £4.7 million were said to have remained in circulation when Comet collapsed, and home furnishings retailer Paul Simon was found to have held £2.4m in customer deposits when it went into administration in 2014. Similar issues were raised in the US RadioShack Chapter 11 bankruptcy last year.
As with many an impetus for law reform, high profile mass consumer losses arising from Farepak prompted a political push for the UK Office of Fair Trading to carry out a review, ultimately leading to the Law Commission inquiry. Empirical evidence about the scale of the problem was gathered in the UK, the resources for which, and the data, is lacking here. After some initial findings and a process of public consultation, the final report and recommendations to government were issued in July 2016.
The UK report has made a number of law reform recommendations which are now under government consideration.
The UK report
As the report says, prepayments by customers are popular because they can be used to budget for big spends, such as Christmas, or as a deposit for major purchases like cars or new kitchens. On a smaller scale, it notes that gift vouchers and cards “solve the dilemma of choosing the ‘right’ gift”, even if in effect simply the equivalent of a £20 note. Others might say that the marketing of gift cards as ‘the gift that keeps on giving’ does not fully explain ‘to whom’.
Recent high-profile retailer insolvencies in the UK have, as the report says, highlighted the lack of protection for consumers making these kinds of payments, or perhaps, loss of any additional protection beyond their status as unsecured creditors.
The UK report suggests that the issues are “complex and go to the heart of the insolvency regime”, although that may be some exaggeration. The 1982 Cork report rejected greater protection for consumers as a category of creditors, noting that consumers typically lose small and affordable amounts while the effect on suppliers can be much greater.
Australia’s Harmer Report took the same view, saying that consumers did not present a sufficient basis for disturbing the pari passu principle. More recently in Australia, any special protection for franchisees of insolvent franchisors has met the same response.
On the other hand, and for good reason, employees across jurisdictions not only have priority, but are often, as in Australia, protected by government schemes.
The UK report, perhaps sensibly, says that statutory protection of gift voucher purchasers, and their recipients, would be disproportionate, but that the consumer community should be made more aware that gift vouchers are not money and that they should be redeemed promptly. It sets out five recommendations which it says would improve consumers’ position on insolvency:
- regulating Christmas and similar savings schemes, which pose a particular risk to vulnerable consumers.
- introducing a general power for government to require prepayment protection in sectors which pose a particular risk to consumers.
- giving consumers more information about obtaining a refund through their debit or credit card issuer.
- making a limited change to the insolvency hierarchy, to give a preference to the most vulnerable category of prepaying consumers.
- making changes to the rules concerning when consumers acquire ownership of goods.
As the report says, this range of recommendations – of varying strengths – can be drawn upon in whole or part if a political decision is made to improve consumers’ position. It expresses some hesitation about singling out particular areas of concern for protection.
The wider UK regime
In the UK, statutory pre-payment protection is available in some sectors, travel agents being one, where large sums are often paid for air flights and holidays. Moneys paid are held on trust by the business and are not available on liquidation. This is the case in Australia.
The need for this protection to be extended further to smaller consumer purchases may receive UK government attention. It would be a populist reform issue, favoured by some governments, despite the moral hazard involved, and its inequity. From an insolvency policy perspective, it would involve yet a further chipping away of the fundamental and long standing equal sharing – pari passu – approach taken by insolvency.
Statutory protection to credit card purchases is given in the UK. Section 75 of the UK Consumer Credit Act 1974 imposes an obligation on a credit card issuer – say a bank – to refund pre-payments for undelivered goods which have cost more than £100 and less than £30,000. This also applies to foreign transactions as well as goods bought online, by telephone or mail order for delivery to the UK from overseas. The impact of the UK regime is reported to have led to a closer monitoring of retailers’ insolvency risks by banks. The report says that this chargeback system represents useful protection for consumers that has often led to their moneys being refunded on a retailer’s insolvency.
In Australia, protection exists under the Code of Banking Practice for those who have paid for their store purchasers by debit or credit card, with various card schemes voluntarily offering a “chargeback” system.
The Australian “gift card inquiry”
The 2016 Australian Senate Committee “gift card” inquiry was dissolved when the recent federal election in July 2016 was held, along with all other such inquiries. We are awaiting their revival.
Although submissions closed some time ago, the Senate Committee may need to re-open the inquiry, or at least give close consideration to this UK report and seek further submissions. More importantly, depending on the timing (the UK government usually gives not only considered responses, but prompt responses, to inquiry reports), the Senate Committee will be interested to know of the decision of the UK government on whether or what law reform is necessary.
This should give some lead for how Australia approaches this issue, one that is common internationally in failed retailers. Given a recent report suggesting that more retail chains in Australia are under financial pressure, some might like to heed the UK report’s advice to redeem their gift card promptly.
 Citing the Sydney Morning Herald, ‘Dick Smith back away from profit guidance after inventory write-off’, 30 November 2015.
 The relevant Bankruptcy Code provision is § 507(a)(7).
 See Professor Chris Symes’ Statutory Priorities in Corporate Insolvency Law (2008) Ch 8, citing the Australian Insolvency Management Practice.
 Symes’ Statutory Priorities in Corporate Insolvency Law (2008) Ch 8.
 See clause 22 of the Code of Banking Practice. See also Guidance Note No 11 of the (Banking) Code Compliance Monitoring Committee, established under clause 36 of the Code.