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25/04/2016

What happens to vouchers in administrations?

With BHS entering administration this morning, we thought it might useful to review one of the things that often attracts attention when a retailer becomes insolvent: what happens to customers’ vouchers?

What happens with vouchers in an insolvency?

When an administrator is appointed, they have a duty to maximise the returns to a business’ creditors. In most cases, the best option is to rescue the business via a sale as a going concern.

To rescue a business, an administrator will have many commercial decisions to make – an important one is whether or not to accept vouchers.

They will think about:

  • How many vouchers are in circulation;
  • The impact accepting vouchers will have on other creditors;
  • The likelihood of achieving a rescue;
  • The relationship between a business and its customers.

Accepting vouchers could:

  • Hurt other creditors by reducing the value of assets available for other creditors (by reducing stock);
  • Deter potential buyers who may not wish to take on the obligation to honour vouchers;
  • Reduce the value of an offer for the retailer given the size of the potential liability.

But not accepting vouchers could:

  • Damage the relationship between the business and its customers;
  • Damage confidence in the business among potential investors.

If vouchers are not accepted, voucher holders/purchasers become unsecured creditors of the insolvency – alongside other creditors like HMRC and the business’ suppliers.

Those owed money are paid in a strict order, determined by statute. There is rarely enough money to pay everyone, and the lower a creditor’s position the less likely they are to recoup money.

Banks and employees are higher up the order of priority.

What protection is there for those with vouchers?

Consumers who paid for a voucher with a credit card are protected by the Consumer Credit Act for purchases over £100 (the purchaser of the voucher is protected rather than the holder).

 Protection for debit card holders depends on the card provider, and whether or not there is ‘chargeback’ protection (again the purchaser of the voucher is protected rather than the holder).

If gift vouchers are not accepted, you can write to the administrator with proof of your claim, but there is no guarantee you will get the full value back. It depends what is available in the ‘pot’ at the end of the insolvency process.

Could the order of priority be changed?

Changing the order of priority to increase protection for voucher purchasers or holders could have unintended consequences.

Changing the order of priority...

  • Wouldn’t mean gift vouchers would always be accepted – holders/purchasers would still have to wait to be paid out at the end of the insolvency, depending on how much is left in the ‘pot’.
  • Would have a negative effect on business lending: expanding the ‘preferential creditors’ category would mean banks would get less money back in an insolvency and would make banks more cautious about lending.
  • Would have a negative effect on the business community. Small businesses are unsecured creditors too and often face considerable losses in an insolvency. Moving voucher holders above them would see small businesses get even less money back.
  • Would have a negative effect on employees who are owed holiday pay or wages by diluting their claim.

More information on vouchers in insolvencies can be found in this guide from R3.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.