Quick guide to gift cards, vouchers, and deposits in insolvency

29 March 2019

Introduction

When a company providing goods or services to consumers enters an insolvency procedure, people with vouchers or gift cards, or who have paid deposits for goods, will become ‘unsecured creditors’. While the people responsible for the insolvency procedure will do their best to repay all that is owed to creditors, the nature of insolvency makes it very unlikely that creditors’ debts can be repaid in full – if at all.

How vouchers, gift cards, and deposits are treated will depend on the facts of each individual case. Commercial reasons might mean vouchers and gift cards continue to be accepted, while the repayment of deposits depends on a number of factors. This guide sets out where consumers with gift cards, vouchers, or deposits stand in insolvencies.

What happens to gift cards and vouchers in insolvency procedures?

When an administrator or liquidator is appointed over an insolvent company, one of their duties is to maximise returns to the company’s creditors. This guide refers to administrators and liquidators as ‘office holders’.

In most cases, the best way to maximise creditor returns is to rescue the company’s business as a going concern, which is normally via a sale of its business and assets. In order to rescue a business, the office holder will have to make many commercial decisions, including whether or not to continue to accept gift cards (or vouchers).

There is no statutory requirement that gift cards and vouchers be accepted by an office holder (although this depends on the card or voucher’s terms and conditions, which may be subject to change), so it is up to them whether to accept or decline them. There are very good reasons for either approach.

The office holder will need to assess: the value of gift cards and/or vouchers in circulation; the impact that accepting gift cards or vouchers will have on other creditors; the likelihood of achieving a rescue; and the relationship between a retailer and its customers.

Accepting gift cards or vouchers could:

• Reduce potential returns to creditors by reducing the value of assets available (by reducing the retailer’s stock for no return value);
• Deter potential buyers who may not wish to take on the obligation to honour gift cards or vouchers; or
• Reduce the value of an offer for the business and assets given the size of the potential liability.

However, not accepting gift cards or vouchers could:

• Damage the relationship between the business and its customers (and therefore the value of the goodwill of the business); or
• Damage confidence in the business among potential investors.

Accepting gift cards or vouchers is far likelier to be considered in an administration (where business rescue is more of a possibility) compared to liquidation, where it is likely that the office holder will wind the company down with a view to maximising creditor returns. In this latter situation, reputation and consumer sentiment hold less weight.

If gift cards or vouchers are not accepted, their holders or purchasers become unsecured creditors of the insolvency, alongside other creditors like HMRC and the company’s suppliers.

As above, one of the office holder’s duties is to maximise realisations with a view to repaying as much as possible to creditors. Creditors are paid in a strict order, determined by statute. There is rarely enough money available to pay all creditors in full, and the lower a creditor’s position in the order; the less likely they are to recoup money. Voucher holders or purchasers and other unsecured creditors sit towards the bottom of the repayment order below creditors such as banks (secured creditors) and employees (preferential creditors).

Deposits

For some large purchases (such as furniture, wedding dresses, or home improvements), it is common for consumers to pay in instalments, or to pay a deposit to secure their purchase. This is usual in cases where the company providing the goods is making them on a bespoke basis – the deposit will go towards paying for raw materials in order to manufacture the product in question. However, sometimes a company will enter administration or liquidation after a deposit has been paid, but before the final product has been delivered to the purchaser.

Whether or not the purchaser will receive their deposit amount back, or the finished product (if available), depends from case to case.

Deposit money

If the deposit money has been kept in a separate, ring-fenced account, and not used as cash for the insolvent company’s day-to-day operating costs, it will be returned. There is no obligation on companies to put deposit monies in a ring-fenced account, however.

If the contract agreed by the purchaser when making the deposit contains a clause stating that the money will be held on trust, the deposit will be held in a ring-fenced account and should be returned to the purchaser.

If the deposit money has not been kept in a separate, ring-fenced account, and has been used for the insolvent company’s day-to-day operating costs, it is treated like any other type of cash within the business, and is unlikely to be returned in full. The person who paid the deposit will be treated like all other unsecured creditors of the company

Some industries have special deposit protection schemes to protect consumers. For example, the Air Travel Organiser’s Licence (‘ATOL’) includes a financial protection scheme, run by the UK Civil Aviation Authority, and protects most air package holidays sold in the UK. Being 'ATOL protected' means that if the travel company becomes insolvent before a customer has travelled, they will receive a refund, while if they are abroad at the time, their hotel and return flight costs will be covered. The ATOL scheme does not cover flights booked directly with an airline, however.

Products

If the product is manufactured on a bespoke basis, has been finished, and can be associated with a specific purchaser, the administrator or liquidator is more likely to be lenient, and to allow the purchaser to take possession of the product. The customer would be required to have paid for the product in full before it would be released.

The more identifiable a product is (for example, a wedding dress in the size and style specified by the purchaser, or a sofa in a certain configuration, fabric and finish), the more likely it is that the administrator or liquidator will allow the purchaser to take possession. In part this is because it is harder to sell bespoke products, and the effort and time involved in finding another buyer may not be worth the likely return.

If the product is mass-produced, it is less likely that the purchaser will be allowed to take possession of the final product. The purchaser will become an unsecured creditor to the insolvent company.

If the product has not been finished, and the insolvent company is continuing to trade during an administration, it will be up to the administrator whether or not to complete manufacture of the product.

If the product has not been finished, but the insolvent company has ceased trading, production will not normally be completed. The purchaser will become an unsecured creditor to the insolvent company for any funds paid in advance

What protection is there for consumers who bought gift cards/vouchers, or who made prepayments?

Consumers who paid with a credit card are protected by Section 75 of the Consumer Credit Act for purchases over £100 (the purchaser of the gift card/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 (once again, the protection applies to the purchaser of the gift card/voucher, rather than the holder). This should be checked with the purchaser’s debit card provider. Payments made with debit cards are not subject to s75 of the Consumer Credit Act.

If a gift card, voucher or deposit has been paid for through an online payment service such as PayPal, the purchaser may be able to reclaim the payment, although this depends on the payment service’s terms and conditions. Payments made through online payment services are not subject to s75 of the Consumer Credit Act.

If gift cards/vouchers are not accepted, you can write to the administrator or liquidator with proof of your claim, but there is no guarantee you will get the full value return – this will depend on what is available at the end of the insolvency process, which can be protracted.

Is anything likely to change?

The Law Commission published a report on consumer prepayments in insolvencies in 2015 which made recommendations for improving consumer protections. The Government has since responded to the report (December 2018).

The Law Commission made five main recommendations, and the Government responded as follows:

1. Recommendation: Pass a law allowing the Government to require protection of consumer prepayments in specific sectors as needed.

Response: The Government has said that it will start this process with Christmas Savings Clubs, and will engage with key stakeholders.

2. Recommendation: The law should require consumer payment and savings schemes to be protected by way of trust, insurance or bond.

Response: The Government will look to implement this as part of its work on Christmas Savings Clubs.

3. Recommendation: Require insolvency practitioners and credit/debit card companies to issue clearer guidance for consumers on what to do in an insolvency.

Response: This has already been introduced by the insolvency and restructuring profession. Administrators and liquidators will now place a standard statement on an insolvent retailer’s website to inform customers that the retailer has entered an insolvency procedure, and provide advice on how to use chargeback mechanisms, as well as information on how customers can register their claim as an unsecured creditor. The UK Cards Association (now part of UK Finance) also issued a best practice note.

4. Recommendation: The Government should consider introducing preferential status for prepayments as a last resort – meaning that, instead of ranking alongside unsecured creditors, people who had made prepayments would be pushed up the order of priority among creditors.

Response: The Government has decided not to pursue this measure.

5. Recommendation: The rules around when exactly a buyer assumes ownership of goods should be clarified and amended.

Response: The Government agreed that work in this area is needed, and has said it wants to discuss the issue further with the Law Commission.