The purpose of this note is to explain the treatment of prepayments (gift vouchers, cash deposits etc.) when a company, in financial difficulty, goes into administration. It outlines the administration process and the statutory order of distribution to creditors of realised company assets. It also considers the possibility of a consumer obtaining a refund. Finally, this paper explores whether there may be scope for a change in the law in this area.Jump to full report >>
Many people buy gift vouchers (or gift cards) especially at Christmas. Gift vouchers remove the “headache” of choosing the “right” gift. The danger is that the unspent gift voucher may become worthless if the retailer goes into administration. If the retailer continues to trade whilst in administration, the administrator may continue to accept gift vouchers at their face value, though he is under no obligation to do so.
Similarly, consumers are often required to pay (in full or in part) for goods and services in advance of receiving them. For example, it is not unusual for a consumer to be asked to pay a cash deposit when ordering an expensive new sofa. If the business that has taken the prepayment goes into administration, consumers may be left with neither the item they paid for, nor any real prospect of recovering their money.
Once in administration, a retail business is likely to continue trading for a period of time before all or part of the business is sold or the company wound-up. Understandably, consumers are frustrated that a business may continue to trade whilst in administration, but refuse to accept their gift vouchers or fail to fulfil an order or return a deposit.
If a retailer stops trading altogether and goes into liquidation, the law imposes a strict hierarchy of creditors to be paid out from any remaining assets. Consumers who are in possession of gift vouchers or made a prepayment are classed as unsecured creditors and frequently receive nothing. As the Law Commission points out, where losses do occur they may are often for relatively modest amounts – perhaps a low value gift voucher. However, in some circumstances, consumers may lose hundreds of pounds. For instance, in 2006 the collapse of Farepak (a savings club) caused considerable distress as thousands of consumers stood to lose a year’s worth of Christmas savings.
On 18 June 2015, the Law Commission published a consultation document, ‘Consumer prepayments on retailer insolvency’, in which it considered whether greater protection was needed for consumers who purchase gift vouchers or make prepayments.The consultation period closed on 17 September 2015, and the Law Commission published its report with recommendations in July 2016. Ultimately, it will be for Government and Parliament to decide whether to change the law.
The purpose of this briefing paper is to consider the treatment of gift vouchers and other types of prepayments when a company, in financial difficulty, goes into administration. It outlines the statutory order of distribution to creditors of realised company assets. This paper also considers the possibility of a consumer obtaining a refund if the gift voucher was bought with, or a prepayment was made, using a credit or debit card. Finally, this briefing paper looks at the current debate on whether there may be scope for a change in the law in this area.
Commons Briefing papers SN06540
Author: Lorraine Conway