The house of Commons briefing paper explains the treatment of gift vouchers and other types of consumer prepayments (cash deposits etc.) when a retailer is in financial difficulty and goes into administration.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 becomes insolvent. 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.
Other types of consumer prepayments are also at risk. A consumer prepayment is where a consumer is required to pay (in full or in part) for goods and services in advance of receiving them. For example, a consumer may be asked to pay a cash deposit when ordering an expensive new sofa. If the business subsequently goes into administration, the consumer may not receive the sofa and may also lose their deposit.
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 other forms of prepayment are classed as unsecured creditors and frequently receive nothing.
On 18 June 2015, the Law Commission published a consultation document, “Consumer prepayments on retailer insolvency”, in which it sought views on whether greater protection was needed for consumers who purchase gift vouchers or make other types of prepayments. The consultation closed on 17 September 2015 and the Law Commission published its report with recommendations in July 2016.
In its formal response, published in December 2018, the government said that it would consult on new laws to protect Christmas savers and to change the rules on when property passes to consumers. However, it rejected the Law Commission’s proposal that, a limited change be made to the insolvency hierarchy so to enable a limited group of consumer claims to be paid in advance of floating charge holders.
This Commons briefing paper considers the treatment of gift vouchers and other types of consumer prepayments when a distressed company goes into administration. In doing so, it also outlines the statutory order of distribution to creditors and 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