The Law Commission has recently launched a research project  considering reforms which would enhance the protection given to consumers in retail insolvencies. In particular, the study is focusing on enhanced creditor status for consumer pre-payments, such as gift cards and vouchers.
In the difficult retail climate since 2008, high profile retail insolvencies have brought into focus the issue of consumers losing out in circumstances where more sophisticated creditors (ie lenders) made a recovery. During the administrations of high street names including Comet, JJB Sports, Peacocks and Jane Norman, administrators either stopped accepting gift cards by consumers or placed new, more restrictive, conditions on their use. According to the Administrators’ progress report in Comet, £4.7 million worth of gift cards were left unused. The holders of those gift cards were unsecured creditors, and they recovered nothing. Given that the gift card industry in the UK is worth an estimated £5 billion per year, there is considerable pressure from consumer groups for change.
The current regime
Vouchers and gift cards are, in law, considered as pre-payments – a sort of unsecured debt owed by the retailer to the consumer. Consumers with gift cards rank at the bottom of the pile of creditors on a distribution, as part of the inevitably large pool of unsecured creditors. Typically any recovery, if anything, is minimal. Occasionally gift cards are honoured even in an insolvent situation, to maintain goodwill if a retailer’s business is to be sold. This is only on a discretionary basis – there is no obligation on the administrators to honour these pre-administration unpaid debts. In cases such as Farepak, the failed Christmas savings club which entered into administration in October 2006 and was subsequently placed into liquidation, poor consumers suffered while the secured creditors received millions – attracting a lot of negative press for the insolvency industry.
The research project moots reforms which will go to the very heart of the insolvency regime, including reviewing the order in which claims will be paid to give consumers a higher priority. If enacted, these reforms will fundamentally change the insolvency regime in respect of retail insolvencies, and more wide ranging consequences are always possible.
But not just yet
Whilst these changes are something to keep an eye on, don’t expect anything to happen overnight. The Law Commission intends to publish a consultation paper this summer, with a view to publishing a report (without draft legislation) in autumn 2016. Assuming that there is still an appetite for reform, the process of drafting and passing legislation then begins. Although the reforms might attract popular appeal – they would derail the insolvency process as we know it. Any new provisions that are detrimental to secured creditors’ interests are likely to result in lenders being less willing to fund retail companies – causing further harm to the high street.
So it’s business as usual then… for now. Watch this space.
 according to the UK Gift Card & Voucher Association