RETAILER INSOLVENCY IN PRACTICE
GENERAL THEMES
3.108 Finally, we consider two general themes which emerged from our analysis of retailer insolvencies. The first is that not all consumers who have lost a prepayment submit claims. The second is the confusion and lack of information which often surrounds retailer insolvency.
Consumer under-claiming
3.109 There are many examples of under-claiming at each stage of the process. This can be seen, for example, when retailers set up trusts. For example, Land of Leather put deposits of £957,000 into trust, but only £147,000 was claimed. In Zavvi, £450,000 was held on trust, of which only £205,651 was claimed and distributed.
3.110 Similarly, even where vouchers are accepted during a period of trading in administration, many are never redeemed. In Comet, there was thought to be
£4.7 million worth of gift vouchers in circulation when the company went into administration, but only vouchers worth an estimated £1.5 million were redeemed during the period of administration. 28
3.111 There are also examples where merchant acquirers held back more collateral to meet chargebacks than was actually claimed. For example, in Comet, £9.4 million was held back, though chargeback claims totalled only £2.1 million; in Land of Leather, £4.5 million was held back but only £1.1 million of chargeback claims were raised. The remaining sums were eventually released back to the company.
3.112 There are several possible causes for these discrepancies: for example, lack of information, the hassle of making claims, and consumers’ lack of confidence that anything can be done.
Lack of information
3.113 When a company enters administration, the process is often accompanied by media confusion and misinformation, as administrators come to terms with the situation and make decisions.
27 S Brooker for Consumer Focus, Pay now, pay later: consumer prepayments and how to protect them (August 2009) pp 11 and 16.
28 Comet, Statement of Affairs (7 December 2012) p 12; Final Progress Report (9 October 2013) p 20.
3.114 This can be illustrated with the recent example of Phones 4u, which entered administration on 15 September 2014. Phones 4u did not regularly take many prepayments from customers. However, the previous week it had taken more prepayments than usual due to the upcoming release of the Apple iPhone 6.
3.115 In the days immediately after the company had entered administration, media outlets attributed the following statement to Phones 4u (emphasis added):29
Any orders that have not already been dispatched will be cancelled and any payments refunded to customers. Phones 4u apologise for any inconvenience.
This statement was not published on the Phones 4u website. Its origin is not clear but it seems unlikely that it was drafted or approved by the administrators.
3.116 The website of the Guardian also suggested that a refund had been approved by the administrators (emphasis added):30
Will customers who ordered the new iPhone 6 lose their money?
No. The administrator said it was Phones 4u policy not to take money in advance for phones, but if money has been paid the company has pledged to refund customers in full.
29 See, for example, http://www.huffingtonpost.co.uk/2014/09/15/phones-4u-iphone-6_n_5820678.html and http://m.digitalspy.co.uk/tech/news/a596707/iphone-6-pre-orders-with-phones-4u-will-be-cancelled.html.
30 http://www.theguardian.com/business/2014/sep/15/phone-4u-to-close-q-and-a.
3.117 Subsequently, in the second week of the administration, the following announcement appeared on Phones 4u’s website:
Unfortunately we do not have any iPhone 6s therefore customers who have pre-ordered an iPhone 6 through Phones 4u will not receive their purchase. Customers who have paid using credit cards should contact their credit card company to try and seek resolution to this matter. If you are unable to obtain a refund through your credit card company and wish to register a claim, your claim (to the extent you have one) will rank as an unsecured claim in the Administration.
The Guardian reported this in a later article entitled “Phones 4u in U-turn over iPhone 6 refunds”.31
3.118 PwC’s dedicated Phones 4u webpage underlined that any payment was likely to be negligible:32
Please note, given the level of secured liabilities, if there is a dividend to unsecured creditors, any payment if made at all, would not be for many months and is likely to be negligible.
3.119 On 24 September, PwC confirmed that 140 Phones 4u stores would be taken over and rebranded by Vodafone and a further 58 by EE. The iPhone 6 orders were not honoured by the purchasers, though Carphone Warehouse, one of Phones 4u’s competitors, did offer to give consumers who agreed to purchase an iPhone 6 with it instead a discount to the value of the lost deposit.33
3.120 Another issue arises from the knock-on effects from one insolvency to others in the group. For example, when Woolworths plc went into administration, another company in the group – Flogistics Limited – had been issuing gift vouchers (“Kingfisher vouchers”) which could be spent at Woolworths, B&Q and Comet.
When Woolworths plc went into administration, Flogistics survived but all three stores stopped accepting the Kingfisher vouchers.34 Flogistics itself later went into administration.
3.121 Some delay in providing information and confusion over conflicting details is inevitable in the first few weeks following an administration as administrators seek to ascertain the details of the retailer’s assets and liabilities. However, our analysis found that, even months and years after the insolvency procedure has been completed, it can be very difficult to determine the final outcome for creditors.
31 http://www.theguardian.com/business/2014/sep/26/phones-4u-iphone-6-refunds.
32
http://www.pwc.co.uk/business-recovery/administrations/Phones4U/creditors_and_suppliers.jhtml. The administrators’
progress report of 14 April 2015 notes that any dividend to unsecured creditors will likely be less than 0.4 pence in the pound.
33 http://www.carphonewarehouse.com/wecanhelp.
34 http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/3834336/Woolworths-vouchers-worthless.html.
3.122 However, access to information is improving, with some administrators providing an information website for interested parties. A good example is www.zavvi-info.co.uk. Deloitte also publishes FAQs for consumers on its website, as well as the information they are required to publish, such as the directors’ statement of affairs and the administrators’ progress reports.
CONCLUSIONS
3.123 The analysis we have conducted shows that, on retailer insolvency, preferential creditors nearly always receive full payment. Secured creditors almost always receive some sort of dividend, but often much less than the value of the secured debt. The outcome for unsecured creditors is often nearly worthless.
3.124 Consumers may be protected in other ways. For example, trust arrangements can provide considerable relief where the trust has been properly constituted.
Often the administrators or incoming purchasers will elect to honour gift vouchers or to fulfil customer orders, but these decisions are made on a case by case basis and cannot be relied upon. Where consumers have paid by debit or credit card, chargeback (and, in the case of credit cards only, section 75 protection) are also of considerable benefit.