GIFT VOUCHERS

3.52 Gift vouchers may take several forms: electronic cards, paper-based tokens or digital codes. Here, we refer to all three as “vouchers”. As we discuss in more detail in Chapter 7, gift vouchers are important to the retail sector. They were an issue in 15 of the 20 high street insolvencies we look at. Although the holder of a gift voucher has only an unsecured claim, vouchers may be honoured by administrators or by subsequent purchasers. Here, we describe the way these decisions are made and then outline the outcome for consumers.

3.53 As we saw in Chapter 2, administrators are under no obligation to allow redemption of gift vouchers; indeed they are not allowed to do so if it would damage the interests of creditors as a whole. However, in some cases, administrators may decide to trade in administration and then, if such trading occurs, to accept gift vouchers during this period.

The decision to accept gift vouchers

3.54 Administrators told us that, on appointment, the decision whether to honour gift vouchers was one of the many difficult issues they faced. They were well aware that a decision to refuse vouchers may lead to significant criticism in the press and on social media and that this could undermine the value of the brand. On the other hand, a decision to honour vouchers could be expensive: with too many vouchers and insufficient stock, the result could be a net outflow of funds, to the detriment of creditors as a whole.

3.55 Before making a decision, administrators need to look carefully at the figures, to determine the number and value of vouchers in circulation and how these relate to the stock available. This will take a few days, during which there will be uncertainty about the issue. This can cause confusion for consumers.

3.56 Administrators told us that the problem is often exacerbated by lack of information: retailers are often poor at keeping up-to-date records of gift vouchers in circulation. While a provision may be made for them in the company’s accounts, this is only cursorily reviewed year-on-year. During normal trading, retailers estimate redemption rates: some vouchers will be written off on the ground that they will never be redeemed. However, these estimates may not apply during administration. Instead there may be a “bank rush”: if consumers know they only have a limited time to redeem vouchers, they may dig old ones out of the bottom of drawers, resulting in a much higher redemption rate than allowed for in the company’s accounts. It will be much harder for administrators to determine the maximum potential liability if the gift vouchers do not have an expiry date to serve as a cut-off point.

3.57 The next consideration is the amount of “free stock” - that is, stock which the administrator is free to sell, without retention of title claims from suppliers. One administrator pointed out that the stock must be in the same geographic location as the vouchers. However, the location where gift vouchers are purchased will not always be indicative of the location where they will be redeemed: one of their selling points is that they can easily be sent to friends and relatives in other parts of the country.

Reasons to honour vouchers

3.58 Administrators emphasised that the decision whether to honour gift vouchers is heavily informed by the commercial realities facing the business when it enters administration.

3.59 There are two main reasons why honouring commitments to consumers may benefit creditors as a whole. First, it will preserve value in the brand, which can then be sold to a new purchaser at a higher price. Administrators emphasised that well-known brands (such as HMV) have a significant commercial value which can erode quickly following complaints in the press and on social media that consumers have lost out.

3.60 Honouring gift vouchers may also bring people into stores. There may be “up-spend”: that is, consumers may spend more than the voucher is worth. Where vouchers tend to be of low value and average spend tends to be high, this might lead to a profit. Alternatively, administrators may require consumers to spend money as a condition of voucher redemption: in Borders, for example, the administrators would only accept vouchers if the consumer bought items of double their value.

3.61 On the other hand, honouring vouchers may be expensive, especially where stock is subject to suppliers’ retention of title claims. An example illustrates a scenario where an administrator might be unlikely to allow redemption:

A customer wishes to redeem the total value of a £100 gift card for an item costing £100 (including VAT)¹⁴ but makes no further purchases.

Title to the item has been (validly) retained by the supplier against payment of the cost price of £50. The administrator decides to allow redemption of the gift voucher during a period of trading in administration and to sell the item to the customer.

Redemption of the voucher extinguishes the customer’s unsecured claim of £100, but represents no cash gain for the estate. The administrator will be liable to the supplier for the sum of £50 and additionally for VAT of £16.67.¹⁵ It has cost the administrator nearly

£67 to allow the customer to redeem the gift voucher.

3.62 It may nevertheless be worth sustaining some losses to make the brand attractive to a potential purchaser, but it is unlikely that an administration could sustain losses of the magnitude just described.

Purchasers of the insolvent business

3.63 Companies buying insolvent businesses will also face decisions about whether to honour gift vouchers and/or consumer deposits on pre-ordered items. Like administrators, purchasers may also have a strong interest in maintaining consumer goodwill and brand value and they will wish to encourage people to continue to visit stores. Unlike administrators, new purchasers are not restrained by legal duties to other creditors. They therefore have more flexibility to make their own decisions.

3.64 However, maintaining the value of a brand is less important where the intention is to subsume the insolvent business within the buyer’s existing brand. This may have been one of the reasons behind Sports Direct’s refusal to honour gift vouchers when it bought JJB Sports (which was subsumed into the existing Sports Direct brand) and, later, Republic (soon subsumed into another of Sports Direct’s brands, USC Clothing).

14 A VAT standard rated product sold at £100 includes VAT amounting to 20% of the pre-tax price. The product therefore costs £83.33, plus VAT of £16.67 (20% of £83.33).

15 Although any amount owed to HMRC in respect of VAT prior to the appointment of the administrations ranks as an unsecured claim in the administration, any VAT liability incurred during a period of trading in administration must be paid as an expense of the administration.

The outcome in the cases we looked at

3.65 Of the 20 insolvent high street retailers we looked at, the question of gift vouchers was evident in 15 cases. The value of gift vouchers in circulation ranged from several hundreds of thousands (Jessops: £870,000) to several millions (HMV:

£6.5 million) of pounds.

3.66 The number of vouchers in circulation reached around half a million in some cases, including Zavvi (510,000 unredeemed vouchers with a combined value of

£4.1 million) and Borders (more than 475,000 gift card holders with balances of

£3.3 million). In some cases, such as La Senza, we have not been able to identify the value of the vouchers in circulation.

3.67 The following table shows the treatment of gift vouchers by administrators and/or purchasers of the fifteen retailers which had issued vouchers:

Table 4: Treatment of gift vouchers by administrators and/or purchasers of 15 insolvent retailers

Gift vouchers accepted in full

3.68 In seven cases, gift vouchers were accepted in full (Comet, HMV, Game, Habitat, Focus DIY, Blockbuster and Dreams).

3.69 The administrators of Blockbuster made an operational decision to continue to accept gift vouchers. This decision was taken in order to maintain goodwill and the customer base, particularly important in this case due to the loyalty of Blockbuster’s customers to their local store. We were also told that the values involved were relatively low. In the case of Game, the company went into administration on a Monday, and gift vouchers were accepted from the Wednesday of that week on the basis that a sale of the business had been agreed.

3.70 HMV’s administrators initially decided that gift vouchers would not be honoured.

However, this decision was reversed in the wake of major media and public outcry, and gift vouchers were then accepted. The administrators emphasised that the decision was specific to this company and based on an assessment of the accounts:¹⁶

16 This statement is reproduced at http://www.retailgazette.co.uk/blog/2013/01/40313-hmv-to-honour-gift-vouchers.

Accepted in full 7 retailers Comet, HMV, Game, Habitat, Focus DIY, Blockbuster, Dreams

Accepted in part 2 retailers Borders, Woolworths

Not accepted 6 retailers Zavvi, Jessops, La Senza, Peacocks, Republic, JJB Sports

The ability of administrators to honour gift vouchers will depend on the specific circumstances of each case. Since our appointment … we have been urgently assessing the companies’ financial position. I am pleased to confirm that, having concluded this assessment, we are able to honour gift cards.

3.71 However, this applied only to HMV gift vouchers. Waterstones gift cards and Capital Bonds gift vouchers, which had also been redeemable in HMV, were not accepted during the period of trading in administration.

Gift vouchers accepted in part

3.72 In a further two cases, gift vouchers were partially redeemable. For example, administrators for Borders agreed to accept vouchers but required consumers to spend double the value of their gift card. This encouraged footfall in stores and meant that the funds for creditors were enhanced by the additional expenditure.

Gift vouchers not accepted

3.73 In the remaining six cases (Zavvi, Jessops, La Senza, Peacocks, Republic and JJB Sports), gift vouchers were not accepted.

3.74 Due to the organisation of assets and liabilities in Zavvi’s corporate group structure, administrators could not allow redemption of vouchers because the trading arm did not own the stock. Jessops’ administrators were unable to continue trading during administration, and could therefore not honour gift vouchers. This was the result of suppliers’ retention of title claims over much of the stock.

3.75 Republic and JJB Sports were bought by Sports Direct, which refused to honour gift vouchers and said it was not their responsibility to do so.¹⁷ The purchasers of La Senza (retail company Alshaya)¹⁸ and Peacocks (Edinburgh Woollen Mill) took the same approach.

Losses to consumers

3.76 Information available in five of these cases suggests that the total value of vouchers not accepted due to the retailer’s insolvency was over £7 million.¹⁹

17 The Guardian reported: “Sports Direct, which bought [Republic] from administration, dashes hopes of HMV-style reprieve for out-of-pocket shoppers”,

http://www.theguardian.com/business/2013/apr/23/republic. While Sports Direct did not honour gift vouchers, the administrators had been able to fulfil 3,500 units of e-commerce orders, worth £0.1 million, placed prior to their appointment.

18 La Senza entered into its second administration, under Alshaya ownership, in July 2014.

We have focused on the first administration, in January 2012.

19 Zavvi (£3.45m), JJB Sports (£1.39m), Republic (£1.2m), Jessops (£0.87m) and Peacocks (£0.75m).

3.77 The overall effect appears moderate rather than severe. In some cases the retailers had sold only a small value of vouchers. For example, in Jessops, the value of vouchers in circulation was only £870,000. In other cases, the loss to each consumer was low. For example, in the case of Zavvi, although the vouchers had a combined value of £4.1 million, the average loss per consumer was only £8.12. According to our calculations, the average balance in the case of Borders was around £6.94 per voucher holder.

3.78 This, however, appears to relate more to chance than law. There is little to prevent severe losses to individual consumers where a retailer sells vouchers of a high value and has little free stock to trade while in administration.