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Comment: The pitfalls of presents - will gift vouchers be another casualty of the recession?

Gavin Matthews, head of retail at business law firm Bond Pearce, asks if the negative publicity that gift vouchers have received following the recent spate of retailer administrations will result in fewer customers buying them.

GENERAL MERCHANDISE

Comment: The pitfalls of presents - will gift vouchers be another casualty of the recession?

Gavin Matthews, head of retail at business law firm Bond Pearce, asks if the negative publicity that gift vouchers have received following the recent spate of retailer administrations will result in fewer customers buying them.

It's been hard to miss the sombre news recently as several large retailers have gone into administration, with resulting loss of jobs and business, and the consequent erosion of the British high street.  

One point being raised time and time again has been the position customers have been left in when they have sought to redeem gift vouchers with those retailers, only to be told that the company in administration has declined to accept them.  The customers are left with a piece of paper (or plastic), which in their mind was the equivalent of cash, and, quite understandably, feel thoroughly let down.  

In this situation, it's not just the customers who are suffering.  There have been concerning stories of store staff being physically threatened by angry customers furious that their gift vouchers will not be accepted at the store. And of course, this negative customer sentiment and feeling of betrayal may damage the residual goodwill and brand value that is left in the business.  

So why do administrators of businesses decline to accept the gift vouchers issued by stores?  Contrary to some popular reports, it is not because they are deliberately seeking to withhold money from customers, depriving them of their rights.  In fact, when a business is no longer solvent and has to go into administration, administrators are appointed to step in and take immediate action to see whether the company can be rescued at all and/or to maximise the assets and recoveries available for distribution to creditors. 

Once appointed an administrator will carefully consider his/her statutory duty to rescue the company or realise maximum value and will assess whether continued trading and on what terms will achieve that.  A company in administration is still bound by the contracts it has entered into prior to the administration but an administrator can choose whether or not to continue to perform those contracts and will only do so if it will assist him/her achieve the statutory purpose.  

Legally, gift vouchers do not have any special status: the laws around them have simply evolved over time, and they therefore fall into the category of an ordinary contract.  Gift vouchers may be honoured in circumstances where an administrator is sure that all of the costs of the administration trading will be covered and where realisations will be maximised but in all other circumstances he/she may exercise discretion to ignore the contract leaving the customer as a normal unsecured creditor for the face value of the gift voucher.  

Of course, as we have recently seen in the case of HMV, an administrator may, following their review of the situation or a change of circumstance, decide that it is in the overall interests of the business to accept these gift vouchers.  In the case of HMV it is likely that either because the administrators had hope of selling the business on as a going concern or, as has recently emerged, the debt was sold to a party that fully understood the retail sector and the value of gift vouchers in connection with customer loyalty, that they decided too much damage would be caused to the HMV brand by declining to honour the contracts at all.  However, for a collapsed retailer, such as Jessops where trading has ceased, customers with gift vouchers will in all likelihood be left holding a worthless piece of paper. 

What can consumers do? They can hold on to the vouchers, in case the appointed administrators subsequently decide that they are able to accept them, whether at full face value, or even partial face value.  Or if the vouchers were paid for by credit card, and the transaction was over £100, it may be possible for consumers to get a refund from their card issuing bank. Ultimately they will have a claim (probably worthless) as an unsecured creditor for the face value of the gift voucher.

But is it possible that the negative publicity that gift vouchers have been receiving will lead consumers to shy away from purchasing them?  After all, cash has less restrictions in terms of redemption for goods, and is not likely to be rendered worthless any time soon!  However there is a strong cultural custom which makes people prefer to give gift vouchers as presents instead of cash.  And from a retailer's point of view, gift vouchers are overall a 'good thing': they represent immediate income, preventing the money being spent at a rival business, and they help ensure footfall for bricks and mortar stores.  

We need to foster consumer confidence and trust in our retail businesses – without this, the British high street is likely to continue to struggle. 


 

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