William Black: Customer deposits and the vulnerability of gift cards - how do we keep on giving?

William Black is Managing Partner of McGrathNicol New Zealand

The retail sector in New Zealand has seen a significant number of companies placed into receivership, liquidation or administration over the last two years. The list of company collapses includes Dick Smith, Wild Pair, Identity, Jean Jones, Shanton and Postie Plus.

McGrathNicol has been appointed as either Receiver or Administrator in many of these insolvencies and, in addition to these appointments, has advised on the restructuring of several other retailers as they seek to address significant challenges in a sector facing intense competition for the customer dollar.

We see no immediate let-up in this trend.

One of the common themes in these insolvencies is the unfortunate plight of customers who have either paid a deposit on a purchase and not received the goods or purchased a gift card which has not been redeemed for goods before the retailer collapses.

When a company is placed into a formal insolvency proceeding (such as a receivership or liquidation) in New Zealand, the law is quite clear with respect to the treatment of customer deposits and unredeemed gift cards.

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In summary, with effect from the date of the receivership or liquidation, customers who have paid a deposit and who have not received the goods, or who hold an unredeemed gift card, fall into the category of creditors of the company referred to as "unsecured' creditors.

What this usually means is that they will face a loss of some or all of their deposit and may well be unable to redeem their gift card, rendering it worthless. Why is this the case?

Put simply, the company has utilised the funds received by way of customer deposits, or the sale of gift cards, to fund its ongoing trading losses, and hence those funds have been absorbed by the business.

Once appointed, the receiver or liquidator very quickly ascertains that those funds are no longer available. The question is, does the law provide adequate protection for customers in this scenario?

If one takes the view that funds received by the company from customers who have either paid a deposit or who have bought a gift card should not be available to fund its working capital requirements, then it's fair to say that the law does not provide adequate consumer protection.

Once a company collapses, any amounts owed to customers who have paid a deposit, or to customers who have an unredeemed gift card, rank as unsecured claims against the company.

A potential way to address this:

• Introduce legislation that deposits taken in the course of trading, or the proceeds from the sale of gift cards, should be separately ring-fenced from other company funds.

• The monies should be held in a separate account and therefore not available to fund a company's working capital needs.

• Introducing such legislation will need a lot of careful consideration of the issues and, while it won't guarantee compliance by companies which take deposits or issue gift cards, it will be a step towards affording a measure of protection to customers.

The issue of protection for customers has been a regular topic of debate in a number of countries, including the UK and Australia. Over the last 30 years numerous reports by UK bodies have considered the issue.

The results of the UK Law Commission's recent review are due to be published sometime in 2016, and it will be very interesting to see what recommendations the UK Law Commission makes in this area and which of them might be applicable in a New Zealand scenario.

In the meantime, what can customers currently do to best protect themselves? The first point is to avoid paying a deposit in the first place. This may not always be practical and if putting down a deposit is unavoidable and there is no ability to shop elsewhere, the second step is to use a credit card.

Paying a deposit by credit card gives the customer the best chance of recovering the lost funds in the event of an insolvency of the company, on the basis that there was a failure to deliver the goods.

With respect to gift cards, when buying a gift card it is almost certainly a better idea to purchase a shopping centre gift card or a Prezzy Card rather than a store-specific gift card.

Shopping centre gift cards, such as Westfield Vouchers and Prezzy Cards, are redeemable at multiple outlets and the latter can be used over 36 million places around the world, which means the customer is virtually guaranteed of not losing out.