HMV’s administrators are allowing gift-card holders to jump the creditors’ queue and redeem their vouchers. That can be justified – in law as well as in finance – only if retaining customers has enhanced the music retailer’s resale value by more than the cost of redemption.
With retailers falling like ninepins in 2013, the plight of voucher holders is real. And they deserve sympathy. Bankers and suppliers can do credit checks before doing business; retail customers cannot be expected to inspect the balance sheet before buying a £10 voucher.
So should a company be selling gift-cards – talking money for goods to be supplied at a future time – if the company is in imminent danger of going bust: ie, having no future in which to supply the goods?
The law is quite clear on the administrator’s duty: he takes on the business’s assets but not its liabilities, so voucher holders retain their relationship with the old – insolvent - enterprise and have no claim on the ongoing business run by the administrator or a subsequent purchaser.
The law should be clear too on fraudulent trading – taking money with no prospect of supplying goods. The closer the likelihood of insolvency – and when directors are already negotiating with banks and suppliers the proximity is very near – the more questionable to decision to issue IOUs. HMV’s directors have stated that they were aware of their duties so they must have satisfied themselves that selling vouchers in the days before its collapse was legal.
But that still leaves customers in the cold.
If a retailer stops selling vouchers, that could send a signal that the end is nigh and cause the collapse. But in HMV’s case, suppliers and bankers already knew administration was a distinct possibility so there was no reason for secrecy.
An alternative – a reasonable and feasible alternative – is to put the proceeds of voucher sales into an escrow account once insolvency looks like a real possibility to keep the funds outside of the business. If the company goes under, that cash can be used to redeem or repay vouchers: if not, the public need never know how close collapse was.
Without such an account, it is possible a buyer of the bust business will accept old gift-cards simply to maintain goodwill in the purchased brand. It seems that HMV’s administrator has anticipated such a move by agreeing to use other creditors’ claims to honour vouchers in the hope that the resale value of the business is enhanced sufficiently to generate more funds to compensate those other creditors. But if a chain was to close for good – as Comet did (after honouring vouchers) or Woolworth - there is no goodwill to bolster and thus no reason for an administrator to pay.
That said, gift-cards have little economic logic. A donor can give money without worrying about insolvency risk. True, a book token or record voucher suggests greater thought by the donor and prevents the recipient frittering it on other frivolities, but tying it to a particular retailer simply transfers the giver’s preferences to the recipient without the shop-chain providing any more than a pretty card for receiving that new business.
Meanwhile the seller of the voucher uses the proceeds as working capital – sometimes to keep afloat businesses that have been refused new finance from elsewhere. If the HMV administrator had not given in, there would be pressure to tighten the law: now that cardholders will get their CDs and DVDs it is unlikely anything will change.