House of Fraser: Don't look a gift card in the mouth

What’s going on here?

UK department store House of Fraser was recently bought by Sports Direct for £90 million. Customers with gift cards for House of Fraser stores have been left unable to use them

What does this mean?

When House of Fraser was purchased by Sports Direct, customers with existing gift cards were told to send them to the Head Office and be issued a replacement. Customers have reported that no replacement for their gift vouchers have been issued so far. With the company silent and unresponsive to customer concerns, the only recourse for customers is to line up as creditors in House of Fraser’s administration.

Why should firms care? 

Customers have been advised to line up as unsecured creditors in the administration. 

The administration procedure within the 1986 Insolvency Act provides a ‘hierarchy’ for repayment to creditors. Secured creditors, typically banks or other lenders, and preferential creditors such as employees, both rank ahead of unsecured creditors in the repayment process

It is not uncommon for unsecured creditors to receive nothing, as the available assets of the company are distributed amongst other creditors first and are usually not sufficient to repay the unsecured creditors in full. 

A news article discussing the Carillion collapse earlier this year indicated that the unsecured trade creditors would receive only £600,000 to share between them, despite their debts of over £100 million. Carillion’s secured creditors’ debts totalled around £900 million, and they will receive payment first from the sale of remaining assets under the Insolvency Act hierarchy. 

Ernst & Young, administrators for House of Fraser, commented that gift card holders are likely to receive only a ‘modest recovery’ against the amount claimed. It has been suggested that House of Fraser customers could be receiving less than 1p for every £1 they are owed and that the process of claiming as an unsecured creditor may take up to 12 months

Gift card holders are also battling against claims from consumers who were refused refunds for goods purchased and paid for online but undelivered before House of Fraser was purchased by Sports Direct. 

The plight of high-street stores has been common in recent years with the growth of low-cost online retailers, coupled with lower household income which has caused slow growth in retail sales. What’s worrying is that despite the administration of high-street stores becoming more common, protection for consumers remains minimal

Limited protection is available under Section 75 of the Consumer Credit Act but only if the value of the purchase was over £100 and a credit card, not a debit card, was used. A claim under Section 75 makes the credit card provider jointly liable with the retailer in the event that the retailer goes out of business. However, there’s no specified time frame for the card provider to resolve your claim and there is still the risk that your claim might be rejected.  

Chances are that most gift cards won’t be for an amount over £100, leaving customers with little choice but to claim as an unsecured creditor in the House of Fraser administration.

While it seems that customers have lost out this time, it may be time to reconsider implementing legislation to strengthen consumer protection in these circumstances.

Report written by Rebecca B.

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