Shortly prior to Dick Smith Electronics’ sudden closure back in 2016, the Government established a working group to look at reforming insolvency law and ways to bolster the rights of creditors in the event of liquidations. On 4 November 2019, the Government published the findings of the working group which it intends to include in a future insolvency law reform bill.
A major focus of the reforms is on affirming the key principle of insolvency law; that all creditors of the same class should be treated equally – the parri passu principle. For instance, the timeframes around ‘clawback periods’ in which liquidators have the power to recover assets the company has disposed of, or is owed by creditors, will be standardised and shortened in favour of non-related creditors. Additionally, other changes are set to include strengthening the ability of liquidators to make claims against directors for reckless trading and expanding the current ‘employee preference’ insolvency policy to include pay for long service leave and payments in lieu of notice.
Another relevant reform that businesses which deal with consumers need to be aware of are those around gift cards and vouchers.
Customers who purchase gift cards or vouchers are currently treated as normal unsecured creditors. They rank second to last (above shareholders) in the list of parties entitled to receive money when a company is liquidated. In reality, this means they are often left with nothing, which was the case with Dick Smith’s collapse.
The working group looked at the possibility of creating a new class of creditors for gift card and voucher holders which would help strengthen their claim to repayment in the event of the company’s insolvency. In favour of this was the fact that the sums owed to such creditors would not usually be very significant, and such creditors are not usually expected to assess for themselves the solvency of a company before buying vouchers or gift cards.
There were several factors going against the proposal of creating a new class of creditors including the fact that the person who buys a voucher or gift card is not always the same person as the holder – which could create confusion regarding who is the entitled creditor. Companies do not usually keep detailed records of who buys vouchers and gift cards either, meaning there would be higher administrative and time costs for liquidators, especially for large retail companies. The impracticalities and costs would be to the detriment of the interests of other creditors, which would go against the central parri passu principle.
Overall, the Government rejected the proposal and came up with a compromise which aims to address the potential unfairness for consumers whilst protecting the interests of other creditors. The compromise means that liquidators of companies which continue to trade after entering liquidation and which, during that period issue vouchers or gift cards, must honour at least 50% of the gift card or voucher’s value.
These proposals are to be included in a bill that will amend the Companies Act 1993, the Insolvency Act 2006 and the Receiverships Act 1993.
If you would like to know more about these changes and how they could affect you or your business, get in touch with our Corporate and Commercial Team