Dick Smith’s administrators, McGrathNicol, held the first creditors’ meeting on the 14th January 2016. Representatives from banks and businesses including Macquarie, Amazon and Westfield, gathered at the Wesley Conference Centre in the Sydney CBD. But the 150 attendees left yesterday’s meeting still asking: Where to next for Australia’s iconic electrical goods retailer?
1. What Happened at the First Creditors’ Meeting?
Typically, the first meeting has a narrow and prescribed agenda under the Corporations Act 2001 (Cth) where attendees vote on two resolutions. The first is whether Dick Smith’s administrators, McGrathNicol, continue with their appointment, and the second is whether to appoint a committee of creditors. Creditors voted in favour of both resolutions and appointed 12 members to the committee whose role will be to consult with McGrathNicol, receive their reports, and approve their fees if required.
2. What Does this Mean for Gift Card Holders?
Ferrier Hodgson, Dick Smith’s bank-appointed receivers, advised that due to the company’s financial circumstances, they could not honour outstanding gift cards or refund payments. Customers who purchased, or received a Dick Smith gift card could submit before the meeting a ‘proof of debt’ form, and register as an unsecured creditor. This is because consumers effectively lent money to Dick Smith through the purchase of gift cards, extended warranties and deposits. But they hold no form of security to protect their loan. Dick Smith’s customers must now wait their turn behind debts and claims that have priority, including employees and secured creditors. Rightfully, employees are afforded priority to recover money owed regarding wages and annual leave. Dick Smith’s 3300 employees are owed $15 million reflecting wage entitlements and annual leave. As a consequence of their low ranking, gift card holders will receive only a fraction, if any of the total value of their claim.
Administrator Joe Hayes of McGrathNicol explained that the receivers’ decision to not honour gift cards and deposits reflects the legal reality creditors face in many of these cases. McGrathNicol, however, declined to comment further on the position of unsecured creditors. Their appointment requires independence and as such, it would be inappropriate to comment on the issue as McGrathNicol would need to form views on creditor entitlements and adjudicate claims in the event of liquidation.
Practically, if customers purchased or received a Dick Smith gift card on credit, they should contact their banks immediately to determine their chargeback rights, and whether they can recover their money from the card issuer. Alternatively, Coles, Woolworths and Australian startup Preeze have agreed to exchange Dick Smith cards.
3. Where to Next?
Creditors and observers now eagerly anticipate the second, and more important, meeting of the creditors. During this meeting, creditors will decide on one of three potential outcomes including whether to return the company to Dick Smith’s directors, enter into a Deed of Company Arrangement or wind up the company. The intention of administration is to provide a better return to creditors than they would otherwise receive in liquidation.
Although McGrathNicol announced the second meeting would take place on the 9th February, this is unlikely to occur given the complexity of Dick Smith’s finances. An advertisement for a potential sale featured in newspapers on the 12th January with preliminary offers due by the 27th January. Receivers Ferrier Hodgson will shortlist the offers and complete due diligence on interested parties. McGrathNicol does not anticipate resolving the issues before the February deadline and intends to make an application for an extension of time.
Unfortunately, Dick Smith’s customers are likely to swallow a bitter pill. Neither administrators nor receivers have any legal obligation to honour the gift cards and they would need to be sure that doing so would result in a better position for the company’s creditors as a whole. If Dick Smith continued trading, honouring the gift cards could assist with stock reduction and rebuild consumer confidence in the brand. But again, this is all speculative until we fully understand the retailer’s financial position and the intention of any potential purchasers.
It is not uncommon for receivers to decide not to honour gift cards, or to modify their terms. In 2011, Ferrier Hodgson honoured gift cards for Borders and Angus & Robertson under updated terms where customers would have to accept that their redemption might be less than the initial price of the gift card.
The unexpected collapse of the electronics giant has borne discussion for reform to the treatment of gift card holders as unsecured creditors. Independent Senator for South Australia, Nick Xenophon, angered at the “inequitable and unreasonable” treatment of consumers suggests a three-limbed proposal. He intends to introduce legislative changes that establish a trust account for money from gift card sales and deposits, make directors of failed companies personally liable for their value, and give customers greater priority.
It remains, however, unclear how the legislation would work in practice. Elevating customers in the priority ranking would transfer welfare from one group of creditors to another. While establishing an escrow would necessarily reduce a company’s working capital when solvent, as well as the amount available to meet the claims of other creditors in the event of insolvency. Having directors personally liable for the collapse would also seem to negate the purpose of setting up a company as a separate legal entity. Importantly, it could deter skilled individuals from accepting a position as a director, and encourage risk-averse business decisions that in turn, may stifle innovation in Australia.
A better solution is to take steps to educate consumers about the rights and risks of gift cards. It is important they understand that they are, in effect, purchasing a set of terms and conditions that allows them to acquire goods and services from a retailer.
Dick Smith gift card holders should expect a minimum six-month wait to determine whether they can recover their money, which is unlikely. With $250 million of unsecured debt, and $140 million of secured debt creditors will watch closely as receivers try to secure a strong offer. In the meantime, if you are unsure what to buy your niece for her birthday, or an office Secret Santa, maybe just opt for cash.
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