Dick Smith, the iconic Australian electronics store, has recently gone into receivership after consistently falling short of its sales expectations. Poor performance and failing financial health led its banks to refuse finance for additional stock, leaving the company with no choice but to find another source of cash flow to try and resolve its existing debts.

Dick Smith’s receivership has impacted consumers as its receiver’s refuse to honour gift cards or existing deposits. Consequently, all consumers who purchased gift cards or made deposits now join a large group of unsecured creditors, including Dick Smith employees, who are hoping to receive some of what they are owed.

What is an Unsecured Creditor?

An unsecured creditor is a person or business who is owed money, whether it be for providing goods, services or financial support, but does not have a form of security against payment. The classic example of a secured creditor would be a bank which has lent money to a homebuyer (i.e. a mortgage). The bank uses the house as security by registering an interest in its title, to offset the risk of loaning money. This means that if the homebuyer is unable to pay the amount required by their agreement, the bank can sell the house and use the proceeds to settle the debt. Secured creditors have priority over unsecured creditors in claiming any property or goods. This means unsecured creditors must wait for secured creditors to be paid first, even if unsecured creditors have money owed by the company.

Where are Consumers in the Creditor Pecking Order?

In this case, consumers lent money to Dick Smith, by purchasing gift cards or making deposits, but hold no form of security to protect their ‘loan’. The consequence being that they must wait in line behind all secured creditors who will use their security to minimise their losses. Consumers must also wait their turn behind debts and claims that have priority under section 556 of the Corporations Act 2001. Unsecured creditors with priority include receivers/liquidators and employees who may be owed wages, superannuation and other entitlements.

Generally, all an unsecured creditor can do is wait until all the secured assets are reacquired or sold off and hope that there will be some leftovers that can be distributed. However, some consumers may be in a slightly more fortunate position depending on how they purchased the gift cards.

What can Consumers do?

The Australian Competition and Consumer Commission (ACCC) has indicated that it may investigate a 10% bonus that was offered to Dick Smith gift card purchasers during the lead up to Christmas. If the investigation does go ahead, it will likely be too little too late for most consumers caught up in the current mess.

In the meantime, if you purchased a gift card or paid a deposit on credit then you may be able to request a chargeback from your credit provider. The period and circumstances in which you may request a chargeback will vary depending on your financial institution, but it is prudent to contact them as soon as possible.

Alternatively, if you bought your gift card through Australian online startup Prezzee, they are offering to swap the value of the Dick Smith card for another store on their platform.

What Happens from Here?

While Dick Smith’s remains are picked apart, and unsecured creditors wait to see if they’ll get any money back, there may be a move away from gift cards as other Australians avoid the risk of being stung.

Although receivership is relatively uncommon in larger retailers, the case of Dick Smith does act as an unfortunate warning to consumers, and business owners, about the risks of becoming an unsecured creditor.

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