It is an unfortunate reality of business that companies fail. When this happens, it can affect a wide range of different parties and their ability to recover money they are owed.
Any company can be placed into receivership by one of its secured creditors if the company has defaulted on its obligations to that secured creditor. This process involves a secured creditor appointing someone to act as a receiver. Often the secured creditor will be a bank which holds security over company assets, such as a mortgage or General Security Agreement.
The receiver’s powers extend to the secured property. This means if there is a mortgage registered in favour of a bank (the bank being the secured party) over company land, that land is the secured property which the receiver has power to deal with. The receiver acts for the benefit of the secured party which appointed the receiver, and exercises its powers in the secured party’s best interests.
Once the receivership process has started, the operation of the company is significantly altered, and a number of parties can be affected. While a receiver only deals with company property over which the secured party holds security, in many cases it may be that the security extends to a large portion of, or even all of the company’s assets.
One potentially affected group are those people who hold gift vouchers. A gift voucher is essentially an unsecured loan, and the holder of a gift voucher is an unsecured creditor of the company. While the receiver must exercise its powers with reasonable regard to the interests of unsecured creditors (among other parties), its first priority is to the secured creditor.
If the receiver thinks that paying back, or entering into some sort of arrangement with unsecured creditors will jeopardise the secured creditor’s ability to be paid back, then the unsecured creditors may not be reimbursed.
The recent appointment of receivers of Dick Smith Holdings is a case in point. In this instance receivers were reportedly appointed by banks NAB and HSBC. The company’s receivers announced that outstanding gift vouchers will not be honoured and deposits will not be refunded, as those who hold gift vouchers and who have paid deposits for items are unsecured creditors for the purposes of the receivership.
As well as the appointment of receivers, the company has also been placed into voluntary administration, which is a separate process aimed at deciding the future of the company. Some companies “trade through” this difficult time and continue in one form or another after the voluntary administration period - a good example is Whitcoulls, which entered voluntary administration and put gift vouchers on hold in 2011. After administration was completed and the company in an acceptable financial position, the company was able to honour outstanding gift vouchers.