Dick Smith’s worthless gift card sale

DICK Smith stores were selling customers soon-to-be worthless gift cards in the lead-up to Christmas, at the same time it was pulling the plug.

DICK Smith stores were selling customers soon-to-be worthless gift cards in the days before Christmas at the same time it was calling in the administrators.

McGrathNicol was brought in to “advise” the ailing company on December 23. The firm was officially appointed as administrator on January 4.

The electronics retailer went into receivership last week with debts of about $390 million, with receiver Ferrier Hodgson informing customers it would not honour gift cards.

“We were appointed on the 23rd of December,” McGrathNicol administrator Joe Hayes told media at the first meeting of creditors in Sydney today.

“In the circumstances it’s usual for a company to appoint an adviser when they’re facing cash constraints — that was only a short-term appointment.”

Asked whether it would have been helpful information for customers shopping for last-minute Christmas presents, Mr Hayes said it was “probably not an issue for me to speculate on”.

“The decision [not to honour gift cards and deposits] reflects the legal reality facing creditors in these cases, which is that the Corporations Act and insolvency procedures afford priority to certain classes of creditors like employees,” he said.

Mr Hayes earlier informed creditors that the ultimate fate of the retailer may not be known for up to six months, with the administrators to make a court application for more time to investigate what led to the company’s collapse.

Given the size and scope of the company, he said it would be impossible to complete the investigation by the current February 9 deadline.

He said it was also key to provide “stability” for the company as Ferrier Hodgson attempts to find a buyer. More than 45 expressions of interest have been made in the business ahead of a January 27 deadline.

Mr Hayes said “strong offers” would be needed in order to compensate all creditors. The company owes secured creditors around $140 million and unsecured creditors around $250 million, including the value of unredeemed gift cards.

Dick Smith’s administrators face creditors in Sydney on Thursday.

The company’s 3300 employees are owed an estimated $15 million in annual leave, long service leave and entitlements, but that figure excludes any redundancy payouts.

Mr Hayes said an initial “snapshot” of the business indicated Dick Smith currently has around $220 million worth of inventory, but said it was too early to say whether that would be written down.

Dick Smith’s dramatic share price plunge late last year was triggered by a series of profit downgrades and a $60 million writedown in the value of its inventory.

The 48-year-old company has 393 stores across Australia and New Zealand under four brands, Dick Smith, Electronics powered by Dick Smith, Move, and Move by Dick Smith.

The gift card debacle prompted independent Senator Nick Xenophon to call for urgent law reform to force external administrators like Ferrier Hodgson to honour gift cards, and make the directors of companies that collapse personally liable for the value of gift cards purchased or deposits paid for goods.

And he argued that funds used to purchase gift cards, or deposits paid for goods, should be required by law to be quarantined in a separate account, to be held in trust for the customer.

This would mean that the customer would always be able to get their money back in the event of a corporate collapse.

“The Dick Smith Holdings collapse highlights the lack of protection for consumers when it comes to gift cards and deposits paid,” Mr Xenophon said.

“These proposed reforms, which will be contained in legislation I will be introducing into the Senate next month, will finally give consumers the protection they deserve.

“The reforms, if passed, will also have the effect of strengthening consumer confidence in gift cards which has been shaken with this collapse.”

A number of competing retailers, including Coles, Woolworths and Kogan, have offered to redeem Dick Smith gift cards.

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