His master's voucher: HMV exposes the risks of holding gift certificates

PUBLISHED : Monday, 21 January, 2013, 12:00am
UPDATED : Tuesday, 22 January, 2013, 1:31pm

Recently Money Post wrote about the terrible value of gift vouchers ("Bottom of the deck", December 31). We were surprised, however, to see our views so quickly validated by news that music retailer HMV is under administration, a form of bankruptcy.

As reported, staff initially told customers they were no longer accepting HMV gift vouchers. The next day the Hong Kong company clarified its position and said vouchers were still redeemable.

The HMV situation affirms the flakiness of gift vouchers - you are trading one highly versatile, fungible instrument (money) for a certificate that is only redeemable at one place, is subject to expiration and - as HMV shows - carries default risk.

"Gift voucher holders are effectively unsecured creditors," says Randall Arthur, a Hong Kong lawyer with insolvency specialist law firm Gall. "When you buy a voucher you run the risk that the company may not be able to honour it if the company becomes insolvent."

When a company is wound up there is a hierarchy to creditors in terms of who gets paid first. As a rule, liquidators first take their fees followed by employees, Inland Revenue and secured creditors. Much further down the pecking order come holders of gift cards.

There may be disbursements during the liquidation but these can take many months. If the voucher expires before the liquidation start date, the holder's creditor claim goes with it.