House of Fraser, the struggling UK department store has gone into administration but is to be acquired by billionaire Mike Ashley, the owner of Sports Direct. There are regulatory difficulties with his acquisition of the Dundrum branch at the moment, but it is anticipated that the entire group including Dundrum will be fully operational in good time to capitalise on the Christmas market.

However, what does this mean for customers with unused gift cards?

In an examinership (which is almost identical to the administration process in the UK), a company obtains court protection from its creditors for a period of at least 70 days (the “Protection Period”).

The effect of this is that during the Protection Period, creditors may not take steps to recover any outstanding debts.

Also during the Protection Period the examiner will assess the viability of the business and attempt to identify an investor to ensure the survival of the company.

The plan for the survival of the company is presented in what is known as a Scheme of Arrangement (the “Scheme”). The Scheme is essentially a proposal whereby creditors are offered a percentage of their debt which varies depending on what class they fall into. The debts are assessed at the date of the commencement of the examinership. While this may seem harsh, it is often better to receive a portion of the debt (and have a continued business relationship with the company) than the alternative, which is usually liquidation where creditors often receive nothing at all.

Creditors fall into a number of classes and those classes are often treated differently – secured creditors, preferential creditors and unsecured creditors are the three principle categories although there are often more. Unsecured creditors are usually the worst affected in such situations.

Those in possession of gift cards are effectively unsecured creditors of House of Fraser and are therefore likely to only recover a fraction, if any, of the value of the gift cards in the Scheme.

EY, who are the administrators appointed to House of Fraser in the UK, are encouraging shoppers to hold onto their gift cards as they may be required to submit claims in the administration. If the administration succeeds and the Scheme is accepted by the Court, there may some redemption value for customers in relation to their gift cards.

However, this is unlikely to be more than a tenth of the value of the gift card.