Out of business, out of pocket

When a business shutters, customers may be left scrambling for gift card repayment — something that may not come, experts say.

“If the company goes under, you probably won’t be able to get your money back practically,” said Dan Wootton, a partner with Grant Thornton LLP’s restructuring team. “We tell our people: ‘Hey, if you have gift cards, go use them.’”

The advice comes amid a rise in bankruptcies and insolvencies across the province. The federal government counted 3,681 Manitoba insolvencies under the Bankruptcy and Insolvency Act for the year ending Jan. 31.

The number is a 26 per cent jump from the previous year.

Tiber River and Celebrations Dinner Theatre — enterprises without apparent bankruptcy or insolvency records — left local clients questioning whether they’d be compensated for gift cards. Both businesses closed within the past year.

Tiber River’s practice to not accept gift cards online during its final days raised eyebrows — and questions of legality — among experts and customers.

Some questions and answers on the issue:

Will I get money back for my gift card if a company shuts down?

It depends.

Canadian gift card holders are unsecured creditors. They assume a lower priority than government (for unpaid taxes and payroll deductions) and secured creditors (such as banks). They also take a lower priority than other unsecured creditors (such as employees), according to John Graham, Retail Council of Canada director of government relations in the Prairies.

“It feels very unfair,” Graham wrote in an email.

However, prioritizing gift card repayment over employees or suppliers may jeopardize those businesses and individuals, Graham added.

Usually when a business closes, it doesn’t have enough money to pay all its creditors, both Graham and Wootton explained.

“There’s the legal right that money should be paid back,” Wootton said. “Then there’s the practical situation that if the company is wound up and there’s nothing available — well, you can’t get blood from a stone.”

Can I take action to pursue gift card repayment?

You can, but it’s often not worth doing alone, according to Wootton.

Hiring a lawyer over a $100 gift card will likely result in a loss of money for the complainant. A collective of people with a single lawyer representing them — similar to a class-action lawsuit — yields less costs to each consumer and shows a larger picture of what’s owed.

Sometimes, there’s a lot owed: Wootton has assisted a company that had $10 million in gift card liabilities when it was restructuring to limit financial harm.

Even with a group lawsuit, a win isn’t certain, Wootton added.

People who are informed their gift cards won’t be honoured can also contact the province’s consumer protection office.

“Generally, if a business has not declared bankruptcy or become insolvent or entered in creditor protection or is not in receivership, gift cards must be honoured,” a spokesperson for the Manitoba government wrote in a statement.

What if I can’t reach a company going out of business to get reimbursement for a gift card?

It isn’t illegal for a company to not respond to customers’ emails and phone calls, Wootton noted.

When a business shutters, it’s not paying its staff anymore. It isn’t fair to make someone return calls without receiving a paycheque, he said.

“Communication is a key factor,” Wootton continued, adding businesses should update their websites and voice mails to give customers important information.

Firms entering a formal bankruptcy proceeding are partnered with a bankruptcy or insolvency trustee. Later, they provide a report to creditors detailing the company’s assets and events leading to the bankruptcy, Wootton outlined.

The trustee would search for “suspicious” previous transactions, he said, and creditors would be able to ask questions at a meeting.

Some small businesses cease operations before reaching bankruptcy because of the cost involved, Wootton noted.

Why do businesses keep closing?

The reasons vary. Sectors involving non-discretionary spending — including some in retail — have been “getting into trouble” because of inflation and consumers closing their pocketbooks, Wootton said.

Many businesses are still recovering from increased debt and decreased income during the COVID-19 pandemic.

Did Tiber River operate illegally by not accepting gift cards online during its final days?

It’s unclear.

Several customers said they couldn’t use their gift cards online after the skin care product company closed its last Winnipeg storefront in April. Days later, the wellness firm announced it would close completely. It encouraged patrons to buy final stock on its website, until product ran out.

Meantime, customers with gift cards haven’t been reimbursed, nor have they received replies to their Tiber River queries, some impacted people told the Free Press on Tuesday.

Tiber River representatives did not answer Free Press questions about gift cards. Instead, president Michelle Lalonde wrote the company “ran out of options” while trying to secure funding to continue operating.

If the fine print on the gift cards read, at the time of purchase, the cards wouldn’t be accepted online, customers had agreed to the terms, Wootton stated. However, someone paid for the cards in question and are still owed that money, he added.

(None of the customers the Free Press contacted still had their gift card receipts.)

Companies have a duty of care to their shareholders in normal times, Wootton said. When businesses are technically insolvent, duty of care shifts to creditors.

“(Tiber River is) almost taking in a course of action that is contrary to the duty of care that they have to their creditors,” Wootton said, adding the company may have sought “fresh money” online while ignoring gift card holders.

“There could be a legal issue there.”

Can Celebrations Dinner Theatre reimburse ticket holders but not gift card recipients?

According to Wootton, no.

The Winnipeg entertainment company should not show preferential treatment to ticket holders over gift card recipients, he said. Instead, all customers should be reimbursed, even if it means nobody is fully repaid.

gabrielle.piche@winnipegfreepress.com