Sadly, in the case of insolvency, yes. Insolvency is when a company is unable to pay its debts as and when they fall due. When the directors believe their company is in this state it is their duty to apoint an administrator.
Dick Smith passed into external administration a few days ago. At that point all creditors (including people who have gift cards/paid deposits as well as suppliers and employees) are no longer entitled to payment except in accordance with the insolvency provisions of the Corporations Act.
From that date the administrator is responsible for any future debts but not anything in the past. The administrators have indicated that Dick Smith will continue trading while they look for a buyer of the business.
Let's assume (and these are purely hypothetical) that Dick Smith owes $50m, say $10m to employees (leave, severance, superannuation etc.), $20m to secured creditors (banks etc.) and $20m to unsecured creditors (including gift card holders and the tax office). If Ferrier Hodgson are successful in selling the business for say $36m then the money gets distributed like this:
- $1m (say) to the administrator for doing their job
- $10m to employees
- $20m to secured creditors
- $5m to unsecured creditors or 25c in the dollar.
This would be an extremely good result for unsecured creditors. A far more likely outcome is nothing or fractions of cents in the dollar.
Of course, this dividend, if it comes, will be 2-5 years from now and only to people who have proven their debt.
The moral is: don't lend money to people who can't pay it back. Oh yeah, buying a gift card is lending money, didn't you know?