Insolvency in Franchise: Is it as good for the Goose as it is for the Gander

It is incredibly common, almost boilerplate, for any franchise agreement to contain a clause that deals with the rights and obligations of parties when a franchisee goes into external administration (liquidations, receivership or administration).

Of concern is that virtually no agreement talks about parties’ rights and responsibilities when a franchisor goes into external administration.

Historically speaking it was such a rare thing to see a franchisor collapse, it is much more likely to see a small business like a franchisee go down. After all, franchisors are normally pretty big operators with established enterprises which then get up-scaled, systemised and franchised.
How could they fail?

But in truth, the last ten years has seen a significant number of franchisors collapse under the weight of external market pressures, internal management issues and other factors. The last decade has also seen an explosion of small businesses, not all of whom are ready for the rigours and stresses that comes with franchising a business, trying to cash in on the structure.

Businesses like Pets Paradise, Billy Baxters, New York Pizza and Pie Face all succumbed to these pressures.

But all of these situations left franchisees wondering what happens to them now. Liquidators and receivers view the franchisees as a saleable asset of the business and one they hope to realise with potential sales of the franchise structure, but who is looking after the franchisees in the meantime?

And what if there is no sale?

A franchise agreement is a contract, and for a contract to remain alive the parties in it have to be ready willing and able to fulfil their obligations to the other. If that’s not possible for any reason, the contract may be deemed repudiated or frustrated depending on the circumstances and may be capable of termination, but this will depend on specific circumstances in each case. The problem with franchise business and insolvency are that they are as individual as the products and services they sell.

If you are a franchisee, who is in a situation where your franchisor has gone into external administration you should get advice as soon as possible about your position, rights and options moving forward.

You may benefit from the sale of the franchise to a better-prepared franchisor or maybe, if possible, you might do better with your business on your own.

Authors

Spencer Slasberg is a Senior Associate at Bennett & Philp Lawyers

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