What happens when a franchisor goes into liquidation, do the franchisees have any rights?
Liquidation marks the “corporate death” of a company. After paying the costs and expenses of the liquidation, the liquidator will distribute the net proceeds realised from the company’s assets to creditors subject to a statutory order of priority.
A franchisee would not usually be owed monies by a franchisor, although where a national account business is operated a franchisee may be due credits from the franchisor. However, unless monies have been kept in a separate designated deposit account in the franchisee’s name, it is unlikely that the liquidator can pay them over. The franchisee would be left to lodge a claim for the monies as an unsecured creditor.
It is more likely that the franchisor, before the liquidation, withdrew support and failed to carry out marketing activities or supply stocks. Normally, a franchisee might claim damages for breach of the franchise agreement. However, on the liquidation of the franchisor the franchisee would be left seeking such a claim as an unsecured creditor. In many cases, there are insufficient funds available to pay unsecured creditors anything at all.
An interested party may seek to buy some or all of the assets of the franchisor. This could include the franchise network – the trade marks, property, stock and franchise agreements. This is more likely if the franchisor has entered into administration since the primary purpose of administration is to rescue the business. In these circumstances, franchisees would be advised to collectively try to persuade the liquidator or administrator to only to sell to a purchaser of their liking.
There is usually no contractual right for a franchisee to unilaterally terminate their franchise agreement on a franchisor’s liquidation. Indeed, any franchisee attempting this could be in breach of contract and the liquidator might seek to enforce a claim for damages. In many cases the liquidator will disclaim the agreement since the company will have ceased trading and be unable to fulfil its obligations. A liquidator may let franchisees buy themselves out of their agreements and take over properties if this will realise assets for the benefit of the company’s creditors. If a franchisee can afford to take these steps, it presents a good opportunity to continue their business (debranded) free from the constraints of the franchisor. If not, it is possible that their business will in turn fail.
Sheilah is a Senior Solicitor for Blake Lapthorn’s Commercial IP/ IT team and heads up the firm’s non-contentious franchising practice. She advises on the full range of issues faced by those in the sector including setting up and managing franchise networks, complying with relevant regulatory requirements, dealing with underperforming franchisees and extracting franchisees from networks and much more. For more specific help on any franchise legal issue, Sheilah can be contacted at Blake Lapthorn.