(Im)possibilities in case of bankruptcy

The past few years have been a period with a particularly low number of bankruptcies. However, unexpected events – such as the corona pandemic or a (deep) (recession) – can lead to companies finding themselves in financial difficulty. Franchisors and franchisees are just as likely to run the risk of bankruptcy as entrepreneurs who do not operate a franchise formula. In the event of a franchisee or franchisor going bankrupt, the franchise agreement(s) will often be the main source of legal discussion.

In this article I will discuss the question of whether a franchise agreement continues during a bankruptcy, and if so, what the consequences are and how this can be prevented.

FRANCHISE AGREEMENT CONTINUES

A misconception is the idea that declaring bankruptcy will automatically end the franchise agreement for the franchisor or franchisee. The main rule is that continuing performance agreements – and that is a franchise agreement – ​​continue to exist. The agreements in a franchise agreement also remain in force during a bankruptcy and the parties must therefore continue to fulfill their obligations under the franchise agreement.

DISCUSSION WITH THE CURATOR

An important nuance to this principle is that the trustee has the authority to choose whether or not to fulfill the bankrupt’s obligations under a reciprocal agreement concluded before bankruptcy (in this case the franchise agreement). The curator will of course choose to comply with the agreement if this is in the interest of the estate. However, the other party to the curator in this case, the franchisee or the franchisor (“the creditor”) does not have that authority and can be forced by the curator to comply, even if this is not in the interest of the creditor.

The curator’s power of choice is not unlimited. Under the Bankruptcy Act (Article 37 Bankruptcy Act), the creditor can request the trustee within a reasonable period to indicate whether he will comply with the franchise agreement. Regarding the reasonable period, the bankruptcy law previously stipulated that this had to be requested within a period of eight days. This fixed term is no longer included in the law, but in practice it is often used to implement that concept. If the creditor exceeds the aforementioned period, his rights under Article 37 Fw will in principle lapse.

If the curator does not respond or does not respond in a timely manner to the creditor’s request under Article 37 of the Bankruptcy Code, he may no longer demand compliance with the franchise agreement during the bankruptcy. In addition, this situation then (in any case) offers the creditor the opportunity to terminate the franchise agreement (pursuant to Article 6:265 of the Dutch Civil Code) and to submit claims for damages to the curator.

If the curator indicates that he wishes to comply with the franchise agreement, he must provide security – for example via a bank guarantee – so that (for example) the creditor is assured that he will receive payment from the curator.

In short, in the event of bankruptcy, the franchisor or franchisee must take quick action to obtain clarity about the status of the franchise agreement. If not, there is a risk that rights will lapse, leaving fewer options to secure rights.

PREVENTION OF DISCUSSION

Parties can largely avoid the above discussion by including agreements in the franchise agreement regarding termination in the event of bankruptcy. For example, the franchise agreement can include that it can be terminated immediately in the event of bankruptcy. The concept of termination, unlike that of dissolution, is not regulated by law. While dissolution sometimes gives rise to complex obligations to undo, these do not apply in the event of termination. If cancellation is made in accordance with the agreements, the parties are in principle separated from each other. Through a termination provision, parties in a bankruptcy situation can therefore say goodbye to each other more easily than if the main rules of the (bankruptcy) law were followed.

In this context, many franchise agreements often state that they can be terminated in the event of bankruptcy. However, such a provision is meaningless, because the law already has the power to dissolve. Contrary to what the parties often intend, such a provision does not create the possibility of terminating the franchise agreement. On balance, the creditor runs the risk of the aforementioned possible discussion(s) with the trustee. After all, the franchise agreement continues in principle.

In short, it is important for both franchisor and franchisee to take this into account when drawing up a franchise agreement, so that in the unlikely event of bankruptcy they are not faced with difficult discussions with the curator.

These are not the only discussions that can arise in a bankruptcy situation. For example, discussions may also arise about the (post) contractual non-compete clause in the franchise agreement. I will return to this discussion and possible other discussions in my next contribution.