The bankrupt franchisor

In the penultimate contribution to this column, the phenomenon “Franchisor in difficulties, what to do?” discussed. Recently, unfortunately, another bankruptcy has been declared for a leading franchise organization in its industry. Following on from the penultimate contribution, it will therefore now be discussed; what to do if the bankruptcy is a fact?

The first days after the bankruptcy order are often decisive for the answer to the question of whether a restart is possible. Although all emotions on the side of both the bankrupt franchisor and the franchisees are usually, and understandably, still very high, it is good to realize that a bankruptcy can also herald a new beginning by shaking off old ballast. A collective and integrated approach together with the curator can then offer an opening for a solution. A strong franchise association can then provide good services.

Incidentally, a franchise agreement does not automatically end due to bankruptcy, at least not if nothing has been arranged in this regard in the franchise agreement. The franchisee must set a reasonable term in writing to the trustee within which the trustee must indicate whether he still wishes to comply with the franchise agreement. What is reasonable depends on the circumstances of the case. If the answer is yes, the trustee must also provide security for compliance. If there is no, or no positive, answer and/or insufficient security is provided, the franchise agreement may, in principle, be dissolved, i.e. if the failure to comply with it continues, and the franchisee may submit a claim for additional compensation. at the curator. Since that claim can only be paid if the preferential creditors have been paid, it is often not necessary to expect too much from that claim.

In addition, it is important to realize that due to the bankruptcy there is a wider power of settlement, so that it is sometimes worthwhile to submit a claim for that reason alone. For example, claims that are not yet due and payable and claims whose justification cannot be easily determined in advance can be settled (provisionally). However, a contractual exclusion from the set-off also remains in force in the bankruptcy. Such an appeal to set-off must also be made in writing, clearly indicating which claims and debts will be set off. If the claim for compensation is contested by the trustee, it will eventually have to be litigated, if it is worthwhile doing so.

If a collective restart scenario is not possible, the franchisee in subletting situations will have to assess for himself to what extent his company is still viable on its own or by joining another organisation. In subletting situations, it is also important to determine whether and under what conditions the main tenancy rights can be obtained. This may require intensive negotiations with the owner of the property and the trustee.

Finally, in the case of a restart, one should always realize that the bankruptcy in principle also leaves the post-contractual obligations, such as a non-competition clause, unaffected. After all, the trustee can retain an interest in the sale of the formula and thus retain the establishments. It is therefore not self-evident that a restart can be made without or with a competing organization. In this respect too, agreement must be reached with the trustee, or suspension and/or ineffectiveness of the post-contractual prohibition of non-competition must be claimed.

Ludwig & Van Dam franchise attorneys, franchise legal advice