The bankrupt franchisor

In the current time of economic downturn, bankruptcies of companies are the order of the day. Both franchisees and franchisors can be affected by bankruptcy. This contribution examines the consequences for franchisees of the bankruptcy of their franchisor.

If a franchisor goes bankrupt, this has immediate consequences for its franchisees. After all, consumers will have the impression that not only the franchisor, but also the franchisees are bankrupt. The consumer is usually not aware of the fact that there are no own branches of the franchisor, but of franchise establishments that are operated at the expense and risk of the franchisees. Franchisees must therefore communicate to the consumer as soon as possible that the bankruptcy of the franchisor does not mean that their establishment is also bankrupt. 

The bankruptcy also has consequences for the legal position of the franchisees vis-à-vis their (former) franchisor and the trustee charged with settling the bankruptcy. Contrary to popular belief, the bankruptcy of the franchisor does not automatically result in the termination of the franchise agreement. In principle, the franchise agreement also remains in effect after the bankruptcy. However, most franchise agreements do contain a termination provision which means that, in the event of bankruptcy, the franchise agreement can be terminated with immediate effect. If the franchisee wishes to make use of this, the franchise agreement must usually be terminated by registered letter. This letter should be addressed to the trustee. The trustee also has the authority to terminate the franchise agreement.

Before a franchisee proceeds to terminate the franchise agreement, he must be fully aware of the consequences of such termination. First of all, termination of the franchise agreement means the end of the franchise right, so that the franchisee is no longer allowed to continue to operate his franchise establishment under the name of the franchise formula and the associated image. Moreover, the (sub)lease agreement between the franchisor and franchisee is often linked to the duration of the franchise agreement.

If the link has been made correctly, the end of the franchise agreement also results in the end of the (sub)lease agreement and the franchisee cannot continue to operate his business in the leased property. In consultation with the curator and with the consent of the main lessor, the leased property may be used continuously. Finally, if such a clause is included in the franchise agreement, the non-competition clause that applies after the franchise agreement has expired will also remain in force. As a result, after termination of the franchise agreement in connection with the bankruptcy, the franchisee is still bound by the non-competition clause and may not operate a competing company in its location or area of ​​work. In certain cases, however, it may be contrary to reasonableness and fairness if the trustee invokes such a non-competition clause.

In summary, if the franchisor is declared bankrupt, the franchisees would be wise to assess (or have assessed) on the basis of the franchise agreement and the other agreements concluded, how the franchise formula can be discontinued and what the ( legal) consequences thereof.

Ludwig & Van Dam franchise attorneys, franchise legal advice