The bankruptcy of a franchisor: end of the franchisee’s right of action?

Although fortunately sporadic in itself, it does happen that franchise organizations go bankrupt. In most cases, this has quite a few consequences for all parties involved in that organization, in particular the franchisees. It goes too far to discuss all these consequences here. Here we consider the question of what the situation is with regard to mutual rights of claim. A somewhat turbulent period often precedes the bankruptcy of a franchisor. This can have a negative impact on the business of both the franchisor and the franchisees, resulting in claims from the franchisor against the franchisees, for example for unpaid fees and deliveries. Conversely, in such a period, claims often arise from the franchisee’s side against the franchisor due to possible attributable shortcomings in the fulfillment of the franchise agreement: a bankrupt franchisor often no longer pays too much attention to the ins and outs of the franchise organisation.

What about the rights of claim arising from that period? This question is particularly important for a franchisee. It is precisely in bankruptcy that the saying applies that it is difficult to pluck a bald chicken. On the other hand, after the bankruptcy, the trustee collects all outstanding claims of the bankrupt on behalf of the joint creditors. The situation thus arises that the franchisee can no longer enforce his alleged claim against the franchisor as a result of the bankruptcy, and can at most still submit it to the trustee for verification, since he will often only be an unsecured creditor, and on the other hand the trustee will have the collect outstanding claims of the franchisor against the franchisee concerned. A partial solution to this inequality lies in the means of set-off: it is possible, with the consent of the trustee, and if this cannot be obtained, if necessary in court, to set off the franchisor’s claims against the alleged claims of the franchisee against the franchisor, provided that it concerns claims that all date from before the moment of bankruptcy. In this way it can at least be achieved that the franchisee no longer has to pay to (the receiver of) his bankrupt franchisor. Whether the franchisee receives any payment for the remainder of his alleged claim against the franchisor depends primarily of course on the state of the estate. Unfortunately, unsecured creditors often receive nothing. 

On the franchisor’s side, reasoning the other way around, it should therefore be taken into account that the franchisee will invoke this settlement option. Franchisees leave debts unpaid for a long period of time, which can cost a lot. It is true, as already follows from the above, that the possibility of set-off does not exist a priori: this requires either the consent of the trustee in bankruptcy or a judicial decision, since it often concerns directly payable claims of the franchisor under of outstanding invoices, versus claims for damages on the part of the franchisee that are not immediately due and payable. In any case, the instrument of set-off in bankruptcy situations is of great importance to all parties involved.

Ludwig & Van Dam franchise attorneys, franchise legal advice