Section 84.1 was recently added to the Bankruptcy and Insolvency Act (BIA) and negatively affects franchisors when their franchisees file for bankruptcy. Before s. 84.1 was enacted, a franchisor could prevent a trustee from selling a franchise. Ford Motors, a case from the Alberta Court of Appeal,confirmed that under s. 84.1 that a trustee in bankruptcy may sell a franchise to a third party, even if the franchisor objects to that sale. Trustees may now apply to the Court, satisfy certain requirements, and sell the franchise, regardless of objections by the franchisor.
Section 84.1 allows a trustee to assign the rights and obligations of a bankrupt to a third party if: (1) the proposed assignee is capable of performing the obligations, (2) the rights and obligations are assignable; and (3) it is appropriate to permit the assignment. Courts will focus on maximizing benefit to the creditors and preserving the value of the franchise, even if this compromises some of the franchisor’s contractual rights.
Going forward, franchisors need to do more than point to contractual requirements for consent to an assignment. Language in a franchise agreement describing the obligations as “personal” will not protect franchisors either because franchise agreements can be deemed to be standard commercial contracts and therefore assignable. Franchisors opposed to a transfer must prove to a Court why a proposed assignee is not capable of performing the obligations under the franchise agreement.
Facts of the Case
In January 2010, Ford Motor Company of Canada, Limited (Ford), the franchisor, discovered that the senior management of their franchisee, Welcome Ford Sales Ltd. (Welcome), had been misappropriating funds. Ford seized vehicles in the dealership and the dealership ceased operations. On May 19, 2010, Welcome was placed into bankruptcy, owing nearly $10 Million to various secured and unsecured creditors. Welcome’s trustee in bankruptcy (Trustee) sought to use s. 84.1 to obtain court approval for the sale of the Welcome franchise to a third party. Ford’s refusal to consent to the sale of the Welcome franchise did not prevent the Court of Queen’s Bench from granting an order authorizing the sale, even though Ford’s consent was required according to the dealership agreement (the Agreement).
The Court of Appeal upheld the lower court’s decision to approve the sale, even though approval of the sale compromised some of Ford’s contractual rights. The sale was approved as it maximized benefit to (secured and unsecured) creditors, enhanced the value of the Welcome franchise, and would not prejudice Ford’s ability to recover the secured collateral. Section 84.1 overruled Ford’s contractual right to prevent the Trustee from selling the franchise as the franchisee does not need the consent of the franchisor to make an application under this section of the BIA.
The purchaser of the Welcome franchise was capable of performing the obligations as he had a good track record of successfully managing other Ford dealerships and had received many national awards from Ford. Ford argued that the Agreement was a personal obligation and therefore not assignable by reason of its nature, but the Court disagreed and found that the Agreement was a standard commercial agreement that could be performed “by virtually any business person and entity with some capital and experience in automotive retailing”.
In determining that it was appropriate to permit the assignment, the Court found, inter alia, that Ford unreasonably withheld their consent to the assignment, that the assignment would remedy Welcome’s earlier breaches and that Ford would not be prejudiced by the assignment.