With REDgroup administrators, Ferrier Hodgson, desperately searching for a buyer for REDgroup's Australian book business, the consequences for franchisees remains uncertain.  Whilst the nine remaining Borders bookstores are set to close, no decision has yet been made on the future of Angus & Robertson (A&R).

In April of this year, 25 A&R stores sought to break away from REDgroup by terminating their franchise agreements and trading as independent book retailers.  The franchisees sought to terminate on the basis that the franchisor was failing to provide services including advertising and management advice. Administrators, Ferrier Hodgson responded with legal action which resulted in the breakaway franchisees reluctantly agreeing to continue trading as franchised stores.

Despite this turnaround, it is interesting to consider what kind of an impact it would have had on the franchising sector if the franchisees continued their legal battle and won.  If the Court found that the administrators had failed to fulfil the role of the franchisor under the franchise agreements, it would have a dramatic impact on the franchising legal landscape.

The Franchising Code of Conduct provides a right for the franchisor to immediately terminate the franchise agreement if the franchisee becomes bankrupt, insolvent, under administration or an externally-administered body corporate. This right, however, is not reciprocal. This result is to allow our administrator to sell the franchise network to a buyer in its entirety - not in parts if a franchisor was insolvent.  Otherwise, creditors are at more risk of not recovering any money from their investment. The obvious flow on effect then would be that banks would become very reluctant to lend to franchisors if there was a real risk that the franchisees would be able to get out of their franchise agreement due to actions or inaction of administrators.

Our recommendation for franchisors is to review your franchise agreements to ensure that any obligations you have to assist the franchisees are easily capable of being fulfilled by a third party such as an administrator.  This will strengthen your relationship with your bank as it will provide them with more comfort that their investment is protected.