Franchisees are often unable to fulfil their payment obligations and, in such cases, their debts quickly accumulate.
The special cooperative relationship between a franchisor and its franchisee usually leads to negotiations and contractual agreements between the parties regarding the repayment of the accumulated debts. In some cases, such agreements might be insufficient and the franchisee may still become insolvent.
A key question is whether showing leniency in the context of insolvency proceedings will be beneficial or detrimental to a franchisor. A distinction is made below with regard to whether the franchisee files a request for insolvency or seeks protection from its creditors.
To reorganise its business, a franchisee can seek protection from its creditors by virtue of the Business Continuity Act 2009. If the franchisee produces the required legal documents, this request is likely to succeed.
The protection period can be extended for up to 18 or, in certain cases, 24 months. During this time, the franchisee must establish a reorganisation plan, which must be accepted by the majority of its creditors and the court. The reorganisation plan must explain, among others things, how and under which timeframe the franchisee will reimburse its existing outstanding debts. Within certain legal parameters, the franchisee can divide its creditors into categories and offer different levels of repayment to each category.
During the protection period, creditors can no longer force the recovery of their existing claims. However, a franchisee is not protected against new debts that it incurs (eg, in carrying out its obligations under the franchise agreement) after protection has been granted. The franchisee can also suspend the performance of some agreements if doing so is necessary for its recovery. It is unlikely that a franchisee would suspend the performance of the franchise agreement itself, as this would make any continuity impossible.
Alternatively, a franchisee can voluntarily pay its outstanding debts if such repayments are required to ensure its continuity. If the franchisor complies with the appropriate legal requirements, it can dissolve a franchise agreement due to the franchisee's refusal to pay. The special status afforded to the franchisee by the franchise agreement – together with the franchisor's power to end the agreement – could lead the franchisee to pay the outstanding existing debts voluntarily (at least to the extent possible).
Claims relating to goods that have been delivered with a valid retention-of-title clause do not, in principle, receive a haircut. In any case, negotiations between the franchisor and franchisee are once again deemed to be appropriate.
Following a franchisee's insolvency, the franchisor can submit to the receiver a declaration of debt for the remainder of its outstanding claim. If the franchisor is not in a position to invoke a privilege or security, the recovery of any amount is unlikely. However, debts that are incurred during the franchisee's protection period under the Business Continuity Act must be prioritised.
An instalment agreement concluded before a franchisee's insolvency remains valid, in principle, and can thus be used against the receiver. However, the receiver will discontinue the performance of the agreement. In accordance with the agreed contractual reimbursement schedule, instalments of outstanding debts which were paid by the franchisee before the insolvency remain with the franchisor.
To the extent that the court considers that the franchisee had ceased its payments before the date of the insolvency, it can set the cessation of payments date up to six months before the opening date. This period before the insolvency is referred to as the 'suspect period'. All agreements concluded or performed during the suspect period will be carefully examined by the receiver. The receiver can challenge the instalments paid during the suspect period and thus claim reimbursement thereof. If the court accepts the receiver's claim, the franchisor must return all payments that it received from the franchisee during the suspect period.
For such a claim to succeed, the receiver must, in the first instance, show that the franchisee and the franchisor, by concluding or performing an instalment agreement, disadvantaged the other creditors – for example, if the result of the instalment agreement is that all immediate proceeds from the performance of the franchise agreement go to the franchisor and, as such, nothing remains with which to pay additional debts. In such a way, a benefit is created for the franchisor, while the other creditors are disadvantaged.
Further, the receiver must demonstrate that the franchisor was aware (or should have been aware) that the franchisee ceased its payments. The receiver can find such evidence in the instalment agreement or the information made available to the franchisor by the franchisee in the context of their cooperation.
However, a claim from the receiver for repayment will not succeed if the payment of the outstanding debts occurred during the franchisee's protection period. The Business Continuity Act explicitly excludes that voluntary payments made in the course of the protection period are, after insolvency, challenged on this basis by the receiver.
It is important to assess a franchisee's existing and future situation regarding payment difficulties as much as possible and, on encountering problems, timely and appropriate interventions will be needed to increase the franchisor's options to recover its claims. However, franchisors must be careful not to abuse their position of economic dominance over their franchisees.
For further information on this topic please contact Bart Heynickx or Alexander Hansebout at ALTIUS by telephone (+32 2 426 1414) or email (email@example.com or firstname.lastname@example.org). The ALTIUS website can be accessed at www.altius.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.