Two reforms proposed in a recent report to the Commonwealth Government are directly concerned with financial distress of franchisors, and one of those recommendations has the potential to be contentious for the insolvency and turnaround industry.

The report, commissioned by the Commonwealth Government and released on 17 May 2013, makes 18 recommendations for changes to the Commonwealth Franchising Code of Conduct (Code). The Government's response is expected shortly, with any changes to the Code likely to commence later this year.

Relevant to insolvency and turnaround professionals, the report made two key recommendations:

  • The Code provide both franchisee and franchisor with a right to terminate the franchise if an administrator is appointed to the other party. That right, however, may only be exercised if the administrator does not turn the business around or find a buyer for the franchise system within a reasonable period of time.
  • Any franchise fee paid up front by the franchisee be apportioned across the franchise term, with an amount referable to the unexpired portion of the franchise agreement to be an admissible, unsecured debt owed to the franchisee (should the franchise end due to the franchisor's insolvency). This recommendation is relatively uncontroversial.

The first recommendation flirts with the American bankruptcy concept of preventing counterparties from relying on ipso facto clauses in the context of a corporate rescue attempt. There are many well-worn arguments in favour of and against that concept; however its adoption would be a major development for Australian insolvency law. The Commonwealth's reaction to the recommendation will need to be monitored by the insolvency and turnaround industry.