The recent announcement of the administration of the Australian Master Licensee for Carl’s Junior has made the topic of franchisors going into liquidation very relevant. Understanding what happens when your franchisor goes into liquidation is crucial for franchisees. This article will cover the status of a company in liquidation, the importance of the terms of the franchise agreement, standard terms in these agreements, notification requirements, and the steps franchisees should take.
The Status of a Company in Liquidation Generally
When a company goes into liquidation, it means that it is unable to pay its debts and must wind up its affairs. A liquidator is appointed to take control of the company, sell its assets, and distribute the proceeds to creditors. The liquidator has the right to terminate, continue, or renegotiate ongoing contracts. This includes franchise agreements. Franchisees must understand that the liquidator’s primary role is to maximize returns for creditors, which may involve significant changes to existing agreements.
Accordingly, if your Franchisor does not operate as a Master Franchisee themselves, the fate of your business will largely be in the hands of the liquidator. The liquidator may choose to terminate the agreement, or even sell the entire network. In the latter circumstance, your franchise agreement would be transferred to a new franchisor.
The Importance of the Terms of the Franchise Agreement
The terms of your franchise agreement, including, where applicable, both the master agreement and the sub-agreement, play a crucial role in what happens during liquidation. The master agreement governs the relationship between the master licensee and the franchisor, while the sub-agreement governs the relationship between the franchisee and the master franchisee. These agreements typically outline the rights and obligations of each party in the event of liquidation. Franchisees should review these documents carefully to understand their rights and any potential changes that could occur. Usually, on the liquidation of a Master Franchisee, the franchise agreements will be assigned or novated to the Master Franchisee, should the Master Franchisee elect. This means your franchisor may become an overseas entity.
Standard Terms of a Franchise Agreement
Standard terms in franchise agreements often allow the franchisor to assign or novate the agreement at will. In the context of liquidation, a standard term of a master agreement is that if the master licensee goes into liquidation, all third-party agreements entered into by the master licensee can be novated at will to the master licensor. This means that the franchisor can take over these agreements without needing further consent from the franchisees. In the case of Carl’s Junior, it is likely that the master licensor will take over the agreements held by the Australian Master Licensee. This process helps ensure continuity for franchisees, but it is essential to confirm this with the liquidator.
Notification to Franchisees
According to the Franchising Code of Conduct, the liquidation of a master licensee is a circumstance that requires notification to franchisees. This notification should provide detailed information. Franchisees should read these notifications carefully and seek clarification if needed. This transparency helps franchisees understand what is happening and what steps they need to take.
Steps for Franchisees
Franchisees should take proactive steps when their franchisor goes into liquidation. First, they should contact the liquidator and any master franchisor to understand the situation. A franchise lawyer can assist in interpreting the terms of the franchise agreement and any communications from the liquidator. Until franchisees receive specific instructions or updates, they should continue to operate their business as usual to avoid breaching the franchise agreement. This approach ensures that they meet their obligations while gaining a clear understanding of any changes that might occur.
Franchisees should also keep detailed records of all communications and transactions during this period. This documentation can be helpful if disputes arise later. Additionally, franchisees should stay in touch with other franchisees in the network to share information and support each other during the transition.
Conclusion
The liquidation of a franchisor can be a challenging and uncertain time for franchisees. However, understanding the process and taking proactive steps can help mitigate potential issues. Franchisees should familiarize themselves with the terms of their franchise agreements. They should also stay informed through notifications, and seek guidance from a franchise lawyer. By doing so, they can navigate the liquidation process more effectively and ensure that their business operations continue smoothly. The situation with Carl’s Junior highlights the importance of being prepared and informed when a franchisor goes into liquidation. Franchisees should remain vigilant and proactive to protect their interests and maintain business continuity.