If you run a franchise through a limited company, there may come a time when you want to close the business and explore a new venture. This can be accomplished through a liquidation process, whether a CVL or an MVL, depending on the company’s liquidity at the time of closure, and the termination clauses within the franchise agreement.
While liquidating a franchise can be considerably more complicated than closing down a conventional limited company, the good news is that it is possible to get out of a franchise. In UK insolvency law (which frequently exceeds the terms of a franchise agreement), the Insolvency Act of 1986 stipulates that in formal insolvency proceedings, the office-holder can cancel ‘onerous contracts,’ which may include a franchise agreement.
Franchise liquidation and the duty of the liquidator
In an insolvent liquidation, the office holder’s primary responsibility is to collect and recover assets, as well as appraise the company’s liabilities. Because a franchise agreement requires the payment of fees and other charges to a franchisor, the liquidator is entitled to treat it as a liability rather than an asset, even though the firm would not exist without the franchisor.
If the liquidator finds that this is the case, the franchise agreement is deemed an ‘onerous contract’ and may be disclaimed under UK insolvency law.
Onerous contracts
A liquidator has the authority to terminate “onerous contracts,” according to Section 178 of the Insolvency Act of 1986. These can include franchise agreements, even if the agreement does not state that termination is immediate in the event of franchisee insolvency, a clause might still apply.
The ability of a liquidator to act in this way assists in the winding up and closing of a corporation during liquidation. When a contract is terminated by the liquidator, the franchisor becomes an unsecured creditor for any fees, charges, or other obligations payable to them under the original contract.
We can assist directors with a franchise business
Many of the most well-known names on our streets, from restaurants and coffee shops to convenience stores and driving schools, operate under franchise agreements, which may include a privacy policy and specific termination clauses. When a company director is facing insolvency, McLaren Insolvency Practitioners has the experience and know-how to assist them with any franchise agreement, including:
- McDonald’s
- KFC
- Papa John’s
- CeX Stores
- Subway
- Pret
- Costa Coffee
- RED Driving School
A franchise agreement involves leased premises
A franchisor normally owns the head lease for the facilities occupied by their franchisees, which are considered company assets. The premises are then subleased, and if a franchisee falls insolvent, the holder of the head lease is likely to be held liable for rent arrears.
This permits the liquidator to reduce the insolvent company’s expenses while increasing creditor returns. Unfortunately, this condition might lead to financial troubles for the franchisor, especially if more than one franchisee has faced financial difficulties.
So, what if the franchisor is facing liquidation?
Franchisee options when a franchisor is liquidated
When a franchisor becomes bankrupt and must be liquidated, franchisees have a number of concerns. One of these concerns the intellectual property, such as trademarks, designs, and other artistic works, around which the franchisee business is constructed.
The liquidator will identify intellectual property as a major corporate asset and sell it for the benefit of creditors, but the franchisees may opt to band together to purchase the intellectual property themselves.
Other concerns include the ownership and usage of tangible assets like machinery and equipment. Given the particular relationship between the two parties, a company’s insolvency and subsequent liquidation in a franchise agreement can be a complex matter involving multiple clauses.
We can assist you in determining your company’s financial status and deciding on the best course of action. If you require additional information on company liquidation in a franchise agreement, McLaren Insolvency Practitioners will provide practical help and assistance.
We can assist you in determining your company’s financial status and deciding on the best course of action. If you require additional information on company liquidation in a franchise agreement, McLaren Insolvency Practitioners will provide practical help and assistance.
