Challenges that Franchisees of Insolvent Franchisors Pose for Liquidators

Abstract

Franchising is a business model based on contracts between a franchisor and its franchisees. Like any commercial entity, a franchisor might become insolvent. The interests of franchisees whose franchisor becomes insolvent raises particular issues for insolvency law and policy. The current approach of Australian insolvency law of casting the franchisee as simply a party to a contract fails to acknowledge the roles the franchisee occupies in the franchisor's business. How an insolvency administrator deals with an insolvent franchisor can determine whether the interests of the franchisees are preserved, or fail altogether. This roles and rights of franchisees in the franchisor's solvent business are identified. The franchisees' status in the franchisor's insolvency is examined and the nature and extent of their claims are identified. The responses of insolvency law are examined in terms of issues that liquidators and administrators need to take into account in dealing with the insolvency of a franchisor. Some avenues for reform are addressed.

Keywords: franchisor bankrupt, franchisor insolvent, administrator, liquidator, franchisees' role, franchise law, insolvency law

JEL Classification: G33, K12, K19