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What are a brand's key rights and responsibilities when a franchisee, distributor or licensee enters an insolvency process?

Our international lawyers outline and articulate a comparative analysis across Germany, Ireland, Italy, Spain, The Netherlands and the UK and answer eight key and basic questions below:

1    Can I terminate a franchisee for entering into insolvency proceedings (in the event that the agreement does not contain an ipso facto clause or, if it did, such clause would not be valid), or pre-emptively terminate them if I know an insolvency practitioner is about to be appointed?

This depends on what is stipulated in the agreement and the circumstances of the case.
In principle, the franchise agreement remains in force in the period leading up to and even during insolvency proceedings. Neither the filing for nor the opening of insolvency proceedings leads according to German law automatically to a termination of such a contract. This applies accordingly to so-called protective shield proceedings (Schutzschirmverfahren).

Depending on the terms of the agreement, the franchisor's termination rights might be limited to some extent. Clauses in agreements which lead to a termination right or an automatic termination of the agreement in the event of insolvency and which circumvent the statutory protection provisions may be invalid. However, a termination with future effect may be possible for other reasons, e.g. if the franchisee defaults on its contractual obligations that arose after the application was made.

2    Am I obliged to continue to supply a franchisee that is in insolvency proceedings? How does this process affect my contractual rights?

Unless otherwise agreed, the franchise agreement remains in force during the insolvency proceedings. As a consequence, the franchisor is obliged to continue to supply the franchisee, but only if the insolvency practitioner (on behalf of the bankrupt estate) fulfils the franchisee's obligations under the agreement as well. Otherwise, the franchisor may withhold delivery for the time being.

The franchisor may ask the insolvency practitioner to indicate within a reasonable time whether he is willing to honour the agreement. If the insolvency practitioner does not positively respond (in a timely manner), he may no longer claim fulfilment of the agreement. If the insolvency practitioner does declare himself willing to honour the agreement, the corresponding purchase price claims of the franchisor for the goods still to be delivered become so-called debts of the insolvency assets (Masseverbindlichkeiten), meaning that they are to be satisfied with priority over all other claims.

3    Can I retrieve products for which the franchisee has not yet paid? If so, how and when?

This depends, inter alia, on whether the franchisor has established or retained a security right over the products, such as a right of pledge or retention of title. Without such a security right, delivered goods cannot be reclaimed in principle. In this case, the franchisor can only register its claim in the insolvency table and will be satisfied equally with the other unsecured insolvency creditors.

The right of pledge is a security right with which a property or claim can be encumbered. With this right, the franchisor is entitled to recover its claim against the franchisee with preference over other creditors from the proceeds of realisation of the pledged products.

The effect of a retention of title is, in principle, that the franchisor retains ownership of the products delivered until the franchisee has paid for them. Depending on the type of retention of title agreed upon ("simple retention of title", "extended retention of title" and "prolonged retention of title") the franchisor can either demand the surrender of the goods or at least obtain a so-called separation right (Absonderungsrecht) and is therefore satisfied with priority from the proceeds obtained from the realisation of the goods.

4    Does a post contractual non-compete clause remain in force after the franchise agreement has ended by or because of insolvency proceedings?

The termination of the franchise agreement and the insolvency of the franchisee do not necessarily bring an end to a non-compete clause, which is ordinarily meant to remain in force after termination or expiration of the agreement. Hence, in principle, the franchisor may invoke the non-compete clause against the franchisee and/or its insolvency practitioner in bankruptcy. Whether the franchisor or the insolvency administrator may terminate the post-contractual non-competition clause is a question of the individual case and depends on what is agreed in the agreement.

5    Is the franchisee entitled to goodwill in case of termination of the agreement and if so, does this still apply in an insolvency situation?

The agreement may contain specific provisions on claims to goodwill and their calculation. Otherwise, under German law, the franchisee is only entitled to goodwill in certain cases when the agreement ends. If such claims arise, they may be asserted by the insolvency administrator against the franchisor.

6    A franchisee is in financial difficulties and is going to sell its business (as an asset sale) to a new franchisee. Do I have any legal duty to the purchasing franchisee?

In principle, no, as the franchisor does not have a contractual relationship with the purchaser. If the franchisee wants to transfer its legal relationship (all rights and obligations) with the franchisor to a third party, this requires, in general, the cooperation of the franchisor.

7    A third party wishes to buy the franchisee's business from the insolvency practitioner - to what extent do my contractual rights to approve the sale, if any, clash with the insolvency practitioner's duty to realise value for franchisee's creditors?

This depends on what the franchise agreement stipulates regarding the right of approval, for example, whether approval may be refused if the purchasing franchisee is not equivalent to the bankrupt franchisee. Basic rule is if nothing else has been agreed- that a party to an agreement may not assign its legal relationship with the counterparty to a third party without the cooperation of this counterparty, and the counterparty (in this example: the franchisor) is, in principle, not obligated to cooperate. So, even though it is the duty of the insolvency practitioner to create as much value as possible for the creditors of the bankrupt franchisee when selling the business to a third party, the insolvency practitioner is dependent on the franchisor's approval of the transfer of the franchise agreement.

8    An insolvent franchisee operates at a key location – how can I ensure there is business continuity and a transfer of the lease/business, either back to the franchisor, or to a third party of its choosing?

In case of leased property and bankruptcy of the lessee, in principle, both the insolvency practitioner and the lessor may terminate the lease before expiry. However, the termination rights of the lessor may be limited and a termination only due a default of the lessee prior to filling for insolvency or a deterioration of the financial situation of the lessee may not be possible. A termination for other reasons remains possible, though. On the other hand, the insolvency administrator has a special termination right. He must observe the agreed or customary notice period, provided however that three months’ notice will in any case be sufficient. So, if the franchisee goes bankrupt and the franchisor is also the lessor, he may terminate the lease agreement in certain cases. If the franchise agreement ends as well, the franchisor can appoint a new franchisee at the same key location. In the event that the franchisor is not the lessor, he should try and strike a deal with the lessor.