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

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?

Contractual provisions stating that a franchisor can terminate the contract if the franchisee enters into insolvency proceedings are not valid. Termination of the franchise agreement based solely upon the event of insolvency proceedings is not sufficient - other breaches of contract must be form the basis of a termination notice.

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

If there are no breaches of the franchise agreement, such as payment terms, the franchise agreement remains in full force and effect and the franchisor is still obliged to continue supplying the franchisee.

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

Unless the franchise agreement states expressly that the ownership of the products delivered does not pass to the franchisee until full payment is made, the franchisor cannot retrieve the products.

Another method to protect the franchisor’s interest is a pledge. While a pledge will not permit the franchisor to recover the products, it will require the franchisee to pay the franchisor before other creditors upon sale of the products.

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

In the event that the post contractual non-compete clause was executed exclusively by the franchise corporate entity and this company successfully comes out the insolvency proceedings the referred clause will continue to be enforceable. However, in the event that the company is liquidated, this clause would be unenforceable.
In the case that this clause was executed also by the Board of directors, shareholders or owners of the franchisee in their personal capacity, this clause would remain enforceable against these individuals.

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?

No, Spanish law distinguishes between franchisees and agents, so this is a purely contractual matter.

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?

Generally speaking, no, but depending on the wording of the franchise agreement, if the franchisor is consenting to the sale it has an interest in ensuring that the incoming franchisee is fully aware of the situation and has a good prospect of turning the business around.

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?

In some Spanish jurisdictions, based upon jurisprudence, the insolvency practitioner may require the franchisor to accept the sale of the franchisee’s business regardless of the franchise agreement previsions. Related to this fact, it is important to take into account the intutui personae character of the franchise contract.

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?

According to Spanish insolvency jurisprudence, the only way to force the lessor to maintain the contract in the event that the franchisee/lessee enters into an insolvency proceedings and breaches the lease contract is selling the business unit of the franchisee within the insolvency proceeding. It will be necessary to pay all the outstanding debt  of the lease contract to ensure its continuing enforceability.