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. The agreement may contain exceptions. If termination of the agreement is out of the question, for example, because the agreement does not provide for this, and the franchisee is in default, the franchisor may dissolve ("cancel") the agreement. Cancellation has no retroactive effect but releases the parties from the obligations affected by it. To the extent that such obligations have already been performed, the legal ground for this performance remains intact, but for the parties an obligation arises to (where possible) reverse the performance of the obligations which they have already received.
If the franchisee has gone bankrupt, the franchisor may set the insolvency practitioner in bankruptcy a reasonable term within which the insolvency practitioner must declare whether he is willing to be bound by the agreement, failing which he will forfeit the right to demand performance of the agreement himself. Although in this case the agreement is not legally cancelled, the result is the same in the sense that the franchisor is no longer bound by it.
An ipso facto clause does not work in case of a procedure to obtain court confirmation of a private restructuring plan.
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 state of insolvency. 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. As mentioned, 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, he is obliged to provide security for such performance with that declaration.
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.
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. The only creditor who ranks higher than the pledgee is the tax office, but this applies only to goods that are meant to remain permanently on the franchisee's premises, so not as regards stock. The effect of a retention of title is that the franchisor retains ownership of the products delivered until the franchisee has paid for them.
Both security rights can be exercised as if there were no bankruptcy. However, there may be a delay by the declaration of a so-called stay period. On the application of each interested party or ex officio, the rechter- commissaris may issue a written order stipulating that, for a stay period not exceeding two months (which period may be extended once by again maximum two months), each right of third parties to recourse against property belonging to the estate or to claim property under the control of the bankrupt or the insolvency practitioner may be exercised only with his authorization. The stay period may, therefore, temporarily prevent the exercise of third-party rights, including the requisitioning of products on which a retention of title is established.
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. Should the insolvency practitioner compete with the franchisor despite being bound to a non-compete clause, he might be held personally liable.
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 franchise agreement should determine whether goodwill is present in the franchisee's business, its amount and how it will be calculated at the end of the agreement. Whether the franchisee is entitled to goodwill on termination depends on the extent to which goodwill is attributable to the franchisee. Goodwill should, in any case, be reimbursed to the franchisee in the event the franchisor continues the business after termination or transfers it to a successor franchisee.
If set-off is not excluded and the franchisor still has a claim against the franchisee that is due and payable, set- off of the goodwill yet to be reimbursed is also possible.
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 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, both the insolvency practitioner and the lessor may terminate the lease before expiry. The agreed or customary notice period must be observed, 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. As the franchise agreement most likely will end as well (either by operation of law or by termination), 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.