How to liquidate a company when in a franchise

Liquidation advice for franchisees and how to terminate a franchise agreement

If you decide to wind up a company within a franchise due to insolvency, the franchisor might end the franchise agreement, considering it as an unsecured creditor. 

Alternatively, you could opt to leave the franchise agreement, but there may be restrictions on how you can do this.

 

What would be the liquidation process when the company is in a franchise?

Closing a company within a franchise agreement can be intricate, involving various factors not encountered in a typical company liquidation. This applies whether it’s the franchisor or franchisee being liquidated, as each party faces distinct challenges due to their partner’s closure.

Here, we explore some of these concerns, how they can be addressed, and whether exiting a franchise agreement is feasible.

 

Does it need to close a limited company that is franchised? 

When a franchisee company becomes unable to settle its debts and enters insolvency, the franchise agreement is usually terminated automatically. Most franchisors incorporate this clause into their contracts to mitigate the impact on their financial standing.

Shutting down a limited company with debts involves the liquidator assuming control of franchisee assets and selling them to generate funds for the company’s creditors. 

This is the main duty of a liquidator, alongside evaluating the company’s liabilities, such as its ongoing contracts.

 

What are ‘Onerous contracts’ and their effect on a franchisor? 

According to the Insolvency Act of 1986, a liquidator may terminate onerous contracts to streamline the winding-up process of an insolvent company. 

Onerous contracts are perceived as financial burdens, and the liquidator’s ability to cancel them can enhance overall returns for creditors.

Every franchise agreement involves the payment of fees, which allows a franchisee to use the company’s name and other intellectual property. 

If the office-holder chooses to disclaim this agreement, the franchisor becomes an unsecured creditor for any outstanding fees and charges.

Regrettably for the franchisor, this positions them at the lowest priority for repayment, potentially resulting in no financial recovery from the liquidation proceedings.

 

Exploring the Franchisor’s responsibilities for arrears of rent

Another concern for the franchisor pertains to the franchisee’s business premises. In a franchise setup, it’s common for the franchisor to sublet business premises to the franchisee company under the ‘head lease’ they hold.

The holder of the head lease is then accountable for any rent arrears accrued by the insolvent franchisee. This can compound financial challenges for a franchisor, who might not have been aware of their franchise partner’s impending insolvency.

 

What if it’s a franchisor that is to be liquidated?

As previously noted, a liquidator’s duty involves identifying and managing company assets. In the event of a franchisor’s financial collapse, the company’s intellectual property, integral to the success of franchisee partners, will be considered a significant asset by the officeholder.

Company assets, including intellectual property like patents, trademarks, and designs, which formed the foundation of the business, must be sold to benefit creditors. In such scenarios, franchisee partners might have the opportunity to buy the intellectual property independently and continue operating without the franchisor.


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Tips to get out of a franchise agreement

Can a franchisee terminate a franchise agreement?

Franchisees typically have limited rights to terminate a franchise agreement, usually only applicable in cases of serious misconduct by the franchisor. This could involve instances where the franchisor fails to meet a fundamental obligation necessary for basic business operations.

Another instance where a franchise agreement might be considered terminated is when a franchisee is denied access to essential computer systems or equipment required to continue their business operations. 


When a franchisor be able to get a franchise agreement?

Franchise agreements typically contain a provision enabling the franchisor to safeguard their business by terminating the agreement, either automatically or through explicit action. This commonly occurs in cases of franchisee insolvency or significant breaches of contract.

At times, franchisors afford their franchise partners a chance to rectify their breach, and if this isn’t remedied, they proceed to terminate the contract.

If you’re worried about the financial state of your franchise partner, Vanguard Insolvency can offer the professional guidance you require.

With over 100 offices spanning from Inverness to Exeter, Vanguard Insolvency provides unmatched director advice throughout the UK and can schedule an initial appointment free of charge.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.