18. What if the franchisor becomes insolvent (fails)?

When a franchisor becomes insolvent, this can seriously affect a franchisee’s business. For example:

• if the franchisor holds the lease and has sublet the premises to the franchisee, the franchisee may lose their right to occupy the premises
• the franchisee may be unable to obtain stock, if this is being provided by the franchisor or an associated company
• the franchisee may lose their rights to use the brand
• the franchisor may no longer be able to carry out its obligations under the franchise agreement, such as providing marketing and training support
• potential customers may not want to deal with franchise outlets whose franchisor is insolvent.

The Franchising Code does not deal specifically with the insolvency of the franchisor. Under many franchise agreements, a franchisee will have to continue to pay royalties and other fees even when the franchisor goes into administration (as long as the administrator continues to meet the franchisor's obligations. A franchisee who believes that the administrator is not continuing to meet the franchisor's obligations should obtain legal advice before stopping payments.)  In addition, franchisees may have entered into other arrangements which require them to make ongoing payments to suppliers, landlords, employees and banks, regardless of whether the franchisor remains in business.

Before you enter into a franchise agreement, you should seek professional advice about your rights to intellectual property, leases, etc. in the event of franchisor failure. You need to have a plan to ensure that your investment is protected.