How to liquidate a company when in a franchise agreement

If you operate a franchise through a limited company, there may come a time where you wish to close down the business and move onto a new venture. This can be done through a liquidation process, either a CVL or an MVL, depending on the solvency of the company at the time of closure. 

While liquidation while running a franchise is slightly more complex than winding down a standard limited company, the good news is that it can be done. In UK insolvency law (which often supersedes the terms of a franchise agreement) The Insolvency Act, 1986 states that in formal insolvency proceedings, the office-holder can terminate ‘onerous contracts,’ of which a franchise agreement may be one.

The liquidator’s role in franchise liquidation

The office-holder’s main role in an insolvent liquidation is to collect in and realise assets, and assess the company’s liabilities. As a franchise agreement involves the payment of fees and other charges to a franchisor, the liquidator is within their rights to regard it as a liability rather than an asset, even though without the franchisor, the business would not exist.

If the liquidator decides that this is the case, the franchise agreement then becomes what is known as an ‘onerous contract’ which can be disclaimed under UK insolvency law.

‘Onerous contracts’

Under Section 178 of the Insolvency Act, 1986, a liquidator has the right to terminate ‘onerous contracts.’ These can include franchise agreements, even if there is no clause within the agreement stating that termination will automatically take place in the event of franchisee insolvency.  

The power for a liquidator to act in this way helps to facilitate the winding-up and closure of a company during liquidation. Where a contract is terminated by the liquidator, the franchisor becomes an unsecured creditor for any fees, charges, or other payments owed to them under the original agreement.

Franchises we can help directors with

From restaurants and coffee shops, through to convenience stores and driving schools, a huge number of the most popular names on our high streets are operated through franchise agreements. At Begbies Traynor, we have the knowledge and expertise to help company directors working under any franchise agreement during times of insolvency, including:

• Subway
• McDonalds
• Pret
• CeX Stores
• RED Driving School
• Papa John's 
• Costa Coffee
• KFC

Leased premises in a franchise agreement

A franchisor usually holds the head lease for premises occupied by their franchisees. Premises are then sub-let, and when a franchisee becomes insolvent, the holder of the head lease is likely to become responsible for arrears of rent.

This allows the liquidator to reduce the insolvent company’s expenditure, and maximise creditor returns. Unfortunately, this situation can lead to the franchisor also experiencing financial problems, particularly if more than one franchisee has experienced financial difficulties.

So what if it is the franchisor that is facing liquidation?

When a franchisor is liquidated

There are several areas of concern for franchisees, when their franchisor enters insolvency and has to be liquidated. One of these involves the intellectual property, including trademarks, designs and other artistic works, around which the franchisee business has been built.

The liquidator will identify intellectual property as a major business asset, and subsequently sell it for the benefit of creditors, but the franchisees may decide to group together to buy the intellectual property themselves.

Other issues involve the ownership and use of hard assets, such as machinery and equipment. The insolvency and subsequent liquidation of a company in a franchise agreement can be a complex affair given the unique relationship between the two parties.

We can help you establish your company’s financial position, and make sure you take the most appropriate action. If you need further information about the liquidation of companies in a franchise agreement, Begbies Traynor will provide practical support and assistance.

We can examine the franchise agreement, establish where you stand, and provide professional guidance on the best way forward. Call one of the team for a free same-day consultation with a licensed insolvency practitioner.