Franchisee is not eligible for debt restructuring due to lack of good faith

Court of Appeal in ‘s-Hertogenbosch

Recently, the Court of Appeal in ‘s-Hertogenbosch issued a judgment which shows that when applying for debt restructuring, the way in which the debts came about is broadly examined. Actions in the pre-contractual phase can also be taken into account when assessing whether the debts have been incurred in good faith by the debtor. After all, if the debts have not been incurred by the debtor in good faith, the applicant will generally not be admitted to the debt restructuring.

The issue is – briefly summarized – as follows. Person X has been running a branch for a franchisor for several months now, but not as a franchisee. Why X was placed in the relevant branch by the franchisor is not apparent from the judgment, but it can be read ‘between the lines’ that apparently there was a previous franchisee who terminated the operation of the branch, making it necessary that the franchisor took up the operation of the establishment in-house.

At the end of 2005, the franchisor requests X to take up the operation of the establishment as a franchisee. In addition, information is – apparently – provided by the franchisor to X on the basis of which the latter assumes that profitable operation is possible. X has established that there is a break-even situation under his leadership. Because of this fact, as well as the information from the franchisor, X expects that he could realize a profit situation in the short term. For that reason, he therefore agrees with the franchisor’s offer to continue operating the establishment as a franchisee.

The previous franchisee did not give X access to the financial data relating to the period before X came into the picture. As already noted above, it is not clear from the judgment why this is the case, but it is not inconceivable that the previous franchisee had already left with the northern sun and could not be reached for comment. Apparently the franchisor did not have the financial data at its disposal either, or there was no reason for it to provide this data to X.

Anyway; because no financial data are available, X does not obtain long-term financing from his bank. X does have a current account at his disposal. After the branch has to move, by order of the franchisor, X can no longer meet his financial obligations towards his creditors. This is apparently due to some – unspecified – financial setbacks. The tax authorities then seize and the franchise agreement is terminated by the franchisor with immediate effect. X is thereby denied access to the establishment. As a result, he no longer has access to his administration, which completely derails the situation.

X then reports with a substantial package of debts (at that time apparently more than €  500,000) to the court to apply for debt restructuring. Half of this consists of debts to the tax authorities, the other half of debts of the bank and the franchisor. However, the court rejects X’s request to be admitted to debt rescheduling because it is unlikely that the debts were incurred in good faith. According to the court, the franchisee has taken over a company without access to the figures and has entered into extensive financial obligations with third parties, without having arranged the financing thereof. Partly in view of the size of the debts, according to the court, this course of action justifies the presumption that the debts arose due to irresponsible actions by the franchisee as an entrepreneur. Furthermore, apparently no documents were submitted to the contrary.

X appeals and hopes for a better outcome at the Court of Appeal in ‘s‑Hertogenbosch. However, the Court of Appeal upholds the District Court’s judgment, because apparently no documents have been submitted by X from which the correctness of X’s statements can be deduced, or that he is not to blame.

Some may consider the franchisee’s action in taking on the operation as ‘too light’, but there are some elements that justify a nuance. For example, justification can be given that the franchisor had apparently provided certain information, which contributed to X’s decision to take on the operation. The franchisor also urged X to take on the operation, which may have given X the impression that profitable operation was possible.

Without an assessment of the procedural documents themselves, it is not possible to fully assess the value of the judgment of the Court of Appeal in ‘s-Hertogenbosch, partly in view of the limited scope of the judgment. The answer to the question to what extent the Court of Appeal has steered the franchisee in the wrong direction in this regard cannot be answered. Fortunately, the ointment on the wound is that X can still submit a new request at a later time. Hopefully this time with the documents that the judge deems necessary.

Mr JH Kolenbrander – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to info@ludwigvandam.nl