WHOA & franchise

At the beginning of this year, the Homologation Private Agreement Act ("WHOA") was introduced. This makes it possible not only to restructure debts but also to modify or terminate contracts that hang like a millstone around the company's neck.

When terminating and amending agreements, it is obvious to think of the company's lease, where high penalties are due in the event of early termination. See also this article on this subject.

However, it is often forgotten that the legal provision in this regard can be used much more broadly and is not limited to rental and lease agreements. In this contribution, therefore, we take a closer look at possibilities for a retail company to modify or terminate the franchise agreement frequently used in that industry.

We will address both the situation where the franchisor is in "financial distress" (the situation where a debtor is in a condition where it is reasonably likely that it will not be able to proceed with the payment of its debts) and the situation where the franchisee is in financial distress.

Legal framework

The basic premise of the WHOA is to offer a composition to the company's creditors, which is ultimately approved ("homologated") by the court. Its purpose is to prevent bankruptcies.

With the introduction of the WHOA, the legislature added Section 373 to the Bankruptcy Code. This article contains the principles for restructuring agreements. Employment contracts are exempted from it (section 369 paragraph 4 Fw). The debtor may make a proposal to his contracting party to modify or terminate the agreement. If the contracting party does not agree to the proposal, the debtor may terminate the agreement with the court's consent. The court will generally always give that permission if the agreement is homologated. The consent will be refused only if the court refuses the homologation or if it is established that the debtor was not in distress.

Any penalties due because of the termination can be included by the debtor in the agreement (373 paragraph 2 Fw).

The franchisor in financial distress

In recent years, franchisors have regularly found themselves in distress. Consider, for example, Hema and Mitra. Hema was successfully restructured, but Mitra was declared bankrupt.

Why would you want to restructure franchise agreements as a franchisor? The franchise agreement may give only a few circumstances under which an agreement can be amended or terminated. This has to do with the fact that the franchisee often has to invest heavily to operate under the franchisor's banner. Nevertheless, it is conceivable that the franchisor may want to part with franchisees after restructuring. Perhaps the margins are under too much pressure or it is better for the future of the franchisor to continue with only (part of) its own stores to change course for the future.

Thus, where the franchise agreement often does not provide an exit, the WHOA does provide that possibility. The franchisor can propose to modify or terminate the agreement. This can have major consequences for franchisees; after all, without a contract, the future of their business is uncertain. On the other hand, franchisees are entitled to compensation for damages, which must also be included in the agreement.

The franchisee in financial distress

As a rule, the franchisee will more quickly face a situation where it may be better to continue under "his own banner." This may have to do with purchase obligations, costs for using the franchise, or perhaps the formula no longer meets the wishes of the franchisee and/or of the public. If the company is also in financial distress in the process, the WHOA not only offers the possibility to restructure debts but also to amend or terminate the franchise agreement.

Oppose modification or termination?

As a contracting party who is confronted, can you do anything against the proposal to amend or terminate the franchise agreement? If you do not agree with the amendment or termination of the franchise agreement, you must object to it yourself. Until the day of the homologation hearing, a request can be made to reject the amendment or termination of the agreement.

A contracting party may not invoke a ground for rejection if he has not protested the matter to the debtor or the restructuring expert if appointed, within a reasonable time after he discovered or reasonably should have discovered the possible existence of that ground for rejection.

A successful objection requires that the contracting party be able to show that the debtor is not in a condition in which it is reasonably likely that the debtor will be unable to continue paying its creditors.  

Since the court will only grant the request for permission to terminate the contract if the (entire) agreement is homologated, the contracting party can also attempt to oppose the homologation of the agreement itself. The contracting party can then invoke the legal grounds for rejection.

It is good to realize that the starting point is that if the agreement can be homologated, the debtor is in principle allowed to modify or terminate the agreements. Thus, the court does not (really) test the interests of the contracting party, but in a larger sense whether no creditor is worse off than if bankruptcy were to follow. So it is quite a daunting task to oppose amending or terminating contracts as a contracting party because, in a much broader sense, the contracting party will have to undercut the entire agreement.

However, if the objection succeeds, the agreement will not proceed, at least not be amended or terminated. This may result in the debtor subsequently being declared bankrupt.

The consequences of bankruptcy

As a contracting party, it is therefore prudent to consider the consequences of bankruptcy for the agreement. For the debtor, it is also important to consider the consequences of bankruptcy: if the franchise agreement includes rental provisions, the contracting party in bankruptcy will have an estate claim for up to 3 months under article 40 Bankruptcy Act. For the rent payments for those months - the estate claim - the contracting party is "in the money." You have to take that into account in the agreement, because in-the-money creditors have a special role under the WHOA. It is better to terminate the agreement in compliance with that three-month period, which again saves on class certification.

Conclusion

Under the WHOA, agreements can be amended or terminated. This also applies to franchise agreements. Opposition to this power is difficult unless the contracting party can invoke a statutory ground for rejection.   

For questions about this article, guidance on a WHOA proceeding or offers for appointment as a Restructuring Expert, please contact Christian Gäbler or Laurens Sjoerts.