COVID-19 and the Franchising Code of Conduct
COVID-19 has meant many businesses have had to pivot their businesses. Governments are no different having acted quickly and passed emergency legislation. Whilst many laws have been amended the Franchising Code of Conduct (“Code”) is not one of them. From a franchising legal perspective there is no talk of any extensions of time being granted for Disclosure Document updates or the relaxation of any of the requirements of the Franchising Code of Conduct, accordingly, franchisors must continue to meet their compliance obligations.
Some franchisors may be experiencing solvency issues and we summarise below the key obligations under the Code:
- Item 21.1 of the Disclosure Document requires a solvency declaration to be made. If the solvency position of the franchisor has changed since the end of the last financial year the Disclosure Document will need to be updated.
- clause 17(3) of the Code provides that if a franchisor becomes a Chapter 5 body corporate disclosure must be made to the franchise network within 14 days. A Chapter 5 body corporate means a body corporate:
- that is being wound up; or
- in respect of property of which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting; or
- that is under administration; or
- that has executed a deed of company arrangement that has not yet terminated; or
- that has entered into a compromise or arrangement with another person the administration of which has not been concluded.
- clause 17(1) of the Franchising Code of Conduct provides that if:
- either a statement or declaration referred to in item 21 of Annexure 1 is made or a document referred to in that item (i.e. financial statements or an audit report) comes into existence; and
- the statement or declaration is not reflected in, or the document is not provided together with, the Disclosure Document, the franchisor must give to a prospective franchisee a copy of the statement, declaration or document, as soon as reasonably practicable, but in any event, before a prospective franchisee enters into a franchise agreement with the franchisor. This means if new financial information becomes available it must be disclosed to a prospective franchisee before the prospective franchisee enters into a franchise agreement with the franchisor.
- Item 21.6 of the Disclosure Document requires a franchisor (or consolidated entity) to disclose whether it was insolvent in either or both of the last 2 financial years and if so provide a statutory declaration of solvency supported by an independent audit report.
Franchisors should also note that under the Australian Consumer Law there is still an overarching obligation not to mislead or deceive franchisees. Accordingly, franchise networks that have been affected by COVID-19 and in particular by the government mandated closure of their franchised businesses should provide an update in their Disclosure Document as to the impact of COVID-19 on the network, including details of the period of suspension of operations. The above obligations will also need to be considered and may necessitate changes to the Disclosure Document.
The question of solvency is a question that requires specialist legal and financial advice. Legal advice should also be obtained on the requirements of clause 17 of the Code and on how to complete Item 21 of the Disclosure Document to ensure ongoing compliance with the Code.