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Recent Scandals Further Scarring the Beleaguered Franchise Sector

In addition to the much-publicised inquiry by the Parliamentary Joint Committee on Corporations and Financial Services and the resultant Fairness in Franchising Report handed down in March 2019, the franchising sector has continued to attract considerable media attention in recent months.

Several scandals involving different franchise brands have made headlines lately. Following is a summary of some of the more infamous franchise news stories including Michel’s Patisserie, Chatime and JUMP! Swim Schools.

Initiating Proceedings In The Name Of A Company: Lessons From Junior Academy

The recent decision of the Victorian Supreme Court in Re Junior Academy ELC Pty Ltd (No 3) [2019] VSC 161 serves to highlight how dishonest and deceptive conduct of one director is highly relevant when determining whether the Court could grant leave allowing that director to bring a claim against another director in the name of the company.

In this matter, Mr Urban brought an application seeking leave to bring an action against Mr and Mrs Lahmy (the Lahmys) in the name of a company of which they were equal shareholders. Mr Urban alleged that the Lahmys breached their director’s duties by developing a childcare centre on the same road as a child care centre they owned and operated jointly.

In refusing to grant leave, Justice Robson highlighted the circumstances where granting leave to bring a case is inappropriate, and what considerations about the person bringing an application are relevant.

Corporate Insolvency Regime Reform: The ‘Combatting Illegal Phoenixing’ Bill

Illegal phoenix activity is a significant problem that affects the government, businesses and employees. A report conducted by PricewaterhouseCoopers in July 2018 for the Phoenix Taskforce estimated that the annual direct cost of illegal phoenix activity was between $2.85 billion and $5.13 billion in 2015/16. As a result, on 13 February 2019 the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) (Bill) was introduced into Commonwealth Parliament as part of the government’s reform of Australia’s corporate insolvency regime. The Bill intends to amend the Corporations Act 2001 (Cth) to introduce penalty provisions for individuals and officers who engage in phoenixing-related conduct. It also proposes to give ASIC the power to reverse such transactions.

These proposed amendments have received significant public interest, and no doubt insolvency practitioners are already keeping tabs on the progress of the Bill. This article summarises the background to the changes set out in the amendments as at 13 February 2019 and outlines this area of insolvency laws for business owners to increase their awareness of phoenixing and detail courses of action if they fall victim.