Franchising and Directors’ Duties:
Sometimes it may be too good to be true.
Part of selling any business is to talk about its good points, how much income it makes and the benefits to any potential purchaser. The problem comes when those benefits are oversold. With selling a business as part of a franchise it is the same as a recent article I published highlighted.
Under the new Franchising Code of Conduct, which commenced in January 2015, Franchisors have new disclosure obligations and a duty to act in good faith when dealing with Franchisees and prospective Franchisees. In 2015, the ACCC is making it a priority to crack down on breaches of the Franchising Code.
In a recent case in the Federal Court (you can find all the details here) , in proceedings brought by the ACCC, the Court found that South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) as Franchisor had contravened both the Australian Consumer Law, and the Franchising Code of Conduct.
The Court found that the Franchisor had engaged in misleading and deceptive conduct, including overstating what potential income two potential Franchisees might earn if they bought a Franchise from the Company. They also misrepresented the systems the Franchisor had in place under the Franchise to both collect payments from customers and to pay Franchisees on time. In addition, they failed to inform one of the Franchisees to obtain independent legal advice.
The Court ordered a penalty of $500,000 against the Franchisor. The Court also made orders against the sole Director personally. He was:
- Required to pay a $30,000 penalty and
- Disqualified from managing a corporation for two years.
The Court found that the director had used “unfair tactics in his dealings” with the Franchisees.
The case serves as a warning both to Franchisors, their Directors, and to potential Franchisees. For Franchisors, it is essential that you comply with the Franchising Code of Conduct in all dealings with your Franchisees and Potential Franchisees. For Directors, it is evident that the Court is quite happy to order penalties against a Director individually, even where there is a company structure in place, if the Director is aware of, or is engaging in conduct that is in breach of the Franchising Code. For potential Franchisees, the warning is to carefully research any potential Franchise purchase, including obtaining independent legal and financial advice, as sometimes, what is being sold really is too good to be true.
If you want any assistance with understanding what your Franchise and Directors duties are, buying a business or franchise or selling a Business or Franchise, you can contact our Business and Property Law team for a confidential initial discussion.