In march of this year the Argentine Commercial Court of Appeals extended the effects of a bankruptcy to franchisees based on the evidence that there existe patrimonial confusion of the involved companies to the detriment of creditors, as allowed under our bankruptcy law.
In this case the action was promoted by a labour credit of an employee whose salaries and social security payments were unpaid.
The reason was that there existed a patrimonial confusion between the bankrupt company and three franchisees penalized under section 161 of Argentine Bankruptcy law, subjecting all of the assets belonging to the bankrupt companies to the action of common creditors of the group.
Below the relevant considerations:
Extension of bankruptcy for patrimonial confusion always require either collusion or a sort of conspiracy to the detriment of creditors and the reason to distinguish this extension of bankruptcy is that it involves a franchisor –franchisee relationship. Moreover it is the first case raised under the new Civil and Commercial Code of Argentina , which expressly forbids franchisor to hold directly or indirectly an equity interest in its franchisee other than permitting licenses involving payment of royalties and other considerations for advertising or sales of inventories but maintaining a legal independence between the two companies.
The court based on inferences and assumptions found that there existed a plan carried on by the owners of Franchisor, “ Restaurant partners” and three franchisees CTL S.A. Casanuova S.A. and Pescaglia S.A. based on the following facts: i) Franchisees did not pay royalties or publicity payments owed under the franchise agreement. Ii) Pescaglia and Casanuova kept their books in the same domicile. iii) All royalty payments were waived by franchisor in favour of franchisees; iv) Same natural persons acted on different companies, (as shareholders or directors or managers). Two of the franchised companies have the same domicile although they claim that they were independent. Vi) The same stores were in sequence operated by CTL S.A. and then by Pescaglia and Casanuova without fulfilling the requirements under Argentine law which gives to creditors the right to oppose to any proposed sale of assets in bulk and obtain embargoes against the sum to be paid (the bankrupt company had no assets being a restaurant and the assets were diverted to franchisees.) vii) No payments for the missing assets were registered in franchisor books when they were delivered to Pescaglia. viii) There was no evidence that Pescaglia paid for them. viii) the bankrupt company did not have assets, it was emptied by the decision of its controllers..
Furthermore, under Argentine law, a Franchisor, in order to be protected from labour claims and not being liable for the debts of franchisee, must be legally independent to enjoy the benefits of being protected by law from labour claims of from commercial creditor claims. The Court did not analyse the franchise relationship in detail, it only verified that one person acted as franchisor and the others held the title of franchisees under franchise agreements. The factual evidence showed that the corporate separation of companies and patrimonial interest did not exist and make all the group of companies liable under the bankruptcy law.
However this case leaves some interesting conclusions. Firstly, it was decided as a result of the application of a bankruptcy law in violation of creditors' rights. The second message is for counsels and franchisors at large: the franchisor-franchisee relationship cannot be used as method to unlawfully prejudice creditors, including the labour creditor who brought the case to court.
Osvaldo J Marzorati, IDI country expert for Argentina