Therefore, the franchisor should ensure that his financial claims with the franchisee are paid well in advance of the termination or avoidance of the franchise agreement. Subsequent to termination of the franchise agreement, the recovery of funds from the debtor often proves difficult. If your franchisee is subject to insolvency proceedings, such as reorganisation or bankruptcy, there is the risk that the payment made available will by recovery proceedings be ordered reversed to the former franchisee or his bankruptcy estate.
Recovery can be used for the mutual restoration of different types of property rights. A wide range of transactions and arrangements can be ordered reversed. The primarily means of recovery is the return of the very assets received from the debtor and reciprocally the refund of the consideration extended to the debtor.
Common cases of recovery to a franchisor are the payment of some debt later than three months before filing for reorganisation or bankruptcy, either [i] prematurely, [ii] with unusual means of payment, or [iii] in an amount which must be considered significant in relation to the assets of the estate (pls. note, in case law, 10 % of the estate’s assets have been considered significant), provided that the payment is not considered normal in the view of the circumstances.[1] Less common is the recovery of a transaction found inappropriate, as such or in combination with other measures, by which [i] the creditor has been favoured to the disadvantage of other creditors, [ii] an asset has been transferred beyond the reach of creditors or [iii] debts increased to the detriment of creditors, however, always subject to that the debtor was insolvent at the time of the transaction or that the transaction contributed to his insolvency.[2]
Where, for the cause of a franchise concept, it may prove essential that the goods in stock of an insolvent franchisee is not sold by auction or some other manner that may be likely to reduce the valuation enjoyed by the goods, it may become irresistible for the franchisee to yield to the temptation to accept the franchisee’s goods in stock as payment of his claims. Since not even in the context of a franchise the goods in stock is likely to be regarded as a normal means of payment, subject to that the criteria are there, the payment is likely to become subject to reversal to the former franchisee or, in the event of bankruptcy, to his bankruptcy estate.
The Rule of Law. If nothing remains of the very asset to be returned or if it is not otherwise returnable, it is provided that the value of the asset received from the debtor and to be recovered must be compensated.[3] The duty of and the right to the return of the asset have been deemed applicable merely to the very objects obtained from the debtor (the specific goods/property). In Finland, the significance of the obligation to return items has been considered to be found, above all, in protecting the recipient of the assets subject to reversal in the event of the bankruptcy of the recovery defendant.
Although in the neighbouring Sweden, the court practice of whom is being closely monitored in Finland[4], the regulation on the return of an asset or on compensating it is essentially the same as in Finland[5], in a significant precedent on the reversal of give-away priced shares[6], the Swedish supreme court held that the defendant is, in principle, entitled as well as under the duty to convey to the bankruptcy estate an equal number of shares equivalent to those originally received. According to the grounds of the judgement, it often does not matter to the bankruptcy estate whether it receives back the “pieces” handed over by the debtor, e.g., of currency, of shares or of oil, or to the same amount of other similar assets. In the case of shares, there is also explicit support for the position taken in Sweden, contained in the preliminary work of the legislation. On the other hand, in Finland, in the preliminary works of the Recovery Act you will not find support for the different status of fungibles as regards the duty to return some returnable asset.
In its yearbook decision KKO 2021:48[7], the Supreme Court had to set the limits of the item-specific nature of the assets to be returned in a case where a nation-wide kiosk chain (the franchisor) had terminated its franchisee due to that the latter (a limited liability company) had lost the majority of its equity. As consideration for its receivables, the franchisor took the franchisee’s goods in stock at the value of 39 016 euros as payment for its claims.
The background to the Supreme Court case 2021:48. At the recovery proceedings set about it was established the transfer of the goods in stock to franchisor had been made within three months of the filing for bankruptcy of the franchisee and that the value of the goods in stock was significant in relation to the assets of the estate. Therefore, the transaction was ordered reversed. However, maintaining that nothing remained of the goods in stock and insisting it was about fungibles, the franchisor claimed it should be allowed to fulfil its obligation by means of returning similar assets to those transferred to it by franchisee. Reversing the payment, the court of first instance held that the franchisor was not entitled to fulfil its obligation by handing over to the bankruptcy estate items corresponding to the assets received as payment of the debt, but by compensating the value of the assets received.
The Supreme Court. On the issue of returning the very property transferred, the Supreme Court upheld the decisions of the court of first instance and that of the court of appeal. Therefore, the franchisor was not permitted to fulfil its duty of reversal by means of providing assets of equivalent quality and quantity. The Supreme Court considered that the case differs substantially from the above mentioned Swedish case on the obligation to return shares. The goods in stock of the kiosk cannot be regarded as equating the fungibles mentioned by the Swedish supreme court, such as currency, shares and oil.
In its explanatory statement, the Finnish Supreme Court argued, inter alia,
[i] that in the case of other types of goods there would be significant problems in assessing the equivalence of assets received from a bankruptcy debtor and offered as a refund,
[ii] that it would be inappropriate by interpretation, to the detriment to the bankruptcy estate, to enlarge the sphere of returnable and into money convertible assets,
[iii] that this was by no means a matter of surrogate assets received instead of the franchisor’s assets, but merely of the provision of alike goods to the bankruptcy estate and,
[iv] that, since pursuant to the general doctrines of the law of obligation the debtor is not entitled to fulfil his duty by means of a substitute payment, the defendant in the recovery proceedings does not have the right, without the consent of the person entitled to return, to pay compensation for the value of the recoverable assets by means other than money.
What did we learn from this? If the franchisee’s bankruptcy estate would agree to that the franchisor returns the assets with assets corresponding to the assets received as payment, there is no obstacle to the return as such a contribution in kind. However, in the light of the above Supreme Court precedence 2021:48, it remains questionable whether, in anticipation of the risk of recovery and for mitigating the economic consequences of the franchisor, such a clause would be enforceable, contained in the franchise agreement to the effect that assets equivalent to those to be returned would be permitted as restitution. However, I think it would be far-sighted for the franchisor to seek to secure his claims against his franchisee in the event of bankruptcy by means of containing in his franchise agreement a clause to the above effect. Since, if the franchisee’s bankruptcy estate does not withdraw from the contract but commits itself to abide by it (in accordance with the Bankruptcy Act ch. 2 sec. 8), then, as far as can be seen, the contract term is binding as well as if the bankruptcy estate would extend its assent to return of merely alike property and not the specific goods transferred within the three months period preceding the filing for bankruptcy. This view seems to be in accord with the Bankruptcy Act ch.3 sec. 2 para 1 and 2, pursuant to which the bankruptcy estate is bound by any transaction the debtor has taken to prior to the bankruptcy has been entered in the register of bankruptcies and the other party whether knew nor can be assumed to have known that the debtor was not entitled to order the property.
[1] Cf. the Act on the Recovery of Assets to Bankruptcy Estates (758/1991; hereinafter “the Recovery Act”), sec 10
[2] Cf. the Recovery Act, sec 5
[3] Cf. the Recovery Act, sec 15 para 3
[4] Above all due to cultural, economic and political reasons.
[5] In Sweden, Konkurslagen ch. 4 sec. 14, and in Finland the Recovery Act, sec 15)
[6] Högsta domstolen 2010-12-29, målet T 2618-09 (NJA 2010 s. 709): ”Vid återvinning av en överlåtelse av aktier har det ansetts att återvinningssvaranden får återlämna likvärdiga aktier samt att, om varken den mottagna egendomen eller annan likvärdig egendom kan återlämnas, ersättning för egendomens värde ska bestämmas till värdet vid återvinningsmålets avgörande, när detta är möjligt. När svaranden förfogat över de mottagna aktierna och återvinning sker enligt 4 kap. 5 § konkurslagen har konkursboet dock rätt att i stället kräva det belopp som tredje man betalat. 4 kap. 14 och 15 §§ konkurslagen (1987:672)”
[7] Supreme Court 11 June 2021 no. 922 case S2020/254 (1332 Katja Tiisijärvi Oy:n konkurssipesä v. R-kioski Oy)
Patrick Lindgren, IDI Country Expert for franchising in Finland
