FEG can claim Franchis(or/ee) Marketing Funds as circulating security assets

Aussie Farmers Direct Liquidation (AFD) has hit the news again, following a judgment handed down last week from the Victorian Supreme Court (VSC).

The VSC ruled in favour of FEG, and against the Liquidator, by holding that the Marketing Fund is property of AFD, “comprised in or subject to a circulating security interest” (CSI) and is available for distribution to creditors per s561 of the Corporations Act 2001 (Cth) (the CA).More information about FEG can be found at my previous articles: Proposals to address corporate misuse of FEG and Re Amerind Take 2.

Meaning that FEG is to receive the proceeds of the MF in priority to all others!

Let me unpackage this for you …

What was the Marketing Fund (“MF”)?

The Franchisor, AFD, and the approximate 91 franchisees entered into the Franchise Agreement (FA), which included terms to the effect that the franchisees were required to pay funds into the MF to pay for marketing, advertising , etc. Just short of $800k is currently held in the MF.

Was the MF held on trust for franchisees (per the Liquidators submissions)?

1. Express Trust – The VSC began by ruling that there was no express trust between AFD and the franchisees, because:

  • there is no element of exclusivity to the intention or purpose of the MF, nor is there a requirement to actually apply the money to anything at all (clause 13.5 of FA)
  • clause 5 of the FA actually defined the relationship as an “independent contractor” – the VSC saw this as the antithesis of a trust relationship
  • there was no certainty of beneficiary – was it the ‘franchisees as a class’ or individually?
  • clause 13 doesn’t survive termination of the FA, meaning that it had no effect in the Liquidation
  • no requirement under the FA to hold the MF in a separate bank account – however, new laws in 2015 are acknowledged in the case as requiring said separate accounts
  • franchisees had no recognisable rights in the MF under the FA
  • AFD even recorded the MF as an asset on its balance sheet
  • the explanatory memorandum to the new 2015 laws expressly rejected the idea of a trust relationship

2. Quistclose Trust – The VSC then dealt with the concept of a Quistclose trust (QT) being imputed into the relationship. A QT may for instance arise where monies are paid for a specific purpose, despite the specific purpose no longer being able to be performed. The VSC recognised two tests that must be met in order to establish a QT:

(a) a specific purpose; and

(b) an intention by the parties that the MF would not become an asset of AFD until the specific purpose was fulfilled – it was on this ground, and based on the bullet points above, that the VSC said a QT did not, or could not, arise.

If no trust, is the MF available to pay FEG and other creditors of AFD, rather than franchisees?

The Liquidators submitted that clause 31(3) of the FA should be read harmoniously with s501 of the CA, such that the Liquidators were prohibited from distributing the MF to creditors of AFD.

Clause 31(3) of the FA provides only for the distribution of the MF to meet marketing fees, certain expenses and reasonable costs, but is silent to what happens in the event of AFD’s insolvency.

Relying upon Black J judgment in In the matter of Australian Institute of Professional Education Pty Ltd (In Liq) [2018] NSWSC 1028, the VSC held that absent clear statutory language from Parliament excluding the operation of ss 501, 555 and 556 of the CA, those provisions must apply (over and above the provisions of the FA).

What now?

If you are a franchisee or interested in becoming a franchisee, you need to make sure that the new 2015 amendments to the law are being applied properly by the franchisor, and that the Franchising Agreement specifically provides for what happens to the marketing/advertisement fund in the event of an insolvency event. This is crucial!!

For Practitioner’s, don’t underestimate the legal prowess of FEG!

#SVVoidables

 

 

 

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