Who owns the marketing fund on liquidation?

By Robert Toth | 16 Jun 2020 View comments

Did you know as a franchisor holding a separate marketing fund account if your franchise business is liquidated, franchisees may not get back their marketing fund money?

The case of Stay in Bed Milk & Bread Pty Ltd sheds light on what happens to a marketing fund if the franchisor is liquidated.

The Supreme Court of Victoria has found that a liquidated franchisor’s marketing fund was not subject to a trust in favour of franchisees.

So instead of franchisees benefiting from the $789,000 fund, the franchisor’s priority creditors, including the Commonwealth, would be the beneficiaries.

This is a significant case because even when funds may appear to be held on trust, if the language of ‘trust’ has not been used to define obligations in a commercial agreement the Court is reluctant to find a trust relationship exists.

Who owns the marketing fund on liquidation?

Stay in Bed Milk & Bread Pty Ltd (“SBMB”) operated the Aussie Farmers Direct franchise that delivered milk, fresh produce and household items to customers via a network of franchisees. On 5 March 2018, voluntary administrators were appointed to SBMB.

Franchisees had contributed to the franchisor’s marketing fund which the Franchising Code required franchisors to hold in a separate account from the 1 January 2015.

SBMB established the separate bank account and held $789,391.40 in its marketing fund account on the date of administration.

The liquidators applied to the Court for declarations and directions that the funds in the marketing fund account were subject to either an express trust or a ‘Quistclose’ trust in favour of the franchisees who had paid the marketing levies and therefore could be returned to franchisees. 

The Commonwealth who was a priority creditor, argued that the marketing fund was not subject to a trust and there was no prohibition on distributing the fund in accordance with the Act and therefore the fund was available to pay creditors and the Commonwealth (who had advanced funds to cover certain unpaid employee entitlements).

In the decision, the Judge determined that neither an express nor Quistclose trust arose.

So, although payment of funds into a separate account may be an indication of a trust, it does not necessarily mean that is the case.

The Judge also found there were other factors which pointed against the existence of an express trust, including that:

  1. under the Franchise Agreement, SBMB retained the discretion to spend the marketing fund as it saw fit and it did not have to be exercised for the benefit of any one franchisee.
  2. the Franchise Agreement did not provide a mechanism to transfer surplus funds back to each franchisee or to be distributed amongst the franchisees as a class; and
  3. there is no need to overlay a trust relationship on top of the commercial contractual relationship between the parties.

Quistclose trust arises where money has been paid for a specific purpose, and the purpose for which the money was paid fails, in which case the money is returned to those who paid it.

Importantly, the payer(s) of the money and the person to whom it is paid must mutually intend that the funds paid not become part of the latter’s assets.

The Judge concluded that the franchise agreement indicated that neither the franchisees nor SBMB intended that the marketing levies not become part of SBMB’s assets.

Although the marketing fund may have been identified for an exclusive purpose, it was not clear the fund would benefit each of the franchisees until that purpose was complete.

What this means in the current economic climate of Covid-19

For franchisees:

  • The money paid into the marketing fund is unlikely to be recoverable if the franchisor goes into liquidation.
  • Franchisees should ensure they receive annual audited accounts of the marketing fund as required under the Code,
  • Franchisees should review the accounts and if there is a significant sum held franchisees or the FAC should encourage the franchisor to spend the fund wisely on suitable marketing. This is preferable to building up a war chest that may simply be available to creditors on a liquidation.
  • Consider in negotiations up front incorporating a clause in the franchise agreement that addresses what happens to the marketing fund on liquidation. Ensure reference is made to the fund being held on trust for the franchisees in proportion to their contribution if possible.

For franchisors

  • Be aware that the marketing fund on liquidation is likely to be treated as funds available to your creditors. Is this something to consider?
  • Would it be seen as a positive gesture and also a positive statement to  your franchisees to say – we have determined to treat the fund as a trust funds and to hold the fund on liquidation for the benefit of franchisees? This would set you apart from all other franchisors.
  • Consider whether it is just and equitable for creditors to benefit from the franchisees contribution to the marketing fund rather than returning unused funds to the franchisees?

This decision highlights the Court is reluctant to infer a trust in a commercial context if there is no express reference to a ‘trust’ in the documents and the Court also look at the manner in which the parties dealt with the asset.