Twenty-two franchisees face an uncertain future as administrators work to determine the fate of poultry producer and retailer Red Lea Chickens, which collapsed into voluntary administration last Thursday.
The Western Sydney business has been trading for “over sixty years”, according to its website, and has a processing plant employing 500 staff members, as well as six company-owned stores and 22 franchised sites.
However, the business confirmed on its website last week that it had called in administrators McGrath Nicol to Red Lea Chickens Pty Ltd and associated entities. The company informed customers that, “due to the financial position of the companies, we regret to advise that the administrators are unable to trade the business” and operations would begin winding down.
In a statement provided to SmartCompany, administrators Jason Preston, Kathy Souzou and Barry Kogan said that due to the financial state of the company, there was no choice but to immediately close the processing plant. The closure has resulted in immediate redundancies for “the majority of staff”, with a few continuing to work until the plant is properly closed.
The company-owned stores are also closed, but franchisees involved in outlets that sell Red Lea produce will continue to operate. But they now have to work out how to “secure chicken products from alternative suppliers”, according to the administrators.
The administrators said no further comment could be made about the future of the franchised stores at this time, however, they confirmed they are still meeting with stakeholders to determine the cause of the failure of the business, and the next steps.
A first creditors meeting will be held on April 12, but the administrators say it will be the second creditor’s meeting, held in one month’s time, that will seal the future of the business.
“We have been advised by the sole director that he intends to submit a [deed of company arrangement] DOCA proposal which will cover the outstanding employee entitlements (including unpaid superannuation, wages, annual leave, long service leave, pay in lieu of notice and redundancy) in full and provide a return to unsecured creditors,” the administrators said in a statement.
A deed of company arrangement would avoid the need for the company to be liquidated.
Speaking to the ABC, a Red Lea store manager said the closure of the business had left his staff in tears.
He said the challenges facing the business were obvious, coming down to “no new products, no new direction”.
Red Lea joins a number of businesses in the fresh produce space that have been forced to call in administrators this year, including shopping centre kiosk business John’s Nuts and grocery delivery service Aussie Farmers Direct.
Franchisees vulnerable during company collapses
Franchise law expert at the University of New South Wales, Jenny Buchan, says in general terms, franchisees are placed in a very precarious position the minute that a parent company enters voluntary administration.
“It’s like pulling a lynch pin out of an arch — the whole thing can start to collapse,” she says.
While it’s unclear at this stage how franchise leases were held at Red Lea, Buchan says one of the many challenges franchisees can face in cases like these is dealing with landlords.
In cases where the franchisor holds the leases for sites, once it enters voluntary administration, franchisees may have no choice but to “choose whether they want to renegotiate”, Buchan says.
Even if the rental leases prove not to be a big issue, it’s still often the case that franchisees are left without a link to the products they supply, like chicken, she says.
With a parliamentary inquiry into the franchising sector in the works, Buchan believes now is the time to get specific about how franchisees’ rights can be beefed up, particularly when it comes to arrangements where they are the “sub-tenant” and a lease is held by the franchisor, rather than the franchisee directly.
Whether these issues will come to fore in the inquiry is yet to be seen, however, with Buchan believing the terms of reference for the review are “not as widely directed as they should be”.