Regarding a Chatime franchise, what is the Guarantor prohibited from doing in the event of liquidation, bankruptcy, composition, arrangement, or assignment for the benefit of creditors until the Franchisor receives all money payable?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
16.9 Guarantor Not to Prove in Liquidation or Bankruptcy
Until Franchisor has received all money payable to it by Developer, Guarantor must:
- (1) Not prove or claim in any liquidation, bankruptcy, composition, arrangement, or assignment for the benefit of creditors; and
- (2) Hold any claim it has and any dividend it receives on trust for Franchisor.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, in the event of the franchisee's liquidation, bankruptcy, composition, arrangement, or assignment for the benefit of creditors, the guarantor is restricted from taking certain actions until Chatime receives all money owed by the franchisee. Specifically, the guarantor cannot make any claims in the liquidation, bankruptcy, composition, arrangement, or assignment for the benefit of creditors.
Furthermore, the guarantor must hold any claim they have, as well as any dividend they receive, in trust for Chatime. This means that the guarantor's claims and any payments they might otherwise receive are essentially set aside to ensure that Chatime is paid first. This provision protects Chatime's financial interests in situations where the franchisee is unable to meet their financial obligations.
This clause highlights the importance of the guarantor's role in ensuring Chatime's financial security. Prospective franchisees should carefully consider the implications of this clause and ensure that any potential guarantors are fully aware of these obligations. It is common practice in franchising to have a guarantor, especially if the franchisee is a corporate entity, to provide an additional layer of financial security for the franchisor.