A cleaning franchise now in liquidation has just been fined $500,000 for contravening Australian Consumer Law.

The business, formerly Coverall Cleaning Concepts (the South East Melbourne Cleaning Pty Ltd), was the Victorian franchisor of a national professional cleaning franchise system and was taken to court by the Australian Competition and Consumer Commission.

When the case came to court last year it was found (in October 2014) that Coverall Melbourne had engaged in unconscionable conduct, made false or misleading representations, and had contravened the Franchising Code of Conduct in its dealings with two prospective franchisees who subsequently signed up to the cleaning franchise.

The Court declared that Coverall Melbourne had made false or misleading representations in regard to the income that the two franchise buyers would earn. The Court also found that Coverall Melbourne had contravened the Franchising Code by providing this false or misleading information to the two individuals and by failing to notify one of the franchisees of the need to seek independent advice before entering into the franchise agreement.

Coverall Melbourne was also found to have engaged in unconscionable conduct by failing to pay the franchisees for the work they had completed and continuing to demand payment for the initial franchising fee.

“This significant penalty decision is important for all involved in the franchise industry. By imposing a penalty of $500,000, the Court is seeking to deter other franchisors from engaging in similar conduct. This is a clear message that franchise businesses must ensure they comply with their obligations under the Australian Consumer Law and Franchising Code of Conduct,” ACCC deputy chair Dr Michael Schaper said.

Justice Murphy had found that Coverall Melbourne “did not have in place a business system capable of collecting payment and actually paying its franchisees on time…nor did it have a willingness to implement such a system and to pay franchisees in accordance with their entitlements.”

Justice Murphy also noted that Coverall Melbourne “gave scant regard to the requirement that franchisees should be fully informed and given the opportunity to be independently advised before committing to the purchase of a franchise business”.

Orders were previously made against Coverall Melbourne’s former director, Brett Jones; these included a $30,000 penalty and an order disqualifying him from managing a corporation for two years.

Justice Murphy considered Jones’ conduct to have “reflected a lack of understanding of the proper role of a company director in relation to the legal obligation owed by a franchisor to its franchisees,” and noted that Jones “employed unfair tactics in his dealings [with franchisees] to preserve Coverall’s interests at their expense”.

On 1 January 2015, a revised Franchising Code of Conduct came into effect which introduced significant financial penalties and gave the ACCC power to issue infringement notices in respect of breaches of certain provisions of the Code. Franchise operators are also required to observe new disclosure obligations and have a duty to act in good faith.

Ensuring compliance with the new Franchising Code of Conduct is a priority for the ACCC under its 2015 Compliance and Enforcement Policy.

• How can a franchisee protect their interests? Check out this article.