The Australian Competition and Consumer Commission has been working itself into a lather with investigations of mergers and acquisitions and businesses taking illegal shortcuts to keep cash registers humming.

However, the ACCC and the Australian Investments and Securities Commissions must increase their scrutiny of the franchise sector with the retail sector in a pressure cooker.

The Franchise Council of Australia and most of the franchising cheerleaders, including both franchisors and consultants and advisers raised their hackles last year when the West Australian and South Australian state government's launched new inquiries into the franchise sector.

The two inquiries triggered Federal Government interest in the adequacy of the Franchise Code of Conduct and the legislation framework that controls the sector.

The state inquiries were largely focused on disclosure issues and the renewal rights in agreements for franchisees, an issue that gained attention in Perth when Yum! Restaurants International forced the closure of a successful KFC store at Rockingham because it refused to extend a franchise agreement to Competitive Foods Australia.

Competitive Foods is one of Australia's biggest and most successful fast food players and is owned by one of the country's rich list notables, Jack Cowin.

If Cowin couldn't exact a fair deal on a franchise agreement with Yum Restaurants, a United States fast food conglomerate whose brands include KFC, Pizza Hut and Taco Bell, how could a single store mum and dad franchisee?

Afterall, Cowin had 46 KFC restaurants in WA and four in the Northern Territory operating under franchise agreements with Yum Restaurants. He also owns more than 300 Hungry Jacks restaurants throughout Australia.

Cowin claimed the WA inquiry failed to get to the nub of the issues and vowed to continue to press for legislative reform, much to the chagrin of most of the franchising sector.

Cowin's issues have merit although, like retail tenancy rights, there is a healthy debate about the expectation of an automatic to the renewal of any business agreement that has been struck with a defined term.

However, the franchise sector needs review by the regulators in other areas, particularly in respect of the rights of franchisees when a franchisor collapses.

The Kleins jewellery chain was completely wiped out when the franchisor collapsed last year.

Kleins, the budget jewellery and accessories chain, held the head leases for more than 150 franchises as well as 53 company-owned stores.

When the franchisor went under for $20 million, all of the stores were forced to close irrespective of the term or status of their franchise rights or their individual trading performance.

When the South Australian chain, EzyDVD, collapsed with debts of around $10 million just before Christmas last year, seven of its 32 franchise outlets closed along with 15 of the 26 corporate stores.

EzyDVD started out as a bricks and mortar retail concept and its financial troubles owed, at least, some of their genesis to attempts by directors to develop online, kiosk and movie download concepts, all initiatives that might bear some analysis in respect of whether or not the new ventures were in the best interest of the retail franchisees.

The remaining EzyDVD franchisees have been taken under the wing of Franchise Entertainment Group, a company owned by former Video Ezy franchisees who took over the franchisor and then went on to acquire the Blockbuster Video stores.

Kleins and EzyDVD are not the first retail franchise chains to test the legal vagaries of franchisee rights in the event the franchisor collapses.

Collins Booksellers was another significant example of the franchisor collapse that left franchisees stranded. A group of Collins franchisees joined together to rescue the books retail chain.

The Collins and EzyDVD rescues were, at least, clean with the new owners acquiring the brands, trademarks and other intellectual property, along with the other business assets.

It has not always been so crystal clear with franchise chain collapses and there is an urgent need to clarify the legal rights, obligations and ranking of franchisees in a liquidation or sale of the business by receivers.

It is also interesting to consider the rights of Harvey Norman franchisees with the company deciding at corporate level to close up to 10 stores in the near future.

Harvey Norman is probably big enough to offer franchisees that want to continue with the company an alternate opportunity within in the group but the rights of those franchisees might well need some scrutiny.

The tenancy rights of franchisees, in particular, need to be reviewed and possibly covered by legislation.

However, the ACCC and ASIC need to do quite a bit more spadework on existing franchises if the Franchise Code of Conduct is to provide confidence about the regulation of the sector.

Fair Margin advances three clear examples but could easily expand to a number of other franchise groups that are clearly struggling to weather the current economic conditions and, in reality, were in strife before the financial meltdown in 2008.

The first is a resolved matter. Dare Gallery was placed in receivership while it was working on a franchise-based expansion program. Fantastic Furniture acquired Dare Gallery from receivers in May 2008.

Strathfield Group, a controversial and financially troubled group for some years, has been touting franchising as its salvation.

Listed on the Australian Stock Exchange and mired in controversy over governance issues, Strathfield directors called in the receivers this month still arguing that a business model that is not working will emerge as success story with franchising.

Then there is a significant electrical appliances chain which Fair Margin understands has exhausted the considerable grace of its suppliers and is now totally reliant on the support of its bankers to continue trading.

The patience of bankers would be running short, Fair Margin would expect, given substantial ongoing trading losses and the failure of the company to either attract franchisees for its stores or to re-capitalise the business.

This is serious stuff. Two companies that are at the brink of collapse want to recruit franchisees to their stricken businesses even as they face the very real prospect of liquidation.

In difficult market conditions and in circumstances when funding for growth and working capital is hard to access, the idea of selling off some stores to franchisees looms as a tempting option.

We have seen in the past the folly of palming off under-performing locations to franchisees with Speeds Shoes and Roger David, among others.

The efforts of a franchisee may well lift trading performance in a store compared to a company-owned and operated outlet, but a franchisee will not revive or survive in unsound business model.

Franchisees cannot prop up businesses that are fundamentally flawed.

Directors of businesses that try to sell franchises when they know that their company is going down in flames belong in jail and the ACCC and ASIC should be increasing their scrutiny of the franchise sector to ensure that companies promoting franchise opportunities are and continue to be viable.