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The consideration of Intellectual Property in insolvency

View profile for Christopher Buck
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Where a company is experiencing extreme financial difficulties it is well known that such a company can be cash-flow insolvent, (i.e. they cannot pay their debts as they fall due), or balance sheet insolvent (the company’s liabilities outweigh their assets). It is the role of the insolvency practitioner to consider the company’s assets in order to maximise return for creditors.

Currently, according to the Insolvency Statistics for April to June 2015, the total number of company insolvencies in England and Wales decreased and were at the lowest level since Q4 2007. Although the total number of insolvent companies is currently decreasing, considering the insolvent company’s assets, including Intellectual Property, is still of high importance. This should be the case regardless of the financial circumstances of other companies as it is relevant to explore each company’s individual financial circumstances.

Therefore, insolvency practitioners should always review the intellectual property rights of the company. However, believe it or not, no such action is routinely taken at present.

Intellectual Property rights shouldn't be overlooked in insolvency

The legal definition of Intellectual Property is “Intangible rights protecting the products of human intelligence and creation”. This is deemed to include trade marks, trade secrets, copyrightable works and patented inventions. Although important, and often the most valuable asset to a company, intellectual property is frequently overlooked in insolvency.

It is essential to establish in detail the assets of the insolvent company. For many companies Intellectual Property is a major asset. When considering an insolvent company’s property, insolvency practitioners often do not appreciate the value of intellectual property. This should not be the case, as the company’s intellectual property rights should be fully explored.

The insolvency practitioner should consider, in some cases even before their appointment, any intellectual property owned by the company and any rights that owners of intellectual property have licensed to the company.

Intellectual property should be considered by the insolvency practitioner as their role is to collect and realise all of the company’s assets to maximise their potential. This will ultimately maximise the return for creditors, thus the insolvency practitioner will satisfy their duties and potentially identify any intellectual property which may have realisable value.

The insolvency practitioner, should they identify intellectual property which may have a realisable value, should not only record this but should also look to maximise such value. This may depend on the intellectual property rights of the company. It is therefore likely to be of interest to the insolvency practitioner to consider the following:

  • Whether the sale of any valuable brand names earlier on in the process may generate more realisable value;
  • Where there are pending registrations for intellectual property rights, a balance should be found between commercial considerations, for example a quick sale, and the possibility of maximising asset values; and
  • The knowledge of employees where the value of the intellectual property is primarily made up of confidential information and know-how is key and therefore required to be reflected in the management of the company’s insolvency regarding any disposals.

The relevance of licences

As well as identifying the extent of the company’s intellectual property, the insolvency practitioner should also establish whether any licences of intellectual property have been granted. This will provide the insolvency practitioner with a more informed overview of the company’s current circumstances.

Intellectual property right licences act as a contract to provide the rights to the licensee so as they may carry out acts that otherwise would only be entitled to be carried out by the intellectual property owner. The insolvency practitioner should establish whether the company has granted such licences and if so, to what extent. It should also be established whether the company has had any licences regarding intellectual property granted to it by third party owners.

Any onerous intellectual property licences may be disclaimed by a liquidator only, so long as s178 Insolvency Act 1986 is satisfied. To satisfy the legislation, the licence must be deemed as onerous property. When a licence is disclaimed, the licensee remains entitled to exercise its rights under the licence. The licensee will also have the right to claim any loss from the licence being disclaimed as an unsecured creditor in the winding up proceedings.

As office holders, insolvency practitioners should ensure that they fulfil their duties regarding collecting and realising the company’s assets. This should include ensuring that they are aware of the extent of the company’s intellectual property; both owned and licensed to the company.

Expert advice

If your business is in a difficult financial situation, and you would like some specialist legal guidance as to the value of your Intellectual Property, then please feel free to contact me or one of our Corporate Commercial team on 01908 660966.

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