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Intellectual Property and Liquidation

PRACTICE AREA GROUP: Corporate Restructuring and Insolvency, Intellectual Property
DATE: 21.06.2011

The intellectual property (IP) rights that protect key software, brands and technical processes can be amongst the most valuable assets of a company. But what happens to IP rights when a company becomes insolvent? What happens to the insolvent company's licences, and to its licensees who may have invested significant amounts of time and money in setting up manufacturing facilities to exploit the licensed technology or in advertising under a particular trade mark? This article addresses these questions through a brief case study analysis of a hypothetical insolvent company, FotoCom Limited (‘FotoCom’).

FotoCom is an Irish manufacturer of photographic equipment and accessories. The company has over 50 employees and an extensive IP portfolio, including trade marks, domain names, registered and unregistered designs, and patents. Despite operating for a number of years, the company experienced severe financial difficulties during 2009 due to a dramatic decline in its European sales and loss of key technicians to an international competitor. As a result, the company recently became insolvent, which led to a winding up order being made and a provisional liquidator being appointed in November 2010. Outlined below are some of the key issues and steps which will need to be addressed during the winding up process in order to maximise the realised value of FotoCom’s IP assets.

Due diligence

Prior to dealing with FotoCom’s IP assets, the liquidator will need to identify and evaluate all of the intellectual property in which FotoCom has an interest. In particular, this due diligence process should include a search of the relevant IP registers where FotoCom trades or has traded in the past, including the Irish and European trade mark and patent registers, and the WHOIS domain name database; enquiries of FotoCom’s directors and employees; and a review of FotoCom’s books and records to identify any IP rights that have not, or cannot, be registered, for example, copyright materials, designs, databases, trading and brand names. The liquidator should also carry out an audit of FotoCom’s intellectual property licences to establish the scope of the rights licensed in and out of the company. This process is important to maximise the value realised for the company’s IP assets, and to reduce the risk that third parties may misappropriate same.

The anti-deprivation rule and fraudulent preference

The liquidator must be alive to the problems that FotoCom may face under Irish law if an IP asset, or interest, is disposed of within 6 months of the winding up order. For example, if a contractual provision provides for the transfer of an asset in the event of insolvency then this provision will be void under the common law rule of anti-deprivation. Further, where assets have been transferred to a creditor or a ‘connected person’ of the directors of FotoCom within this 6 month period (for example, a director’s spouse) the transfer may be deemed to be a fraudulent preference and therefore void under the Companies Act 1963.

Intellectual property licences

As a technology focused company, FotoCom is likely to have a wide range of intellectual property licences, including, for example, licences to use specialised photographic software. When reviewing FotoCom’s IP licences it will be important for the liquidator to analyse the terms and conditions relating to termination and/or assignment. In particular, whether or not there is a right to terminate the licence on insolvency, or to assign the contract to a third party purchaser (though this may be subject to agreement by the other party). Where there are no terms to this effect, the liquidator may choose to disclaim the licence.

For example, where FotoCom has licensed specialist camera software from a third party in return for monthly royalty payments, the liquidator may choose to make an application to the court to disclaim the licence as onerous property under section 290 of the Companies Act 1963. Onerous property is defined under the Act to include ‘unprofitable contracts, or of any other property which is unsaleable or not readily saleable by reason of its binding the possessor thereof to the performance of any onerous act or to the payment of any sum of money’. While we are not aware of intellectual property licences having previously being disclaimed under section 290, the Irish courts have held that a licence for real property can be considered to fall under the definition of ‘onerous property’ and there is no reason to believe that an Irish court could not take a similar approach in relation to an overly burdensome intellectual property licence in circumstances where the licence has a severely detrimental effect on the value of the IP at issue. If the licence is disclaimed, the software licensor, assuming it has suffered loss, would become a creditor of FotoCom to the extent of the loss.

In the alternative, where FotoCom is the licensor of a burdensome or non-profitable licence, the liquidator could again choose to disclaim the licence agreement as ‘onerous property’. The rights and liabilities of third parties entitled to the benefit of the use of FotoCom’s IP, for example, under a patent licence for innovative photographic processing technology, will not be affected as the disclaimer will only operate to release FotoCom from its obligations. The difficulty here, however, is that as a result, the licensee will only have an equitable interest, and therefore could have difficulty transferring the licence or enforcing its rights. In these circumstances, and where the licence for IP rights is exclusive and worldwide, the licensee might be able to seek relief by seeking an order from the court which would vest the legal rights in the patent in the licensee. The licensee would have to be able to establish that it is entitled to the property, or that it is just that the property should vest to it.

Third party rights

There are a number of options available to third parties who have an interest in FotoCom’s IP. In particular, the court may, on the application of any person who is entitled to the benefit, or subject to the burden of, an IP contract made with FotoCom, make an order to rescind the contract on terms that may include payment of damages for non-performance of that contract. Any damages payable under such an order will be deemed to be a debt proved and admitted in the winding up. Alternatively, any person who is interested in IP belonging to FotoCom in liquidation may make an application in writing to the liquidator requesting that it disclaim the relevant property in the applicant’s favour under section 290. If, however, within 28 days of receiving this notice, the liquidator has not given notice to the applicant that he intends to apply to the court for leave to disclaim the property, the liquidator will be precluded from doing so going forward.

Securities

Securities granted to and from FotoCom should be registered with the Irish Patents Office or other relevant European or international registers. If a security has not been registered, then there is a risk that a bona fide purchaser for value without notice will obtain good title to the IP free of the security. In this case, it will be very difficult to protect the chargee’s security interests.

Further, it is important to be aware that, like any other disposition of property, a charge over IP could be construed as a fraudulent preference under the Companies Act 1963 where FotoCom was unable to pay its debts at the time when the security was granted. It will therefore be difficult to enforce a security over FotoCom’s IP where FotoCom has entered the insolvency process shortly afterwards.

This article provides a brief summary of the matters affecting the liquidation of intellectual property assets within Ireland. It is important for both liquidators, and directors of a company experiencing financial difficulties, to take these issues into account and to be ready to take appropriate steps to mitigate any loss of value that may arise as a result. Failure to deal with these issues prior to or during the liquidation process could lead to unnecessary loss of intellectual property assets or a costly recovery effort after the fact.

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