Most modern businesses will make use of some form of intellectual property during their lifetime. Some, such as technology companies or manufacturing companies creating products will use many types of intellectual property rights, and often the intellectual property rights that they own are the most valuable assets they hold.
When a company enters a formal insolvency process, such as liquidation or administration where a licenced insolvency practitioner, also known as an office holder, is appointed over the company, the intellectual property rights owned or used by the business can be a vital factor in recouping money into the company for the benefit of the creditors of that company.
It is therefore essential that the intellectual property rights are properly considered, identified and protected when a company enters a formal insolvency, to maximise their potential sales value. Unlike tangible assets, like machinery or property the intellectual property rights that a business owns and uses are often far more difficult to identify and value.
Here our insolvency solicitor Eleanor Stephens looks at some of the intellectual property rights issues that arise in an insolvency situation.
- What are Intellectual Property Rights?
- Why are intellectual property rights so important on insolvency?
- What do you need to know when selling or buying intellectual property in an insolvency situation?
- Intellectual Property Licenses – do they terminate on insolvency?
- Due diligence and the IP paper trial
- How to value the intellectual property rights in a business?
- How to transfer intellectual property rights
- How can we help?
What are Intellectual Property Rights?
Intellectual property rights can be a key asset for a company. Any office holder appointed over an insolvent company is under a duty to realise the assets of the company for the benefit of all of the creditors of the company, and this will include any intellectual property rights held by the company. However, understanding what is there in the first place can be quite challenging.
Intellectual property rights can be registerable or unregistrable
Registerable intellectual property rights are:
- Patents - a right that protects inventions; or
- Trademarks - the branding and logos a business uses to distinguish it from its competitors; and
- Registered designs - the appearance and style of either a two dimensional or three dimensional design.
If registerable, and registered correctly, then as long as at the registration is maintained, these can be fairly easy to identify.
However, many intellectual property rights are not registerable. Unregistered rights arise automatically as long as the relevant criteria is met, sometimes from the first time they are used, or made available for sale. Examples include: copyright works; unregistered design rights, unregistered trade-marks and database rights, websites and their associated domain names, goodwill.
It is also usual to include confidential information, know-how and trade secrets in the definition of Intellectual property rights that have a value to a company. These are frequently sold in the sale of a business. Know-how is technical or practical knowledge resulting from research or experience and usually relates to the way something is done. Trade secrets are a specific type of know-how.
How long are intellectual property rights protected?
Most intellectual property rights have lifespans during which they can be protected. These are individual to the particular intellectual property right. Some depend on registration and the payment of regular registration fees or the rights will lapse, but even unregistered rights have their own specific criteria for ownership and time limits.
Why are intellectual property rights so important on insolvency?
Even if there are no other assets of value, valuable intellectual property rights may be sold to generate funds for the insolvent company’s creditors. We frequently see situations where the existing directors want to continue the business of an insolvent company in some form or other in a new company, and inevitably they will want to purchase the benefit of the goodwill, databases, and any other intellectual property rights that they worked hard to create, to be used in that new company.
When selling intellectual property rights, there are specific considerations that relate only to the sale of these type of assets. For example, when selling the database of a business, containing names and contact details of customers or suppliers and future customers, it is imperative that UK data protection laws are complied with and followed, both by the company selling, and the business purchasing the database. When the officer holder sells the database, including customer lists or employee lists which contain personal data, they will ensure that the sale contract contains obligations on the purchaser to continue to control the data in line with the legislation.
What do you need to know when selling or buying intellectual property in an insolvency situation?
An Insolvency practitioner will need to understand exactly what intellectual property rights and associated rights the company owns before they can start any sale process. Some may be licenced out to third parties, and some may be licenced by the company from third parties, so are not actually owned as an asset by the business at all.
Intellectual Property Licenses – do they terminate on insolvency?
In general, a licence agreement doesn’t usually terminate on the insolvency of the company granting the licence, although this would need to be checked in each case. If there is a risk of termination, then the office holder will need to consider whether they need to, or indeed can, sell the intellectual property rights while it is subject to a licence to a third party. Anyone purchasing the intellectual property rights will need to be aware that they are likely to be bound by the licence granted, for however long that licence may remain.
If the licensee’s rights are registered, then any buyer should be bound by the licence. In the case of unregistered rights, the general position is that only a third party purchaser acting in good faith without notice of the licence and giving good consideration could potentially take the intellectual property rights free of a pre-existing licence right.
Due diligence and the IP paper trial
When taking on a company in insolvency, the insolvency practitioner should carry out a full search of the books and records, and speak with key employees to identify intellectual property rights which are owned and those which are licensed, and also what third party arrangements might be in existence over intellectual property rights, such as licences and assignments. This is fairly straightforward if they are registered, but will require more work and more co-operation with the company directors and employees if not.
Sometimes a company that has been in financial difficulties for some time will have allowed valuable intellectual property rights to lapse and expire. Sometimes what looks like a valuable intellectual property asset of the company might actually be owned by an employee or contractor. Sometimes the rights that appear to belong to the company are owned by a group company. All of this will need to be determined before they can be properly valued and sold.
How to value the intellectual property rights in a business?
Intellectual property rights are notoriously hard to value, as they are not tangible, and hold very different values depending on the company and the rights involved.
Third party rights not owned by the business outright, whether licences, security or co-owned rights, will also affect the value of intellectual property rights.
Determining the value of any intellectual property rights owned or used by an insolvent business is very important for the office-holder acting for the company because they have a duty to get a reasonable and realistic price when selling the company’s assets. They will generally therefore use an independent professional valuation agent to ensure they are correctly valued before accepting any offers for purchase.
How to transfer intellectual property rights
Once a purchaser has agreed a price for the intellectual property rights, then the practicalities of how these will be transferred will need to be discussed and agreed. This will depend on what type of intellectual property right is being sold. The logistics will often be set out in the sale agreement, so everyone is clear when and how title passes. For more information, read our detailed guide on transferring intellectual property rights.
How can we help?
Our team of Intellectual Property and Recovery & Insolvency experts have many years of experience in advising companies on their intellectual property portfolio, as well as acting for companies and office holders when selling or buying intellectual property rights in an insolvency situation. If you would like more information on any aspect of the above, please contact one of our experts here today.