Intellectual Property (IP) rights and insolvency in the UK

This text is drafted on the basis that the insolvent business is structured as (or owned by) a limited company, and so I refer to “company” throughout. I use the term “office-holder” to refer to an insolvency practitioner appointed as liquidator or administrator to that company. It also assumes that the main function and objective of the office-holder will be to realise the assets and business (either as a going concern or on a piecemeal basis) of the company.

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Many businesses take licences to use third parties’ IP, with one of the most common being a copyright licence to use software. A licence will be one of three types:

1. An exclusive licence that grants rights to the licensee to the exclusion of all others, including the licensor. This is the most valuable type of licence.
2. A sole licence, under which the licensor and the licensee may exploit the rights but the licensor may not grant licences to any other licensees.
3. A non-exclusive licence (the least valuable kind) that leaves the licensor free to exploit the rights himself and to grant additional licences to other licensees.

Typically, the best realisation will come from the sale of the company’s business as a going concern. In many cases, the office-holder may have had an opportunity to evaluate the assets, and the prospect of realisation, before his/her appointment. However, if he/she has not, he/she will do so as soon as possible after appointed.

In terms of IP, the office-holder will consider:

• IP that the business owns (and may have licensed out for use by others);
• Rights that the business has licensed in from other IP owners for its own use.

The importance of IP rights to a company and its business (and therefore the proportion of time that the office-holder will be prepared to devote to investigating them) can be significant. For example, in a manufacturing business, patents and designs may be vital. For many service businesses, trade marks are key assets representing their trading goodwill, and much of the value of publishing companies will lie in the copyrights they own. Websites and sales fulfilment software might also represent significant IP assets.

Some IP fails to come into effect, such as registrations failing, or being declared invalid. There can be circumstances surrounding the creation of purported copyright works and databases that mean they do not qualify for protection in the UK. For example, a piece of software will not qualify for copyright protection in the UK if it was first published elsewhere and developed by someone who was not a ‘qualifying person’.

In any sale the office-holder will generally sell assets of the company without giving any representations or warranties as to title, quality, value or validity of the assets and subject to the rights of any third parties. Any warranties that might be implied by law will also be excluded. IP is no exception to this. The office-holder will want to be sufficiently aware of the company’s IP assets to ensure that he/she is not selling them at an undervalue.

The office-holder will also want to identify any barriers to an effective sale of the business as a going concern, because these are usually reflected as a discount on the price achievable on a sale of the assets or business.

The office-holder will also have to assess the worth of any current licences that permit the company to use others’ IP rights, and the prospect of the loss of these rights and any consequent repercussions for the realisable value of the company’s other assets.

This is the most comprehensive and least expensive way of auditing registered IP rights, but anyway the existence and status of registered IP rights can be checked by searching against the relevant company name on the relevant register. Official databases provide information such as filing dates, owner details, and expiry dates, and will also show whether registered IP rights have encumbrances such as mortgages or licences recorded against them.

Which registers should be checked?

The UK IPO maintains databases showing:

• UK applications and registrations;
• Comparable marks (EU) and re-registered designs. Comparable marks and re-registered designs are recognisable by their registration numbers; the numbers of re-registered designs begin with the digit 9 while the numbers of comparable marks start with the prefix UK009;
• European patents designating the UK.

It is advisable, but not compulsory, for an assignee of an IP registration or application to record the assignment on the appropriate register. It is therefore possible that a person to whom the company has previously sold IP may have failed to record his ownership of it. An office-holder should therefore investigate the company’s records as well as the register.

Internet domain names

The office-holder should also check whether the company’s internet domain names are due to expire by searching the appropriate WHOIS databases, which can be found by searching the internet. From 22 May 2018, information about registrants is no longer available to the public via the WHOIS database, other than for those registrants who have expressly consented to this. Law enforcement agencies will have access free of charge to an enhanced version of the database that does provide this information, but other interested parties will have to submit a form requesting disclosure. This often causes delay and frustration.

Rights over domain names are merely contractual (between the domain name owner and the registration authority), and they are not a form of IP. However, they will often contain the company’s word trade marks and can represent significant online trading goodwill and marketing investment and therefore be of value.

There may also be rights that are not IP rights but are often associated with IP, such as rights over domain names, confidential know-how and inventions. In addition, as noted above, it is possible to build up valuable trading goodwill in trade marks without necessarily registering them.

It can be difficult to audit these kinds of rights, as they cannot be identified simply by looking at a register. Confidential know-how represents a particular challenge in terms of ascertaining its extent and value. It is often considered as part of the package of IP assets, although it is not a property right, but merely a common law (and sometimes also a contractual) right to have information kept confidential. Furthermore, the common law right only survives if the know-how is shared solely under conditions of confidence. This can only be confirmed by checking whether an obligation of confidence has been secured from all those who have seen the sensitive information. This will not always have been done by way of a formal confidentiality agreement; it could have been effected, for example, by email. In these cases, the only way of finding out what the business owns is to go through its records and speak to its employees and officers.

All documents that are relevant to IP should be reviewed, including for example, assignments, licences, co-existence agreements and settlement agreements. The documents may identify registered rights in which changes of ownership have not been properly recorded, or restrictions as to where and how IP rights may be used. They may also contain provisions triggered on change of control or insolvency which could affect the sale value of the IP.

The office-holder may need to satisfy a buyer performing due diligence that the rights belonged to the company from the beginning, or demonstrate the transfer of ownership from the creator (or from a subsequent assignee of the rights) to the company. Generally, the employer will own the IP right created by its employees in the course of their employment, unless there is an agreement to the contrary. However, consultants generally own the IP rights they create. Therefore, any historic consultancy agreements might be reviewed to ensure that they contained IP clauses transferring all rights to the company. If they do not what extrinsic evidence is there to imply an assignment of licence of right?

It is advisable, but not a legal requirement, to record the existence of licences and other interests on the relevant register against the IP right that is the subject of the interest. The office-holder should (subject to the possible constraints on his resources and his evaluation of benefit against cost) therefore check the relevant IP registers, but also speak to employees and check the business’s paperwork. The latter is also the only way of detecting licences and other interests relating to forms of IP that cannot be registered.

How does insolvency of the licensor affect a licence?

The Insolvency Act 1986 (IA 1986) does not provide for automatic termination of IP licences on insolvency, nor is it common for a licensee to have a contractual right to terminate the licence on the insolvency of the licensor. It is possible for the licensee to make an application to court under section 186 of the IA 1986 against an office-holder who is a liquidator to make an order for rescission of the licence. The order for rescission can contain terms as to payment of damages for non-performance, to be pursued as a debt in the winding up. However, this is an unusual step for a licensee to take, as most licensees would not want the licence to end simply because the licensor has become insolvent.

Are licences of non-registrable IP rights binding on a purchaser?

A licence is binding on every successor in title to a copyright or unregistered design right, except a purchaser in good faith for valuable consideration and without notice (actual or constructive) of the licence or a person deriving title from such a purchaser (sections 90(4) and 222(4), CDPA).

If a database is sold, the purchaser will take it subject to any ongoing licences only if there is a clause to that effect within the sale agreement. There are also particular data protection concerns that need to be addressed when considering the sale of a database if it contains the personal data of individuals.

Registration of a licence or other interest on the relevant IP register generally means that a purchaser of the IP will be bound to honour the terms of that licence.

Under the Companies Act 2006, a company registered in England and Wales may register certain charges (including mortgages) it creates with the Registrar of Companies at Companies House. It is therefore important that the office-holder check the companies register for charges. Broadly, failure to register will mean that the charge is void against a liquidator, administrator or any creditor of the company.

A licensor’s liquidator may decide to disclaim a licence if, for example, it requires the licensor to maintain a large portfolio of trade marks (requiring payment of large sums by way of renewal fees) or requires the licensor to check the quality of goods being produced by licensees.

Disclaimer of the licence by the licensor’s liquidator will not preclude the licensee from continuing to exercise its rights under the disclaimed licence (section 178(4)(b), IA 1986), if it also complies with its obligations. The licensee will also have the right to prove for its loss arising from the disclaimer in the winding up.

Selling IP

If IP is registered, the purchaser will be unable to enforce it against third parties until he has recorded the assignment on the relevant register.

The office-holder must ensure that he has the power to sell the assets of the insolvent business, but no regulatory or other official consent is needed to sell IP.

After the transfer has taken place, steps should be taken to ensure that the records of all relevant IPRs are updated to reflect the new owner in accordance with law. Many parties include contractual provisions to ensure that this action is taken to conclude the transfer. In some cases, the exclusions of warranty or limitations on liability contained in the documents at the behest of the office-holder may give rise to practical difficulties for a buyer in registering the transfer of the IP. This should be considered in advance of the sale.

IP licences granted to the seller must be assigned or novated to the buyer. The licensor’s consent may form a condition of the transaction.

How to value Intellectual Property

As explained above the company’s IP can be sold either as a part of the business as a going concern, possibly as an element to a pre-pack or sold off separately (such as where the business has no value other than its IP). The commonly espoused theory that it’s only worth what a willing buyer will pay to a willing seller is of course true, but the following should assist an IP to determine what a company’s IP value might be.

The value of a business’ intangible assets and IP is key to its ability to support revenues through sales of products/services, franchising, licensing, or through attracting investment and fundraising activities. In the event of insolvency, the value of these assets is examined in the context of their use by the business, with appropriate discounting for the fact that that they are to be sold in a liquidation. In a pre-pack administration procedure, where the business is still viable, the existing value of the intangible assets may be easier to retain.

Outside of a stressed sale the collection of intangible assets and IP can be said to be the goodwill of the business and a formula followed to value it. The simple method is where goodwill is equal to the average profits for a set time period, multiplied by the number of years you think the previous owner’s goodwill will last, i.e., Goodwill = Average Profits X Number of Years.

When looking to sell IP assets in an insolvency one should consider the Remaining Useful Life (RUL) of the IP. The longer the IP’s life the more worth it has. A patent expires after 20 years, trademarks can be renewed every 10 years indefinitely and some copyrights last long after the author’s death.

Many other factors are considered in determining the RUL of an IP asset, including:

• the expected usage of the IP asset by the entity and whether the IP asset could be managed efficiently by another management team;
• typical product life cycles for the IP asset and public information on estimates of useful lives of similar IP assets that are used in a similar way;
• technical, technological, commercial or other types of obsolescence;
• the stability of the industry in which the IP asset operates and changes in the market demand for the products or services output from the IP asset;
• expected actions by competitors or potential competitors;
• the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level;
• the period of control over the IP asset and legal or similar limits on the use of the IP asset, such as the expiry dates of related licenses; and
• whether the useful life of the asset is dependent on the useful life of other IP assets of the entity.

A starting point for a Liquidator wanting to set a price for the sale of a valuable IP (such as a well-known brand = trademarks/designs) might be the Reproduction cost method. How much would it cost the buyer to create an exact replica of the IP? Add to the cost price a figure for goodwill value. What [gross] profits were enjoyed by exploiting the IP over its corresponding years? That produces a figure which could be said to be an opening valuation; assuming a willing buyer exists!

Evaluating rights of the company to use IP belonging to others

Many businesses take licences to use IP that belongs to others.

Depending on its findings, and the aims and likely course of the insolvency process, the office-holder may consider approaching the licensor to negotiate the continuation of the licence so that the business can continue to trade. Often any agreement of the licensor to waive or forbear from relying on a termination provision which operates by reason of the licensee’s insolvency will depend upon the office-holder agreeing (where this is achievable) that continuing licence payments be made as an expense of the insolvency process.

Will the company’s insolvency contractually entitle the licensor to terminate the licence?

The company’s insolvency doesn’t operate to automatically terminate the licence, but it is common to include such an express provision into the terms of the licence, so insolvency practitioners should check the wording in the licence. If insolvency does terminate the licence then the asset is lost.

What about the anti-deprivation principle?

This is a common law rule designed to protect creditors by preventing a party from contractually providing that, if the party becomes insolvent, title in its property will automatically be transferred to someone else.

Can a licensee assign the benefit of the licence?

If the benefit of the licence is important or critical to the continued operation of the licensee’s business, the office-holder will need to consider whether the benefit of the licence can be assigned. Often the terms of the licence will expressly determine whether and on what terms the licence is assignable. Any assignee is likely to want to assure itself that the licence has not (before it takes an assignment) already come to an end, and that (if it has not already come to an end) the insolvency, or past actions or omissions of the assignor, do not enable the licensor to terminate the licence after the office-holder has assigned it to the licensee.