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Intellectual Property - An alternative form of security
5 January 2009
In the current economic climate, more businesses are realising
that a well managed IP portfolio can be a valuable means of
leveraging value, in particular, IP can be used as security for
loans. However, due to the unique intangible nature of IP rights,
taking security over IP can be more complex than taking security
over tangible assets.
Forms of security
In brief, the three main forms of security available are as
follows:
- Legal mortgage: Used where the IP (registered or unregistered)
is identifiable rather than forming part of a general group of
rights. The relevant IP is assigned to the lender and the borrower
retains an equitable interest in the IP. Legal ownership reverts
back to the borrower when the loan is repaid and if the borrower
defaults on repayment the lender can redeem the IP under the
mortgage
- Fixed charge: Again, used for registered or unregistered IP
rights that can be properly identified. Here, the lender takes an
equitable interest in the IP and the borrower retains legal
ownership unless and until default, at which point the charge fixes
on the IP
- Floating charge: Used for unregistered IP, where it is not
easily identified/defined or where a floating charge is being taken
over all of the company’s assets and the IP is just one of the
assets being secured by the charge. The charge floats over the
unregistered IP and the borrower can deal with the IP unless and
until he defaults, in which case the charge crystallises into a
fixed charge. This form of charge is less valuable to lenders as
holders of fixed charges and preferential creditors take priority
with respect to the proceeds of sale of the assets
If you are looking to use IP as security in other jurisdictions,
you should take separate legal advice for that jurisdiction, as the
position can vary.
Issues for the borrower
Using IP as security
The above shows that the form of your IP affects whether or not
a lender will accept your IP as security and the form of security
taken by a lender. It is therefore advisable to maintain your IP in
a way that makes it suitable for use as security, for example:
- Registering the IP. The IP and title to the IP are easily
identifiable, plus there is a register in which the lender can
record its security interest. You should ensure that the registered
IP is properly maintained, i.e. renewal fees paid, as this is
something a lender will check
- If the IP is not registrable, try to ensure that it can still
be easily defined/identified from other IP and that the chain of
ownership can be demonstrated. Monitoring and recording the
creation of IP within your business and ensuring that all IP
created vests in the business will help
- Checking that the IP is not already subject to any encumbrance,
such as a prior security interest or licence
- Seeking to maintain the value of the IP, for example, enforcing
the IP against third party infringers and defending claims that the
IP is invalid
What type of security?
You should think carefully about the effects that the form of
security chosen, i.e. mortgage or charge, will have upon your IP.
Is it appropriate for the IP to be transferred to the lender, as
required by a legal mortgage? If the IP is fundamental to the
business, and the company’s freedom to deal with the IP as it
chooses without restriction is vital, a legal mortgage may not be
appropriate. If you proceed with a mortgage, then you need to
ensure that the licence back to you is clear and is sufficient to
enable you to continue running the business, as required. The
licence should be exclusive so that the lender cannot use, or
permit others to use the IP, and so that where permitted by law you
can bring proceedings in respect of the IP. Also, consider whether
you will need to be able to sub-license or sub-contract the use of
the IP for the operation of the business. As the intention will be
for you to take back legal ownership to the IP, you should ensure
that the lender deals with the IP appropriately and renews the
registration where renewal is its responsibility; clearly it is in
the lender’s interest to do this but it is sensible to monitor.
Where a fixed or floating charge is being sought it is likely
the lender will want to place certain restrictions over the IP, for
example, you may not create other security interests over the IP or
assign or sub-license without the lender’s consent. Whilst such
restrictions are to be expected, you should ensure that they are
not to the detriment of the business and to its operation.
Dealing with your secured IP
Registration requirements
Companies registered in England and Wales must register certain
security interests with the Registrar of Companies at Companies
House within 21 days of execution of the transaction. Furthermore,
all assignments and licences of, and security interests in
registered IP should be recorded on the relevant IP register at
http://www.ipo.gov.uk/ within six
months of their execution. For the borrower this is important
because failure to do so will mean that the assignee lender or
licensee borrower will be unable to claim any costs or expenses in
infringement proceedings where the infringement occurred before the
registration of the assignment or licence (as applicable). In
addition, the assignee or exclusive licensee cannot bring
proceedings in its own name until the assignment or licence has
been registered. Where international IP portfolios are concerned
the registration requirements can be very time consuming and
expensive, often at the borrower’s cost. Borrowers should therefore
plan and negotiate with the lender at the outset a registration
strategy that is feasible and practicable for the borrower.
Management
Finally, borrowers should ensure that IP which is used as
security is identified as such within the business and is, together
with the key terms of the security arrangement, notified to the
relevant personnel. This should help to ensure that such IP is
dealt with appropriately and that the terms of the security
arrangement are not breached.
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of aspects of the subject matter and does not provide comprehensive
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