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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 companys 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 companys 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 lenders 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 lenders 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 borrowers 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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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

Declan Cushley

Declan Cushley

Partner and Head of IP and Commercial Group

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