Insights

Leveraging intellectual property powers in insolvency

Corporate

Businesses across Australia are contemplating the end of the COVID-19 safe harbour (passed by Parliament on 25 March 2020 and set to expire at the end of December 2020*). While in place, it has granted temporary relief to directors and financially distressed businesses from insolvent trading liability under the Corporations Act 2001 (Cth). Businesses are now focussed on reviewing their supply chains and conducting comprehensive asset reviews which will become central to turnaround plans, restructuring or proposed business sales, and resisting further economic headwinds. The role and value of intellectual property is critically important to this process.

Intellectual property is often a forgotten class of assets. Its value can be obscured by its very intangible nature, particularly when it comes to unregistered IP. However, from patents to trade marks, design rights to copyright, these intangible assets can add immense value to a company in insolvency, immense risk when IP suppliers become insolvent and even immense opportunity for those looking to acquire a competitor's IP. Indeed, a company's entire intellectual property portfolio can be decisive to the outcome of an insolvency event, both as a source of untapped value and unappreciated liability.

IP assets are independently quantifiable; they can be bought, sold, licensed, infringed, used as security and much more. In pandemic conditions, managing IP and implementing an IP strategy has never been more important. Other intellectual property-like assets should also be firmly on the radar, including domain names, databases and confidential information.

When valuing IP, there are also several important Australian-specific issues that need to be considered. This includes the existence of any security interests on the Personal Property Securities Act 2009 (Cth) register and the potential application of its deeming provisions in respect of goods that might rely on underlying intellectual property rights, such as patented technology required to operate robotic equipment.

So, what can businesses do now with their IP to prepare for hard decisions and potentially ensure their survival following the end of the COVID-19 safe harbour? The preparations will differ depending on whether you are an IP owner, an IP user or a lender of credit. Here are a couple of tips:

IP owners/licensors

  • All businesses will own some form of IP. If you don't have an IP register that identifies all IP assets, prepare one
  • Ensure that title as to ownership, particularly of unregistered IP, can be established (through employment contracts, commissioning contracts and/or IP assignment Deeds)
  • Check that IP registered with IP Australia has been maintained, by ensuring payment of renewal fees
  • Consider any IP licence agreements you have granted prevent the licensee from granting a security interest over the licensed rights to a third party. Do the same in respect of any IP licences granted for use in relation to goods
  • Protect your IP from those who may be tempted to take advantage of it for their own financial wellbeing
  • Consider using your IP assets as collateral to secure loans to improve your liquidity
  • Consider selling IP assets you no longer use (such as live patents) to a licensee or to a third party
  • Consider selling IP assets to IP licensees or a third party, under a licence-back arrangement that includes the right to sub-license, so that you can continue earning revenue from the IP under a revenue-share agreement with the new IP owner

IP users/licensees

  • Identify IP assets that are critical to your business operations and review licensing arrangements, including the health of the licensor
  • Identify upcoming expiry of licence terms and commence renewal negotiations
  • For licensed IP that is critical to your business, consider:
    • creating a security interest over an IP licence by registering the interest on the PPSR (provided your licence does not prevent this)
    • negotiating an escrow arrangement that entitles you to keep using IP held in escrow in the event of insolvency or some other trigger event
    • buying the IP from financially stressed IP owners (remembering to check for any security interests which will bind successors in title)
    • sourcing alternative IP from alternative suppliers in the event your licensed IP becomes suddenly unavailable due to insolvency and/or prior creditor rankings

Lenders

  • Before taking a security interest in an IP licence, check the PPSR for any pre-existing security interests in the same IP
  • Before taking IP as collateral and licensing it to third parties on default, ensure this will not amount to breach of a pre-existing licence such as an exclusive licence

*This insight was updated on 7 September 2020, to reflect the government's announcement that the moratorium has been extended until at least the end of December 2020.

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

Key
Contacts

Mike Azarnikow

Mike Azarnikow

Lawyer