IP or no IP? Is that the question?
With asset values on the whole diminishing, a number of funders are revisiting their corporate loan portfolios to examine their security packages, both in relation to valuation and enforceability. Are lenders as secure as they thought? Has that fixed charge evolved into a floater? Were all the appropriate registrations made at the time? Is there anything else that a funder can do that might actually improve the value of an asset class?
Other than in isolated cases, such as technology start-ups, security over intellectual property (IP) tends to be viewed as boot collateral, rather than a key and valuable security. Loans specifically secured on IP are rare. Yet most debentures have detailed provisions describing the IP assets and covenants as to their management. How much thought is ever given to negotiating these "boiler plate" provisions to ensure that they are appropriate for each borrower? Has a reliance on standard wording, followed by little practical monitoring, helped to undermine the security over the IP as a whole?
Fixed or floating charges
When were your standard documents last reviewed by banking and IP specialists in this regard? Following the Beam Tube case ((Fanshawe & Adshead v Amav Industries Limited and others: All ER (D) 246 (Feb); (2006) EWHC 486 (Ch)),) which followed Spectrum, there is some doubt over the validity of a fixed charge over a class of assets, if certain of those assets are used by the companies as they see fit. In that case, the court determined that a purported fixed charge over plant, machinery and equipment was too wide and was properly characterised as floating charge, taking into account the way in which the borrower was allowed to manage the plant, machinery and equipment as a whole. While not specific in that case to IP, it could be difficult to persuade a court to treat IP differently in similar circumstances. For example, if a company has covenanted not to dispose of any its IP but in reality has continued to deal with its IP in the normal course of its business, it is likely that a court would deem the fixed charge to be a floating charge. This would impact on the proceeds paid to a funder on enforcement.
What can be done?
How often does a lender do an audit to check that the IP covenants are being followed? Do the documents allow the lender to do this regularly? Should the fixed charge merely cover specific parts of IP that can be clearly identified and controlled by the funder, to prevent a "catch-all" provision from contaminating the rest of the fixed charge? In order to answer these questions, a funder will need to be able to examine the company's IP management strategy (see below), to work out which assets are valuable (or are potentially valuable), and which assets are less important (or need more active company control). Some IP assets may even be better off charged under a floating charge.
Would better management increase the value of IP?
With the value of a number of assets plunging, ensuring that these values do not deteriorate any more than necessary is high on everyone's agenda. If managed and organised according to a coherent and co-ordinated approach, a company can not only maintain but enhance the value of these assets. This is particularly relevant in regard to IP. Companies should have an officer responsible for delivering an IP management plan – do you know who they are? With such a valuation now sitting on the balance sheet, this can benefit not just the company, but a secured funder. A prudent bank should be ensuring that its borrowers are doing all they can in this regard.
Wragge & Co works closely with specialist valuation experts designing appropriate strategies for companies to enable the full value of IP assets to be realised.
The specialist team at Wragge & Co comprises IP, tax and banking experts.
This action note was written in conjunction with strategic IP management consultant Serena Tierney, serenatierney@pandionIP.com.
This action may contain information of general interest about current legal issues, but does not give legal advice.