It may be Intellectual Property, but is it secure property?
SOURCE: SCOTTISH BANKER, DECEMBER 2005 / JANUARY 2006
The greater the value of the security, the lower the credit risk. In assessing the strength of the security, there are two aspects – the value of the underlying assets and the security itself.
With bricks and mortar, a valuation is straight forward; but where the borrower’s principal assets are intellectual property rights, it becomes more difficult to assess. Scotland is a leading player in the technology field (an area being promoted by the Scottish Executive and Scottish Enterprise) and this is a growing market looking for bank funding. It is becoming more and more common for intellectual property rights (“IPR”) to be valued on the balance sheet – whether trade marks, patents, know-how and, in particular, copyright in computer software. What value is placed on these assets is a continuing question for debate, but whatever importance is placed upon them by the lending bank, it should make sure that they are properly secured.
As an intangible asset, the standard practice of most banks is simply to rely on a floating charge and in many cases this may be sufficient. But the possibility of other forms of security should not be ignored.
In looking at a property company, the bank might expect to take an assignation of rents; in lending to a trading company, an assignation of book debts. Why, then, does the bank not also consider taking similar fixed security over IPR?
Under Scottish law, the only way of obtaining a fixed charge over IPR is to take an assignation in security. For registered IPR, this means that the bank will appear on the relevant register as the holder of the patent/trade mark in security. The advantage of this fixed right is that the Bank may be regarded as having a true right of ownership over the asset and as this would appear on the public register, no third party can acquire rights restricting the Bank’s interest. By contrast, where only a floating charge is granted, the Borrower is free to deal with the assets in the ordinary course of business. Whatever restrictions might be put in place in the floating charge itself, certainly for a technology company the licensing or disposal of intellectual property rights is likely to be seen as acting in the ordinary course of business and a third party will therefore acquire rights which will reduce the value of the Bank’s security.
This is a specialised area and one which many advisers to banks may shy away from – but if the bank is taking comfort from the value of the IPR, it surely makes sense to have them properly secured.
Facility letters and floating charges always provide that the borrower will provide such fixed security as the lender may require and most lawyers will not take the extra step of asking if the Bank has considered any further security which might be available as that will improve the credit profile. Therefore when approached by a new borrower, think about it; and if your existing borrower has valuable intellectual property rights, consider whether you should now be exercising your right to obtain a fixed security over them.
This is a brief overview on securing intellectual property rights and you should always seek specific advice on each transaction.
author: alex innes