News & Insights

Intellectual property (IP) is a valuable asset in any liquidation or bankruptcy. However, it presents unique legal and practical challenges for insolvency practitioners.

These challenges include:

1. Navigating various statutory and common law rules that differ depending on the type of IP;
2. Identifying the existence and extent of IP rights held by the insolvent entity;
3. The possibility of disputes or uncertainty over who is the ‘true’ owner of the IP;
4. Determining whether transfers of IP rights prior to insolvency are voidable transactions for the purposes of the Bankruptcy Act 1966 (Cth) or Corporations Act 2001 (Cth); and
5. Ensuring that any sale of IP by the insolvency practitioner:
   1. transfers the legal and equitable IP rights to the purchaser; and
   2. is a sale for fair value.

Some challenges that may arise when insolvency practitioners are required to deal with IP include:

different rules for different types of ip

IP is a broad term that encompasses many types of intangible property (and certain elements of goodwill attaching to the business), including trade marks, patents, registered designs, copyright and plant breeder’s rights.

Each type of IP is regulated by its own rules that determine how IP and the associated rights operate.

Understanding what rules apply to particular IP is crucial to ensure those rights are protected, that IP maintains its value, and the IP may be dealt with by the liquidator or trustee.  In Reilly v Commissioner of Patents ((1996) 40 ALD 791), the Tribunal held that while the Trustee in Bankruptcy had an equitable interest in the patent due to provisions in the Bankruptcy Act, it was not the legal owner as no transfer of ownership had been recorded in the patent Register pursuant to provisions in the Patents Act 1990 (Cth).

who owns the ip? and who can exploit the ip rights?

While an entity may appear to have rights to exploit or own IP, the extent of those IP rights can be the subject of disputes that result in additional costs or delays in finalising the appointment of a trustee or liquidator.

Chen v Diversipak Pty Ltd (In Liq) ((2018) 363 ALR 692) involved such a dispute.

The former company director purported to terminate the company’s licence to use a trade mark registered in her name, and then sued the company (then in liquidation) for trade mark infringement.

Questions were raised around whether the director or the company was the ‘true’ owner of the trade mark for the purposes of the Trade Marks Act 1995 (Cth) (TMA).

As the court refused to grant leave for the director to proceed against the company in liquidation, the question of trade mark infringement was not determined, nor was the true owner of the registered trade mark established.

However, the court did comment on the legal and factual complexity of determining issues of trade mark ownership in light of the registration requirements of the TMA.  Indeed, this was one of the reasons leave to proceed was refused wherein the court found the costs to determine ownership were likely to substantially exceed the value of the fruits of the litigation.

These ownership or assignment issues, and the associated legal and factual complexities of determining them also arise in other types of IP.

transfers of ip as voidable transactions

Transfers of IP rights (including prospective rights, such as applications) may constitute voidable transactions for the purposes of the Corporations Act or Bankruptcy Act.

However, as the case of McCann v Molnar [2017] APO 30 shows, insolvency practitioners should obtain valuations of the IP or associated rights in order to demonstrate a transaction is voidable.

In McCann, a company purported to assign ownership of a pending patent to its sole director shortly before entering liquidation, and the director was subsequently registered as the owner of the patent.

The liquidator sought to have the company reinstated as the registered owner of the patent on the ground the assignment was an unreasonable director-related transaction.

In hearing the matter, the delegate of the Commissioner for Patents concluded he could not find that the transaction was unreasonable in circumstances where the liquidator had not adduced any evidence of what a reasonable price would have been for the transaction.

The liquidator ultimately failed in his application and was ordered to pay costs.

key takeaways

1. Upon appointment to act as a liquidator or trustee, insolvency practitioners ought to –
   1. consider whether IP is likely to be a factor in the insolvency administration; and
   2. undertake due diligence to determine the true ownership of any IP rights.
2. If IP is a factor in the insolvency administration, a combination of IP and insolvency law advice will help navigate the various requirements, which change depending on the type of IP and whether you are dealing with corporate or personal insolvency.
3. Understanding and obtaining valuation of IP rights is crucial to –
   1. determine whether there is any possibility of voidable transactions for divested assets; and
   2. ensure IP rights are fully realised for the benefit of creditors.