This article is written by Gitika Jain pursuing BBA.LLB (Hons) from Amity University, Kolkata. This is an exhaustive article which deals with the concept of IP financing.
The transformation of ways in which business and economies work related to the technologies and innovations are changing in the 21st century. With the flourishing knowledge-based economy in this globalisation era, recognition of intellectual property as a primary driving force is being given importance.
In order to make one intellectual property work for different businesses there needs to exist a shift in focus. This would encourage innovation and enhance creativity which in turn will boost the businesses to provide exclusive rights to IP holders. Therefore, the IP holder should ensure that the IP is registered, protected and enforced appropriately for it to hold a high commercial value and significant importance.
Talking about the Assets of the companies and businesses they are divided into the following two categories:
- Tangible assets (infrastructures, buildings, etc)
- Intangible assets (intellectual property rights)
Therefore IPL stats include creation, protection, optimisation, securitization, regulation, so that there remains a well-defined role of every stakeholder in a company.
To improve the current level of operations and expand the activities many companies try to look forward to and therefore it becomes essential for the value of the assets to be high enough in order to strengthen the bargaining powers and the access credit facilities for negotiated lower rates on credit. In order to bolster company’s asset values in recent years, intangible assets like intellectual Property Rights (IPR) have been utilised and is commonly known as intellectual property financing which is used for increasing the collateral value of the company and acquiring a loan at lower interest rates.
In contrast to the decision in the Canara Bank vs PN Shukla, a number of Indian statutes allowed securitization to IPRs to receive loans, even if there are differences in the type of charge depending on the different IPs. For a simple understanding, analysis of general legislation will have to take place first in order to determine if security interest may be created upon a property including IPR. Even if there exists legislation that is being interpreted beyond their scope in order to accommodate securitisation of IPR a clear governmental recognition of the fact that is National IPR policy of 2016 to check if the IPR securitisation needs to be facilitated by creating administrative, legislative and market framework.
Ample amount of support by the legislations is received despite the legality of IP financing and the ruling in Canara banks case has also thrown a scary picture which has triggered the doubts regarding validation of securitization of IP. However, an attempt by the author to vindicate the judgement and justify that the Canara Bank ruling does not go against the legislative intent but merely misconstrued because of a particular set of facts.
Facts of the case
To briefly provide the facts of the case, Canara Bank had availed some credit facility and because of failure to repay the principal amount with the interest it signed an assignment deed assigning that his trademarks for agarbatti would be for a period of 10 years with the chief manager of Canara Bank. Accordingly, the bank was able to pay him some amount out of the total amount every year and some part was reserved for repayment of the loan. Later on, when their superiors ask them to cancel the assignment the bank cancelled it.
It was also observed that registration of the assignment of the trademark was applied by the bank according to Section 45 of Trademarks Act 1999. It was also notified by the registrar that registration of the deed can only happen after the assignor of the registered owner of the trademark has filed an affidavit and confirmed the trademark assignment. But since no steps were taken by the bank to comply with the requirements of the affidavit, the assignment could not be registered and it was held that if the assignment deed remains and forced it cannot be held as admissible in the courts of law as a proof to the title of the trademark by an assignment which the court themselves or otherwise direct.
Afterwards, a controversy arose in some part of the judgement where it was said that the bank could not use the trademark to sell the licence sticks because that would prohibit the application of Section 8 of the Banking Regulation Act which is the prohibition of banking companies from dealing in the selling or purchase or buttering of goods unless there is a connection to realising security they have hold. Further, it was also held that permission cannot be given by the bank to third parties to use the trademark and on royalty because it would be an evaluation of Section 6 of the per which lays down an exhaustive list of the businesses that are permitted for banking companies.
Lastly, it was declared that thread work was not to be considered as a part of any security for loans that are made to the respondent and it cannot be held as a property that is in the possession of the bank while satisfying claims of the bank.
Because of the facts of the case being peculiar, the ruling of the same case or were heavily criticised for going against what has already been provided in the relevant legislative provisions and it may be logical to consider that the ruling prohibited the use of third parties for the trademark and earning royalties from it because that could not be connected with any security of loans made and the situation would be problematic because of Section 6 of BR Act that was favouring Setty. Section 65 of the BR Act, however, allows to realise any property by the bank.
This decision, however, indicates that if any borrower has filed to make the repayment of loans and the bank has the hold over his IPR to satisfy their claims of the payment then the bank should be given permission to realise that IPR which would necessarily mean dealing with the rights.
Given that the repayment of loans was cleared by the bank and assignment deed was signed to satisfy this claim by the bank, it came into the possession of the trademark which was an intangible property and because of that the realisation and management were permitted to be used by the third parties. The implication in food from mentioning selling of the property separately from realisation is that there can be other ways also to realise the property that is in possession apart from selling it and moreover this case cannot be considered to mean that the trademark cannot be assigned as loan security.
This case really rules down that unless and until the court has made it clear, an unregistered assignment deal cannot be considered to be admissible as evidence in any court of law. An extension of the same deed to preclude assignment of a trademark is security for loan would be considered as a foul of the Trademark Act that allows the registration of trademarks to be assignable. Where the matter of this case started from 2000 an amendment in 2010 was done to the Trademark Act which resulted in the removal of the clause that made it mandatory for an unregistered assignment deed to be considered as inadmissible in the court of law generally unless and until the court permits otherwise. Therefore, if the voting so the case are to be applied genuinely the statement that the deed is unregistered cannot be precluded from its admissibility.
To conclude everything together it can be said that even if it was held that the trademark EENADU was not considered as a security for a loan taken because it was assigned only after the default on the repayment of the loan by Setty, it will not be justified to interpret as precluding securitization of trademarks altogether. If this was done it would be against the letter and the spirit of laws. The case also lays down that the difficulty to interpret various legislations in favour of security interests in intellectual property is in the interest of the lender and the security shall be considered operational viable and maintainable and thus enforceable in the court of law.
The action taken in this case arose in 2003 when EENADU trademark was assigned by the defendant NG Subbaraya Setty to the petitioner Canara Bank. This resulted in separate lawsuits, the first one being by the borrower because of the cancellation of assignment and the second one was to recover the sum of money that was paid as a loyalty before the cancellation of the deed with interest.
The fact of the case so is whether the suit falls within the provision that has been laid down on the principle of res judicata and the under Section 45 the Trademarks Act 1999 which specified that if an assignment is not registered it cannot be presented as admissible evidence in the court of law. The deed of assignment that was signed between the parties was never registered with the registry thus it was not accepted as a valid document under Section 45 of The trademark act. Further, the parties were of the opinion that the decision of the court as regards the question of law was passed in previous orders and thus the representation between the Supreme Court was prohibited by the Doctrine of res judicata. However, it was held by the court in this matter that if any question of law has only been decided by the other codes and that question can again be raised before the competent court.
Another important issue of this case was whether the intellectual property assignment was acceptable or not where the court held that the assignment was not valid because the parties did not attach intellectual property as security at the time of entering into the loan agreements and the court felt that search intellectual property cannot be attached the school article to set of the claims of the bank. Additionally, Section 6 and Section 7 of the Banking Regulation Act states that top banks only engage in only particular types of businesses. Attainment of royalty from intellectual property and selling of goods through a third party was not allowed as per Section 6 and Section 8 of the Banking Regulations Act. Further, the court also clarified the point that the bank may sell the goods to set off each and every claim that it holds but that it should not do so through a third party and it can just obtain royalties that were never put in before the bank as security. Therefore in this particular issue, the assignment of intellectual property was found to be invalid.
Generally, the national IP policy allows an IP to be attached as security. But the same is considered to be very sceptical by the banks because the IP valuations can sometimes be very tricky unless and until there is a system that can make the registration mandatory. Difficulty in securitization also rises in the Indian scenario. As per current loss, any previous user whose trademark has not been registered can challenge this claim of the registered IP owner.
The example of Vijay Mallya case can also be taken in this perspective. His team Kingfisher was offered as a security to the banks during the time of agreement and it did not form a part of security under Section 6 of Banking Regulations Act. The auction of the trademark was unsuccessful even though it was valid security.
Therefore it can be concluded that although intellectual property is legally possible security but this road is somehow less taken. The various aspects of the nature of IP make it very uncertain for the banks to realise their debts through this process. If an appropriate method is introduced for valuation and registrations it would be easier for the banks to increasingly accept intellectual property as security.
Therefore in this 21st century of high competition IPR law has played a crucial role which has led to an effort of reducing uncertainty around the intellectual property and developing a commercial framework. IP insurance, therefore, in the years to come is going to play an important role along with owners and insurance companies especially in the ongoing situation and post COVID error the age of focus should be to maximize profits to which IP financing would lead to. Therefore the task in hand for IP brokers and companies would be ensuring the IP transactions.
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