This article is written by Ishika Gautam, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
Secured loans are those which are backed up by security and that security is known as collateral. For example, car loans. In a car loan, you have to put financial assets that you own, as collateral, so that if you are unable to pay back the loan, the bank can get its hands on the collateral. The financial assets can be house property, vehicles, insurance policies, etc. Whereas, unsecured loans are those which are not backed up by any kind of security/collateral, but you still have to pay interest for such loans. For example, personal loans. In a personal loan, there’s no such thing as collateral, it is given by financial institutions at a higher rate of interest.
The security agreement is a document that provides a lender a security interest in a specified asset or property that is pledged as collateral. It gives the legitimate assertion of surety to the creditor if there’s a default by the borrower. Grantor (who is a borrower as well as a surety) allocates, permits, and undertakes to the grantee (who is a lender) a security interest in that personal property which is called a guarantee. These security agreements can be used to describe a surety that is already possessed by the debtor. It can be an intangible surety or any after-acquired property.
Loans play a main role in growing/expanding one person’s business. Such loans can be secured and unsecured. If the loan is secured, this means that the guarantee is fixed to the repayment of a loan and that the lender may not be wholly at loss in the event of any default takes place. The main aim of this article is to make the concept of a security agreement with that of copyright as collateral as much clarity as possible.
What is a collateral?
Collateral can be defined to be of various types. An agreement for security can be oral. It can be oral if the collateral is already physically possessed by the secured party or by the lender.
There can be a number of cases where the collateral can be intangible, for example, software rights or intellectual properties. It is extremely important to give a proper written description of intangible collateral.
These floating liens are expected to be seen in security agreements. Floating liens are not necessarily needed to be in the debtor’s possession at the agreement’s commencement time. It can include acquired property. It emerges from the disposition of collateral.
After-acquired properties include any new property that is acquired or purchased after the signing of the agreement. For example, if your security agreement has any after-acquired property and your debtor promises you all the automobiles that are owned by the borrower, then even if the borrower purchases new automobiles after the agreement is signed, the agreement would be collateral.
Why do businesses use security agreements?
All the businesses rely on secured transactions for their growth to get creditors so that they can provide loans can be difficult for individuals many times. This security gives proper reassurance to the creditors that they are not going to suffer any loss. The debtor also gets benefited from the low-interest rate that is present because of the collateral. These agreements give us a legally binding document that outlines all the terms with respect to which the debt can be secured. It also includes all the remedies, in case the debtor defaults. Many businesses do this to assure they are not under any loss.
Examples of such guarantees are shares of livestock, stocks, etc. This agreement does not work to transfer any kind of interest in the real estate, but only in the personal property. The basic document that is used by the lenders to acquire a claim on the real property is a trust deed or a mortgage. This agreement lays down various different rights that are related to the collateral.
There are various challenges which the authorities face regarding the securitization of intellectual property; first of all, there is an inconsistency with the laws that prevail in the country or we can say that the intellectual property can be controlled either by the IP laws or by the acquired transactional laws. On the other hand, the identification of the security rights is important but some authorities do not acknowledge such security rights. Lastly, there are some fixed rules of law that limit the ability of an owner to design the security right in some definite types of IP.
These agreements can be oral, only if the acquired lender has the actual corporal ownership of the collateral. When the security remains in the physical ownership of the debtor, and if the security is non-physical, this agreement shall be in writing so that it can satisfy the precedents. This agreement must be verified by the borrower, which means that it must either be signed by the debtor or must have biometrics. There must be a reasonable explanation of that security and should have words showing the intention to create a lien.
Terms in a security agreement
A security agreement must contain the representation of the parties included, collateral as well as the statement of intent of providing the security interest alongside a sign from the parties. Nonetheless, there are various other terms present in such agreement:
- Warranties : Warranties include conditions which are agreed upon by both of the parties.
- Collateral description: The agreement must describe in detail about the property being held as collateral/security under this agreement. This can include the quantity of the collateral, categories of such security and description of the collateral by type.
- Types of collateral: It can be of different types like stocks, bonds, inventory, accounts, etc and this should be described in this agreement.
- Security interest : This must be used for completing such agreements. An interchange of value must take place, the borrower should relinquish the rights to security and also must be able to validate this agreement by way of a signature.
- Priority : In case of several parties, priority must be given to the procured party which is involved in the agreement. Normally, the first secured party is given the priority over the other. The priority can be realised by filing a funding statement before the other parties.
- Default : The agreement should interpret what would be viewed as a default. Like theft or inappropriate use of the security, neglection to bear by other commitments, or neglecting such evidence which provided security was incorrect.
- Remedies : This segment can provide a solution for the depositors to redeem the forfeiture in case of non-payment from the debtor.
Five tips to draft IP security agreements
- It needs to be checked that the collateral’s description must include everything that is associated with intellectual property, i.e., contract rights, licensing rights, film reels, distribution rights, all receivables and income, rights to sue if infringement is done, foreign rights, etc.;
- After-acquired clause needs to be included in security agreement which consists of all “currently existing and acquired or created afterwards” Intellectual properties. It requires the borrower to get registered as soon as any new intellectual property is acquired or created as well as to inform the secured creditor of any new addition to Intellectual Property to allow the secured creditor to get its interest in collateral;
- Rights of the secured creditor should be preserved so that the remedies can be effectively executed upon default, that is, if the borrower willingly agrees to cooperate with power of attorney to allow secured creditor to allot as well as register the rights after foreclosure.
- It is required that the borrower timely files and pays all the maintenance fees which are required for the patents along with the renewal fees of trademarks. It is also required to notify the secured creditor regarding any kind of infringement litigation as well as to help the secured creditor in safeguarding the rights along with defending the litigation (at borrower’s expense), and
- It also includes warranties in this security agreement with proper description that the borrower carries the good and marketable title, with no pending or previous assignments along with no previous security interests and the one that confirms the validity and proper enforcement of the intellectual property.
Security interests in the copyrights
The Copyright Act properly defines a system for capturing as well as transferring the ownership interests under copyright-protected works. Under this act, after copyright gets registered then a security interest could be implemented after getting the transfer recorded in the Copyright Office. In case of copyright remains un-registered, then the Copyright Act doesn’t serve the UCC regarding perfection along with a priority of security interests.
As an outcome, all the security interests under unregistered copyrights should be made free under Article 9 of UCC. After that unregistered work gets registered, then the Copyright Act automatically comes to application and all the security interests are then recorded again with the U.S. Copyright Office. It is also advised that depending upon the nature of work that is copyrighted, it is required that a borrower registers the copyrighted material by the Copyright Office and records security interest with UCC in the time when the application is pending. A secured lender can get a security interest recorded by the Copyright Office only after the copyright application is finalised.
Clauses of the security agreement
Representations and warranties
Each and every grantor shows and issues warrants to the collateral agent as well as the secured parties that:
- They are subjected to liens that are permitted by Section 7.01 of credit agreement. Each grantor has some valid rights according to the Article 9 collateral according to which it grants the security interest as well as possesses full power with an authority to allow the collateral agent their security interest under Article 9 collateral. It is done to execute, to deliver as well as perform its necessary requirements according to the terms of the agreement, without proper consent or approval of another person other than that has been obtained.
(b) Perfection certificate needs to be duly prepared, completed as well as properly executed. It also needs to be stated that the information then set is completely correct and proper in all material aspects, except information that has the exact legal name of the grantor shall be correct with respect to the closing date.
(a) In spite of all the provisions of the agreement, all rights of grantors of this insurance, contribution, or substitute as per the applicable law else it needs to be fully subordinated to complete payment and that too in cash of secured obligations. No failure from the side of the borrower or from the side of the grantor to complete the payment is required under the law, otherwise, it would restrict the obligations together with the liabilities of the grantor with respect to its necessary requirements, and then each grantor should remain liable to the full amount of all obligations of such grantor.
(b) Every grantor should agree upon any event of default after notice from the collateral agent. All indebtedness that is owed by any other grantor needs to be fully subordinated towards the complete payment in cash of secured obligations.
Transfer of rights
The agreement shall be binding on any successors of the parties. Neither party shall have the right to assign its interests in this agreement to any other party unless the prior written consent of the other party is obtained by that party.
All the communications along with the notices should be given in as stated under Section 10.02 of the credit agreement (except expressly permitted). All the communications together with notices to the borrower or any grantor should be given as per Section 10.02 of the credit agreement.
Termination or release
(a) The agreement, the security interest including all other security interests that are granted should terminate according to the secured obligations, and any kind of liens that arise should be automatically released after the termination of aggregate commitments and complete payment of all obligations (except (i) cash management obligations or obligations that are under the secured hedge agreements and are not yet due as well as payable and (ii) contingent obligations that are not yet acquired and payable) and the termination of all the letters of credit.
(b) The subsidiary party shall be released automatically from its obligations hereunder and security interest in the security of such subsidiary party shall be released automatically upon the fulfillment of any transaction, as a result of which such party quits to be a subsidiary of the borrower; provided that the moneylenders shall have ratified such transaction and terms of such sanction did not deliver otherwise.
(c) On any sale or any transfer by the grantor of any security which is granted under the credit agreement, or on the usefulness of any consent (written) to deliver the collateral interest which was granted.
The security agreement is helpful when the borrower intends to obtain the funding credits with the assistance of the copyright license. The agreement is used by some of the technology companies by mortgaging their software’s copyrights to acquire loans. Although these copyrights are subject matter to ending and relapsing under the copyright law, the moneylender can most of the time be left threatened if the mortgagor all of a sudden stops being the holder of the copyright mortgaged. Hence, it is necessary to draft this agreement with maximal vigilance and in such a manner that it matches the pertinent laws.
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