An IP Licence or a Gift? How to protect your Intellectual Property

What happens when an individual gifts intellectual property to a company, and that company then enters an insolvency process? Who now owns that IP?

Without planning for the worst case scenario from the start, individuals who have developed and input their valuable IP, could lose all ownership rights and find themselves with nothing to show for it if they don’t create an IP licence.

It is a simple question of gift versus an IP licence.

When a company enters an insolvency process, whether it is administration or liquidation, it is the Insolvency Practitioner’s role to identify, get in and realise the assets of the company, so they can be distributed to the creditors.

In a recent example, a company director designed and created a product, patented it, and then assigned the intellectual property rights to that product to their company. The product was hugely exciting and attracted significant investment from external parties.

The investors wanted to see a quick return on their investment which clashed with the entrepreneurial spirit of the creative and inventive director, and a dispute arose. This threatened to put the company into administration.

The product created was crucial to the operation of the company, and even though it was assigned to the company for just £1, the director was not entitled to simply take back the intellectual property, which he had originally created.

The intellectual property was a valuable asset and therefore, any administrator appointed to the company has a statutory duty to act in the best interests of the creditors of the company as a whole. The administrator has to sell the IP for the best price reasonably possible in the circumstances. Therefore, the intellectual property could not simply be given back to the director, as he lost all rights of ownership of it when he gifted it to the company.

Also, the assignment itself contained no mechanism for the intellectual property to be returned to the director if the company went into an insolvent process. However, it is likely that any such mechanism could have been challenged on the basis of it being a breach of the anti-deprivation rule. This is because the effect of the transaction would be to deprive company creditors of an asset of the company, which would otherwise have been available for distribution.

Unfortunately the director didn’t retain their IP as it was sold off to the highest bidder to settle debts with the external investors.

What alternative was there for the director? What could they have done differently?

An IP licence

Had the director instead licensed the intellectual property to the company, on terms which would terminate the licence if the company went into an insolvency process, the director would have retained ownership of the intellectual property. The director would still retain his ownership of the intellectual property, however the company would be able to use it in order to carry on business.

By licencing the intellectual property rights, the director could still retain title to the intellectual property, so that it never forms part of the assets of the company, and therefore cannot fall foul of the anti-deprivation rule. The company is simply able to use the intellectual property so that it can trade and sell the product. The licence will also need to be for a specific period of time; if it is for an undetermined time period, there is a risk that it could be treated as an assignment. We would suggest limiting the period of the licence, but arranging to renew it should it be appropriate to do so. That also gives the director flexibility in the event that their circumstances change.

It is therefore important to ensure that when changing a business structure, so that a product is sold via a limited company, individuals take appropriate steps to ensure that the intellectual property is treated in the way in which they intend it to be treated.

If you have any queries about an IP licence or gift, or any other insolvency related query, please get in touch. Experts in our Business Support & Insolvency and Intellectual Property teams have the experience and knowledge to help guide you through any eventuality.