Introduction

Licensing agreements (“Licensing Agreements”) in respect of Intellectual Property Rights (“IPR”) (e.g. trademarks, patents, copyrights and industrial designs) are common in the marketplace where an owner of IPRs grants a license to the licensee to use the IPRs, usually in return for royalties. While the Licensing Agreements provide handsome streams of royalty for the licensors, it is not uncommon to see licensees investing substantial sums and building their whole business structure around the IPRs under such Licensing Agreements.

Despite the importance attached to such Licensing Agreements, the parties might not have contemplated the eventuality that their counterparty may go into liquidation at some point during the term of the Licensing Agreement and thus failed to insert appropriate provisions in the Licensing Agreement to protect their rights. In this article we will discuss the consequences which will usually follow when the licensee or licensor to a Licensing Agreement goes into liquidation.

When a licensee goes into liquidation

Liquidators may have to deal with Licensing Agreements when a company is in liquidation as the contracts the company has entered into are not automatically terminated unless expressly provided in the Licensing Agreements. Thus, in the case of licensee insolvency, the liquidator appointed may elect to continue to run the business utilising the IPRs when the liquidator considers the IPRs are necessary for the beneficial winding up of the licensee company.However, the liquidator must be careful to check if the Licensing Agreement contains clauses which prohibits the company from using the IPRs in liquidation as otherwise the realisation of assets which utilises the IPRs may be an infringement of IPRs.

The liquidator may also realise the value of the Licensing Agreement by assigning its rights to a third party without the consent of the Licensor when the Licensing Agreement does not prohibit assignment.

Alternatively, the liquidator should consider whether the Licensing Agreement is an “onerous property” to the company. If the liquidator considers that the Licensing Agreement is an onerous property, the liquidator may, pursuant to section 268 of the Companies Ordinance (Cap 32), within 12 months of the commencement of the winding up, apply to court for leave to disclaim the Licensing Agreement if considered to be onerous property of the licensee.

When the licensor goes into liquidation

Similar to the situation above, when a licensor company goes into liquidation, the Licensing Agreement is not automatically terminated unless there are provisions in the Licensing Agreement to the contrary.

Liquidators of a licensor should monitor royalty payments due from licensees pursuant to the Licensing Agreements.Recovery may flow from actions against licensees who breach the Licensing Agreements or from actions against other third parties who infringe the licensor’s IPRs.However, the Liquidator must be aware that the IPRs of the licensor need to be maintained by the timely renewal of their registration with the respective registries failing which the licensor may lose its valuable IPRs.In the meantime, the Liquidator can search for buyers to realize the value of the IPRs.If there are Licensing Agreements, the licensees should be contacted as the IPRs may be an important strategic acquisition for them in their business.

Provisions made to avoid such difficulties?

In negotiating for Licensing Agreements, parties may have addressed the eventuality that one of the parties may go into liquidation. Liquidators should review the Licensing Agreements and see if there are such clauses, as these clauses often determine the rights and obligations between the parties in liquidation. A licensor may have inserted clauses to protect its position in the case of a licensee’s insolvency such as:

1.early termination upon liquidation of the licensee: by making provision for the liquidation of the licensee as one of the termination events, the licensor can ensure that the liquidator will no longer be in the position to use its IPRs without its consent. With the termination clause in place, the licensor will gain considerable bargaining power against the liquidator, particularly if the IPRs are essential to the sale of the business as a going concern. The licensor may be able to negotiate a new licensing agreement with the liquidator or new buyer of the business of the insolvent licensee to minimise its losses as a result of the insolvency of a licensee.

2.non-assignment: by prohibiting the assignment of the Licensing Agreement, the licensor may prevent the IPRs from falling into the hands of parties which may harm the interests of the licensor (e.g. competitors).

3.provision of security: the licensor may also require the licensee to provide security against the payment of royalties to improve its chances of recovery of royalties in the event of the licensee’s liquidation.

On the other hand, a licensee’s position in the event of a licensor’s liquidation may not be adequately served by the insertion of the above clauses. The licensee, if it has integrated the IPRs as an integral part of its business, would be unlikely to wish to terminate the Licensing Agreement upon the licensor’s insolvency, thereby losing the rights to exploit the IPRs. Instead, it would likely wish to continue to have the rights to exploit the IPRs to its benefit. Therefore, the licensee may have adopted the following measures to protect its rights in the Licensing Agreement:

1.option to acquire ownership of the IPRs upon insolvency: this is the most straightforward way for the licensee to secure the IPRs for exploitation upon the licensor’s liquidation. However, a workable pricing mechanism must be agreed in advance and should preferably have been inserted into the Licensing Agreement. The liquidator should review the pricing mechanism and see if the price reflects the market price and consider to disclaim the contract as an onerous property if it does not realise value for the company;

2.assigning the IPRs to an insolvency remote vehicle in advance: the licensee may have required the licensor to assign the IPRs to be owned and the Licensing Agreement be signed by an insolvency remote vehicle in advance to avoid having to deal with a licensor insolvency situation. In that case, the liquidator should review the relevant agreements and arrangements and determine whether the company in liquidation still have any rights to use the IPRs to avoid the possibility of infringement.

If the Licensing Agreement contains no such clauses, in the event of a licensor’s liquidation, the liquidator should contact the licensee and inform him of the progress of the liquidation and the plans for the disposal of the IPRs and be prepared to negotiate with the licensee for a transfer of the IPRs to realise value.The liquidators would then have to consider obtaining valuations from specialist valuers depending on the nature of the IPRs.

Conclusion

For liquidators dealing with companies which are party to Licensing Agreements, they should review all the Licensing Agreements of the insolvent company upon their assumption of office as they may prove to be important assets of the company. It is often that the terms of the Licensing Agreement will determine the substantive rights of the parties.

In a licensor insolvency, if the licensee is keen to continue to exploit the IPRs, the sale of the IPRs to the licensee may prove to be a major realisation of the assets of the company which may otherwise be overlooked by the liquidator. In the case of a licensee insolvency, the liquidator should be aware of the fact that the licensee’s right to use the IPRs are pursuant to the Licensing Agreements, notwithstanding that the IPRs appear to be well integrated into the licensee’s business. Thus, any sale of the assets of the company which utilise the IPRs of the licensor may constitute an infringement. Liquidators should also be prepared to enter into negotiations with counterparties to the Licensing Agreements for the transfer of IPRs to maximise recovery in the liquidation.