Does your floating company charge cover the company as a whole?

Do you know - as holder of a floating company charge - whether the charge also covers the intellectual property rights which are necessary for the operation of the company?

In many companies, the actual values in the company are represented by the customer base, the company's know-how, various inventions, the "brand" - i.e. the non-physical assets: the intellectual property rights.

Charge of intellectual property rights

Until the introduction of the floating company charge on 1 January 2005, intellectual property rights could only be charged by way of an individual chattel mortgage, which had to be registered. Registration of a chattel mortgage requires that the subject-matter is described in detail in the charge agreement.

A floating charge provides a right to charge all the intellectual property rights owned by a company by merely ticking off the relevant box in the floating charge certificate. In case of a floating charge, there is no need to describe the intellectual property rights charged.

As the charge is not required to be described in detail, it is often seen that banks which typically receive floating charges do not examine in connection with the establishment of the charge which intellectual property rights are decisive for the operation of the company - and who owns the rights in question.

Intellectual property rights not covered by the floating charge

It is often seen - when the company has collapsed and the bank wants to exercise its floating charge - that there are intellectual property rights which are not owned by the company and which are thereby not covered directly by the floating charge.

The name by which the company sells its products, i.e. the company's "brand", may e.g. be registered by the company's ultimate owner or by an affiliate.

An imaginary example: A person has an idea for a business concept and a good name and registers the name as a trademark. Later, the person establishes an operating company which uses and adds value to the trademark.  No one reflects on the fact that the trademark has not been registered by the operating company, but by the owner - until the financial collapse when the bank tries to realise its floating charge.

Sale of the company

The bank's possibility of selling the entire company as a "going concern" is significantly reduced because the bank is not able to sell the brand name together with the company. It has not been registered by the operating company, which issued the floating charge.

It could be argued that the operating company then holds a licence to use the trademark - and that this licence may be included in a sale but, until such dispute with the owner has been settled, significant values may have been lost as it was not possible to take prompt action.

Here, the trademark was used as an example - similar problems occur with other types of intellectual property rights where ownership is registered and where a transfer requires participation by the registered owner, such as patents, designs, device marks, domain names, etc.

What can the holder of a floating charge do?

The immediate priority is for the holder of a floating charge to clarify who has registered the intellectual property rights that are decisive for the operation of the company.

If intellectual property rights are registered by e.g. the ultimate owner, the holder of the charge may consider demanding that the right be re-registered to the operating company.

If such agreement cannot be achieved, the holder of the floating charge should ensure that a written licence agreement is prepared between the rights holder and the operating company. The licence agreement is to entitle the licensee to assign its rights under the licence agreement. This will provide a right to assign the licence rights with the company. The buyer of the company is thus certain that the rights may forthwith be used and thereby that the operation may continue on unchanged terms. The company may be taken over as a "going concern", thus maintaining the values to the widest possible extent.

contacts

Piya Mukherjee

Partner