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Intellectual Property Considerations in Closing Your Business

By: Christopher Heer, Annette Latoszewska | Last updated: April 5, 2021

Over the past year, we’ve witnessed the demise of countless once thriving businesses. Faced with regular shutdowns and the need to adapt to constantly changing public health orders, businesses in multiple industries have taken hard hits to their bottom line. If you’re now facing the unfortunate reality of needing to permanently close your business, here are a few things to think about:

  1. Don’t overlook your intangible assets.

    If you’ve been in business a while, if there’s something proprietary about your business, you may be overlooking one or more of your most valuable assets – your intellectual property. Keep in mind that, like your business’ other assets, your intellectual property doesn’t vanish when your business closes its doors - and may be a massive source of value. Take the former telecom giant, Nortel, for example. After filing for bankruptcy in 2009, Nortel sold off its remaining assets. Among these was the company’s patent portfolio, which was purchased for a whopping $4.5 billion.

  2. Be wary of fraudulent conveyances.

    On the eve of your business’ permanent closing, you might be inclined to safeguard select assets, including, for example, intellectual property like patents or trademarks, before your creditors come knocking. This and similar instincts should be stifled.

    Ontario’s Fraudulent Conveyances Act concerns transfers of personal or real property with the intent of defeating creditors. If a creditor believes such a transfer was made, they may initiate court proceedings to determine the matter. If the court finds the subject conveyance was fraudulent, the transfer will generally be void as against the creditors – meaning the recipient of the conveyance will be ordered to make the property available to satisfy the claims of the creditors.

    Historically, courts have voided transfers of intellectual property where the recipient of the transfer had the same directing mind as the transferor, the transfer was completed for nominal consideration (for example, for the sum of $10.00), the transferor continued to use the intellectual property after the transfer and the transferor remained the owner in the relevant database. These are just a handful of the “badges of fraud” a court will look for to determine whether a transfer should be voided.

    Note that even a transfer to a creditor with a general security agreement comprising the subject intellectual property asset has been voided by a court in the creditors’ favour.

    Ontario has other legislation which further limits what businesses can do with their assets. The Ontario Business Corporations Act restricts a business’ ability to pay dividends or redeem shares. Where dividends were paid out and shouldn’t have been, a corporation’s directors may be personally liable for the amount paid out.

    If you’re on the verge of bankruptcy, you would be well advised, when in doubt, to retain your assets. Further, remember that, as a general rule, the closer you are to bankruptcy, and the closer you are to the recipient of any transfer, the greater the scrutiny to which a transfer will be subject.

  3. Consider you contractual obligations.

    As you contemplate closing your business, you are likely also conscious of your ongoing contractual obligations to one or more parties. If one of those obligations is to a licensee with certain rights to your intellectual property, you might be motivated to execute precisely the type of transfer which could be voided as further described above.

    A transfer of intellectual property to an individual or entity which, until the transfer, had a license to the property is no more immune to the Fraudulent Conveyances Act and similar legislation than any other transfer. Your licensees are not preferentially entitled to the intellectual property. However, there is legislation which serves to protect your licensees’ interests in the intellectual property in the event that your business goes under.

    The Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act permit a debtor to disclaim any agreement, including intellectual property licensing agreements. Recent amendments to these acts provide a certain degree of certainty for licensees of intellectual property despite the availability of disclaimer and the potential for the intellectual property to be sold in the course of insolvency proceedings. As a result of these amendments, licensees can rest assured that a sale of the intellectual property will not affect their ability to use the IP for what remains of the term dictated by the licensing agreement. Further, as long as a licensee performs their obligations under the agreement, their right to use the intellectual property will survive a debtor’s disclaimer of the agreement.

    Note that some uncertainty does remain despite the intention behind these amendments. Most notably, the legislation refers to a licensee’s right to “use” the intellectual property, whereas intellectual property rights may encompass not only use but also the right to make, or to sell, for example.

    Of course, these are just a few considerations for business owners making the difficult decision to permanently close their doors. A helpful tip for any business owner answering the question “What now?” is to work backwards from the present day to the first steps taken to establish your business. You’ll want to effectively undo each step along the way. For example, every license and registration acquired, every lease signed.

Given the variety of business structures, province-specific requirements, and other circumstances which may dictate parts of this process, the step-by-step closing of your business is beyond the scope of this article. It is, however, important that this is done right, to avoid incurring liability in association with a business which is no longer in operation. Ontario business owners may benefit from resources like Ontariobusinesscentral.ca or the Government of Ontario’s small business support pages.

As for intellectual property, if you’re a licensee of intellectual property with questions about how to ensure the continuity of your rights, or, if you’re a business owner wanting to make the most of your intellectual property as you close up shop, contact us for a complimentary and confidential telephone appointment.