Pursuing Intellectual Property Assets as a Creditor of a Bankrupt Party

In Canada, a bankrupt generally becomes a bankrupt either by voluntarily assigning themselves into bankruptcy, or by a court order which assigns them into bankruptcy at the application of a creditor. A bankrupt, whether an individual, partnership, unincorporated association, corporation, cooperative society or cooperative organization, has a list of duties to carry out. The first of these duties, enumerated in section 158 of the Bankruptcy Act, is the requirement to disclose and deliver to the bankruptcy trustee all property under their possession or control.

The Act defines property as follows:

property means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.

Faced with bankruptcy, and the need to disclose and deliver all property, many assets will readily come to mind for inclusion in the list. For example, senior management undertaking this task for a hoverboard manufacturer might immediately list off money in the bank, production line machinery, inventory, electronics, and interests in land. These are all things with which we associate value, they are also generally assets which are tangible. It is therefore not unsurprising that a very valuable intangible asset may often be overlooked and thereby go undisclosed to the trustee – an interest in intellectual property such as a patent or trademark.

As a creditor with an interest in being repaid as completely as possible, you’ll want to make sure this doesn’t happen. A patent is a saleable asset and, like any intellectual property asset, may be of substantial value. In fact, studies have shown that as much as 80% of a typical business’ value is intellectual property. Given the considerable value intellectual property can have on a business’ revenue and brand, you should take the necessary steps to ensure you are not overlooking any potential assets.

One way to protect your interests as a creditor, is to verify for yourself whether the debtor company, or individual, holds any interest in a patent. Granted patents will be published, and with the help of Google Patents you can search for patents all over the globe. Note, however, that the debtor may have an interest in a patent application, which has not yet issued to a patent. Patent applications can be harder to find. Most applications for patents aren’t published until 18 months from the filing date, meaning you have no way of knowing the application exists before this date without disclosure by the debtor.

If you believe a debtor may have an interest in a valuable Canadian trademark, you may want to search the Canadian Trademarks Database. The database allows users to search trademarks by the owner’s name, and, unlike, applications for patents, trademark applications are typically listed and viewable within 7 days of filing. Information about the trademark’s history and status is also available publicly. For instance, you can see if there are any oppositions against a trademark application, or any expungement proceedings commenced against a registered trademark. You can also see when the upcoming renewal dates are, and whether the current owner is in default on any notices or payments required to maintain the registration.

If your debtor is a corporation, you could find information on its intangible assets in its financial statements. If the corporation is publicly listed on a stock exchange, its financial statements and annual reports will be publicly available under applicable securities law requirements and stock exchange rules.

Note that an interest in intellectual property mustn’t be outright ownership. If the debtor company is a licensee of intellectual property, meaning they have certain rights to intellectual property belonging to a third party pursuant to an agreement, that interest and those rights may also be sold for substantial value. Note that, if you go beyond identifying a patent licence and end up purchasing a patent licence during a bankruptcy sale, you may be required to pay royalties under the licence. Licensors may seek to prevent such sale, but the circumstances under which they are successful are limited.

Identifying an interest other than 100% ownership is substantially more difficult, even looking at Canadian patents and trademarks alone. The Patent Act previously required that transfers of patent rights be registered. However, this requirement has since been removed. Thus, licenses may not be recorded in the database. Further, there is no way to search patents and applications by licensee name. If, however, you have notice of or suspect the debtor company’s license, the patent database may confirm such license, as many companies continue to choose to record any transfers. In terms of trademarks, a company using another company’s trademark under a license will often give public notice of the license in print near the trademark being used.

Despite any provision in the license agreement between one and the other company, note that the bankrupt company’s license generally cannot be terminated by the licensor upon insolvency. The Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act were amended in 2019 and give fairly broad protection to licensees. For example, a licensee’s right to use intellectual property under the license will not be impacted if a license is disclaimed by a trustee in bankruptcy, receiver or debtor.

If you’ve become aware or are already aware of a debtor’s interest in intellectual property, and don’t believe it has been disclosed and delivered to the trustee, you might be facing a fraudulent conveyance. A fraudulent conveyance is a conveyance made with the intent to hinder or delay creditors. In other words, a disposition of some property which would have otherwise benefited an individual or company’s creditors.

Where a fraudulent conveyance is alleged to have been made, a court is tasked with the determination of whether the conveyance was in fact fraudulent so as to be void as against the creditors. As the requirement that there was a conveyance of real or personal property is easily met, the court’s analysis typically focuses on whether the requisite intent was present. To make this determination, the court considers what are referred to as “badges of fraud”, in other words, circumstances which tend to show that a conveyance may have been fraudulent. These include, for example:

• The conveyance being secret
• The transferor retaining some power to revoke the conveyance (i.e., take the property back)
• False statements as to the consideration (payment) for the property conveyed
• The consideration being clearly inadequate
• Haste in making the conveyance
• A close relationship existing between the parties to the conveyance
• The timing of the conveyance

If it is determined that the conveyance was fraudulent, the subject property becomes available for execution or seizure by the creditors. A court order is usually made which directs the recipient of the conveyance to make the property available for the purpose of satisfying the claims of the creditors.

Note, however, that there are exceptions and procedural requirements which apply in situations where one or more fraudulent conveyances are suspected, and these will depend on the legislation under which the conveyance is challenged. While these are generally beyond the scope of this article, one such example is an exception provided by the Fraudulent Conveyances Act in Ontario. The Act makes an exception if the property was conveyed for good consideration and the conveyance was made in good faith to someone who had no knowledge of the intent to defeat creditors – in such a case the conveyance may not be voided.

Nevertheless, given the potential value of intellectual property assets, value which can be difficult for a third-party to assess, creditors should be mindful of this oft-overlooked category of property. Some informed, simple research can uncover a significant additional asset which may be leveraged to repay a bankrupt’s creditors.

If you have questions about intellectual property ownership, transfers or valuation, contact us now for a complimentary and confidential telephone appointment.