Pursuing Intellectual Property Assets as a Creditor of a Bankrupt Party
When an individual declares bankruptcy, they have a list of duties to carry out before they will be discharged of their debts. 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 a bankrupt’s mind for inclusion in the list. For example, money, vehicles, 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 an individual may often overlook a very valuable intangible asset and thereby fail to disclose the same 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.
One way to protect your interests as a creditor, is to verify for yourself whether the debtor 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.
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’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
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 person’s 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 an individual’s creditors.
If you have questions about intellectual property ownership, transfers or valuation, contact us now for a complimentary and confidential telephone appointment.