How intellectual Property (IP) is treated in administration
For many businesses, the most valuable assets on their balance sheet aren’t physical machinery or real estate – they are intangible.
Your intellectual property (IP) – your brand, trademarks, patents, software code and client databases – often represent the core value of the company.
If you’re facing potential insolvency then it’s important to understand what happens to these assets during administration.
Unlike physical assets, IP is fragile and its value can vanish overnight if the company ceases trading or if its reputation is tarnished.
Here’s what you need to know and how to mitigate the risks of losing it.
The status of Intellectual Property in administration
Once an administrator is appointed, their primary legal duty is to rescue the company, or failing that, to realise the company’s assets to repay creditors.
In this context, your IP – whether it’s a patent, a trademark, copyright or a domain name – is treated purely as a commercial asset with a price tag.
The administrator is legally obliged to sell or license these assets to generate the maximum return for the creditors. This asset realisation can happen in one of two ways:-
- Public Auction/Open Market: The IP is marketed widely to find the highest bidder
- Pre-Pack/Private Sale: The IP is sold immediately upon appointment to a pre-arranged buyer (which could be a new company formed by existing staff and directors.)
If the company is dissolved without the IP being sold, it doesn’t automatically revert to the directors – instead it becomes Bona Vacantia (ownerless goods) and automatically goes to the state (the Crown). Reclaiming IP from the Crown is a complex and difficult process.
The risks inherent in the process
There are specific risks that directors looking to buy back their company’s IP during administration need to be aware of:
- Sold as seen: In a solvent sale, a buyer would receive warranties regarding the validity of trademarks or patents. In an administration, IP is sold on an “as is” or “where is” basis. Administrators generally won’t provide any warranties regarding the title, validity or potential infringement of the IP. This lack of certainty could drive down the price but it also increases the risk for the purchaser.
- The Licensing Trap: If your company relies on IP licensed from others, the administrator has the power to terminate these licences if they’re considered onerous. Conversely, if your company licenses IP to others, those agreements may be sold to a third party, potentially disrupting the ecosystem of your business.
- Value Erosion: If the administration process is prolonged and the business ceases to trade, the goodwill attached to the brand can evaporate almost instantly.
How to mitigate the loss of Intellectual Property
Mitigation requires a mix of long-term structural planning and immediate tactical decisions if insolvency is imminent:
- Pre-insolvency planning: The most effective mitigation strategy must be implemented before financial difficulties become apparent. This can involve holding IP in a separate stable legal entity (called the IP Holding Company) rather than in the operating company. This structural separation involves licensing the IP from the holding company to the trading company. It ensures that if the trading company enters administration then the IP remains safe in the solvent holding company and prevents it from being seized by the administrator to pay the company’s debts.
- Using a pre-pack: If the IP is held by a distressed company then a pre-pack administration is often the best device to preserve its value. A pre-pack will involve selling the business and assets immediately upon the appointment of an administrator and will provide a discrete and swift transfer of ownership. This speed is vital for IP as it prevents the brand damage associated with a long, drawn-out insolvency process and ensures the business continues as a going concern, keeping the vitality of the brand alive. It allows directors to purchase IP assets back through a new company before the value is destroyed by a cessation of trade.
- Escrow agreements: Especially for technology companies, ensuring that source code and critical data are protected via escrow agreements can be vital. This ensures that even if the corporate entity collapses, access to the core technology is maintained for the relevant parties.
- Purchase Agreement Clarity: If you’re buying the assets back from a company, you have to be meticulous in the Sale and Purchase Agreement. Because you get no warranties, you must ensure that the schedule of assets explicitly lists every trademark, URL and patent you intend to acquire. If it isn’t on the list, you haven’t bought it and it could end up in Bona Vacantia. Your accountant can help you greatly here.
In an administration, IP is an asset to be sold, not a right to be retained.
Directors must recognise that without prior planning (like an IP holding company) or a swift execution strategy (pre-pack), the very identity of a business could be sold to a competitor or lost to the state.
Early engagement with professional insolvency practitioners and accountants is essential to strategise how best to retain these intangible but invaluable assets.
Get in touch with us today for a free initial consultation with one of our expert advisors. They’ll be able to let you know what options you have with IP and the rest of your business and you might be surprised by how many you have – but the earlier the better.