What happens if a contracting party to an IP licence goes into an insolvency process, both from a practical and legal perspective?

In the fourth article of our series on the effect of insolvency on IP licences in the life sciences sector, we look at the position of a contracting party to an IP licence which goes into an insolvency process both from a practical and legal perspective. The earlier articles in this series are

  1. “Why licensors and licensees in the life sciences sector need to be aware of counterparty insolvency”
  2. “What steps can life sciences licensees take to better protect themselves on counterparty insolvency?”
  3. “What steps can licensors take to better protect themselves on counterparty insolvency?”

Assuming that the contracting party is a corporate, the most likely insolvency process is an administration or a liquidation. In broad terms, if there is a business to be sold then administration is more likely; if it is a break up asset sale, it will be liquidation.

Administration is supposed to be a short-term process and creates a moratorium preventing creditors from enforcing their rights. Both an administrator and a liquidator owe a duty to act in the best interest of all creditors and to get the best price reasonably obtainable on the sale of the assets of the insolvent entity.

An administrator will attempt to sell the business and assets as a going concern to maximise realisations and the return to creditors. There will be no representations or warranties as to the quality, value or validity of the assets and they will be sold subject to the rights of any third parties. 

It is for the purchaser to carry out due diligence and take on the risk that the asset cannot be used or a third party has competing rights and this is generally reflected in the price paid.

Issues for a licensee:

If there is an immediate sale of the intellectual property, for example through a “pre-pack” administration, then a licensee will need to liaise with the purchaser about whether the licence will continue. If there is not a pre-pack sale and the licensee learns of the administration or liquidation, it may want to bid for the IP itself. 

As touched on earlier in this series, firstly, a licensee should register its interest on the relevant IP registers or it runs the risk of the purchaser taking the IP free of the licence. Secondly, any attempt in a licence to provide for the transfer of IP on insolvency or an insolvency process is most likely to be void as a matter of public policy under the “anti-deprivation” principle.

Liquidators may disclaim an “onerous” contract.  An insolvent licensor’s obligations may be onerous if the intellectual property is worth considerably more with the licence disclaimed, but this is likely to be rare.

If a sale is not possible, the licensor company will eventually be dissolved and any intellectual property will then pass to the Crown “bona vacantia”. The licensee will then need to liaise with the Treasury Solicitor for continuing access.

Issues for a licensor:

From the licensor’s perspective, if the licensee in an insolvency process does not pay the renewal fees in respect of the IP, where required to do so under the licence, this will jeopardise the continued existence of the IP rights. An insolvency practitioner is not necessarily bound to comply with the licensee’s obligations and there has been case law indicating that an administrator can breach a contract where he/she is acting in good faith and in the best interests of all creditors so licensors need to be aware of this risk.

If the licensor wants to continue the licence post insolvency process then it should get the insolvency practitioner’s agreement to pay the licence fees as an “expense”, otherwise it risks being an unsecured claim and most likely irrecoverable.

Also note the comments made in earlier articles about related rights like marketing authorisations.

As set out in this series of articles, there are various issues that both licensors and licensees need to be aware of in respect of insolvency and insolvency processes. Ideally, they would be factoring these issues into the licences when drafted to avoid or mitigate the various risks, but even if they don’t, they need to be alert and to move quickly if a counterparty goes into an insolvency process.

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