Advising on restructuring mandates, whether as counsel to external controllers, creditors or prospective acquirers, consistently exposes one truth: intellectual property is rarely a peripheral concern. Across our cross-border restructuring work, from distressed technology businesses operating across the Asia-Pacific to multinational groups with fragmented Intellectual Property (IP) holding structures spanning the EU and beyond, IP assets have repeatedly sat at the centre of value realisation strategies and, equally, at the centre of the most complex external administrations.
That cross-border dimension matters. Where a distressed group holds IP across multiple jurisdictions, be it registered trademarks in the EU, to patents granted in the US, or software developed under contracts governed by Australian law, buyers face a layered and jurisdiction-specific set of risks that a purely domestic acquisition framework will not adequately address. The considerations set out below are drawn from our experience and are intended to serve as a general and practical guide for buyers considering acquiring IP from IPs (Insolvency Practitioners).
Know what you are buying
External controllers sell assets in their current state, typically on an “as is, where is” basis with limited or no warranties. Unlike a conventional M&A transaction, there is no recourse to a vendor warranty and indemnity regime if the IP turns out to be encumbered, invalid or narrower in scope than represented.
Before committing, buyers must undertake rigorous pre-signing due diligence. This means searching IP registers (including IP Australia, international databases and equivalent overseas registries), reviewing chains of title, and confirming that registrations are current and not lapsed for non-payment of renewal fees. That is a surprisingly common issue in distressed situations where back-office functions have deteriorated and ultimately lead to proprietary interests in company assets being lost.
Identify and understand security interests
IP assets are commonly subject to security interests held by secured creditors. In Australia, General Security Agreements will frequently extend to registered and unregistered IP. Under the Personal Property Securities Act 2009 (Cth), a security interest that has been properly perfected will generally follow the asset, meaning a buyer may take subject to it unless it is discharged on or before completion.
Buyers should undertake appropriate PPSA due diligence and ensure that any registered security interests are released prior to, or simultaneously with, settlement. Do not assume that the appointment of an external controller automatically extinguishes security interests.
Scrutinise licences and contractual arrangements
IP assets rarely exist in isolation. They are embedded in a web of licence agreements, co-ownership arrangements, development agreements and distribution contracts. Buyers must determine:
- Which licences survive the external administration? Exclusive licences in particular can significantly limit what a buyer can do with the asset post-acquisition.
- Are there change of control provisions? Licences may terminate or become voidable upon a change in ownership of the IP.
- Does the external administrator have the right to assign? Some IP rights, especially those created under contracts, may not be freely assignable without third-party consent.
Failure to address these issues can leave a buyer holding an asset that is commercially unusable or subject to competing claims.
Consider voidable transaction risks
Transactions entered into by the company prior to an external administration may be vulnerable to being set aside as antecedent transactions or as part of a scheme intended to defeat creditors’ rights. If the IP was transferred to a related party or restructured shortly before insolvency, a buyer acquiring it from that intermediate holder may face a claim that unwinds the chain of title. Buyers should examine the recent transactional history of the IP carefully and, where appropriate, examine whether the relevant disposition could be susceptible to a voidable transaction challenge.
Manage employee and know-how risks
Much of the IP value in a distressed business — particularly in the technology, pharmaceutical and services sectors — resides not in registered rights but in the knowledge of key employees. If the workforce has been stood down or has departed following the IPs’ appointment, the practical value of the IP may be significantly diminished. Buyers should assess whether they need to retain key individuals and negotiate appropriate arrangements with the administrator to facilitate this.
Move quickly but not recklessly
External administrations move fast. IPs have statutory obligations to act efficiently and timeframes for asset sales are frequently compressed. Buyers who are not adequately prepared risk either missing the opportunity or, equally dangerous, proceeding without adequate diligence and discovering problems post-completion when there is no one to sue.
The solution is preparation. Well-placed buyers go into an IP acquisition process armed with a robust diligence plan, a preparedness to engage specialist IP and restructuring counsel early, and, importantly, the agility to move at the pace demanded by the external administration.
For further information, please contact:
Masi Zaki, Partner, Bird & Bird
masi.zaki@twobirds.com
