Advising on restructuring mandates, whether as counsel to external controllers (IPs), creditors or prospective acquirers, consistently exposes one truth: intellectual property (IP) is rarely a peripheral concern. And yet, under the pressure and urgency of an external administration, IP assets are frequently the most under-examined component of a distressed estate. They are difficult to value quickly, complex in diligence, and easy to inadvertently damage or abandon before a sale is even contemplated.
That risk is amplified in cross-border administrations. Where a distressed group holds IP across multiple jurisdictions, from registered trademarks in the EU, to patents granted in the US or software developed under contracts governed by Australian law, the risks amplify. In those contexts, the IPs inherit a layered, jurisdiction-specific asset class that demands specialist attention from the outset. The considerations set out below are drawn from our experience working alongside our global IP colleagues. They are intended to serve as a practical guide for IPs tasked with protecting and realising value.
Identify and map the IP estate early
The first obligation of any external controller is to take stock of what is there. In a distressed business, that is rarely straightforward. IP ownership is frequently fragmented across group entities, may sit in an offshore holding company rather than the operating entity, and is often inadequately documented in the company’s own records.
Practitioners should move quickly to search for relevant IP registers, including IP Australia, international databases such as the USPTO and EUIPO, and equivalent overseas registries. They should also cross-reference those results against the company’s own IP schedules, licence agreements and balance sheet disclosures. Lapsed registrations are a particular concern. In many distressed situations, back-office functions have deteriorated prior to the IPs’ appointment, and renewal fees may have gone unpaid, resulting in rights being extinguished before the practitioner even has the opportunity to realise them.
Preserve registrations and prevent inadvertent abandonment
Once identified, IP assets must be actively preserved. External controllers should immediately assess which registered rights are at risk of lapsing during the administration and prioritise renewal decisions accordingly. The cost of maintaining a registration is typically modest relative to the asset’s potential sale value; the cost of allowing it to lapse, and thereby destroying value for creditors, can be significant.
The same principle applies to unregistered rights. Trade secrets, confidential know-how and unregistered design rights can dissipate rapidly if the workforce departs and there is no mechanism in place to capture and protect that knowledge. Practitioners should consider what steps can be taken, including through interim confidentiality arrangements or data preservation protocols, to prevent the erosion of unregistered IP value during the course of the administration. In our experience, IPs often miss the starter’s gun on these critical ‘week-one’ issues and that inevitably leads to value erosion.
Understand what encumbrances attach to the IP
IP assets in a distressed estate are commonly subject to security interests. In Australia, General Security Agreements will frequently extend to both registered and unregistered IP. Under the Personal Property Securities Act 2009 (Cth), a properly perfected security interest will generally follow the asset — meaning that a sale of IP that does not address encumbrances at or before completion will either fail to pass clean title to a buyer or, in some circumstances, expose the practitioner to challenge.
IPs should undertake prompt PPSA due diligence and engage with secured creditors at an early stage to understand the nature and extent of their interests, the prospect of consent to a sale, and whether a sale free of encumbrances is achievable and on what terms. Failing to do so will impair the practitioner’s ability to run a competitive sale process and will suppress the price achievable for creditors.
Assess the licence and contractual landscape
IP assets do not exist in isolation. They sit within a web of licence agreements, co-ownership arrangements, development agreements and distribution contracts. Each of those contracts may affect what a buyer can do with the asset post-acquisition and, therefore, how much they will pay for it. Again, in our experience, IPs often miss the starter’s gun on assessing these aspects comprehensively and early enough. They often engage counsel who have limited specialist IP expertise and, unsurprisingly, that leads to an erosion of value and poorly structured sale processes.
Practitioners must assess which licences survive the external administration, whether any licences include change of control or insolvency termination provisions, and whether the controller has the right to assign the underlying IP without third-party consent. Exclusive licences are a particular concern. They can significantly curtail the commercial utility of the IP in a buyer’s hands and, if not disclosed clearly in the sale process, will quickly erode confidence in the process and the asset. Early engagement with key licensees and contractual counterparties is preferable to managing those issues once a buyer is already under exclusivity.
Structure the sale process to attract serious buyers
External controllers operate under statutory obligations to act efficiently and to achieve the best outcome reasonably available for creditors. In an IP sale, that means running a process that is competitive, transparent and tailored to the nature of the asset. Often, IPs focus on the serious aspect by insisting on uncommercial ‘pay to play’ obligations to take part in the processes, demanding upfront ‘non-refundable’ deposits and requiring disclosure of financial capacity when it shouldn’t be questioned necessarily.
IP buyers (particularly for technology, brand or pharmaceutical IP) are a specialist class. A practitioner who approaches an IP sale with a generic business-sale process risks attracting under-informed bidders, depressing competitive tension, and ultimately achieving a price that does not reflect the true value of the asset. Where the IP has significant value, practitioners should consider engaging specialist IP brokers or advisers alongside restructuring counsel, and should give careful thought to how the asset is described and marketed, including the preparation of an IP-specific information memorandum that addresses title, encumbrances and licensing clearly.
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 controller’s appointment, the practical value of the IP may be significantly diminished before a buyer is even found. IPs sometimes go into external administration with a focus on rationalising a business by reducing arguably its most significant operating cost: head count. That comes with inherent IP related risks.
Practitioners should identify key personnel early and assess whether retention arrangements are warranted and achievable. Where a buyer is likely to require the cooperation or ongoing engagement of specific individuals in order to extract value from the IP, the practitioner should facilitate that conversation as part of the sale process rather than leaving it to be resolved post-completion.
Act with urgency but also discipline
External administrations move fast and the pressure to realise assets quickly is real. But in an IP sale, speed without structure creates risk. That risk is real for creditors, for the IPs, and for the integrity of the process. Practitioners who move to sell IP assets without first understanding what they are selling, what encumbrances attach and what contractual constraints apply, risk achieving a poor price, facing post-completion disputes, or, in the worst case, selling an asset the estate does not have clean title to pass and thereby inviting personal risks.
For further information, please contact:
Masi Zaki, Partner, Bird & Bird
masi.zaki@twobirds.com
