Bankruptcy and IP

Many companies face difficult times as a result of the crisis around the coronavirus. For some companies even bankruptcy will not be something they can prevent. But what if your company owns Intellectual Property (IP)? In other words: what about bankruptcy and IP?

What is bankruptcy?

First a brief explanation on bankruptcy in the Netherlands. When a debtor is incapable of paying his debts, it is possible to request bankruptcy. The goal of bankruptcy is the payment of as many debts as possible. This payment is done according to a certain order which is laid down in Dutch Insolvency law. 

IP-rights during bankruptcy

The main goal of bankruptcy is the payment of as many of the debtor’s debts as possible. In order to pay these debts, the company’s assets are sold. IP-rights are company assets and therefore, can also fall in the bankruptcy estate. The connection between bankruptcy and IP is therefore clear: IP-rights can be sold to pay the debts. Selling your IP-rights is undesirable on its own, but on top of that, your competitors can also participate in the auction of your company assets in an attempt to buy your IP-rights. 

Separate holding

Many companies know all too well how important IP-rights are and have anticipated to this risk. In order to protect their IP-rights, they have established a separate entity (such as a holding) in which they put all their IP-rights. The operating entity, which is the entity that will in practice use the IP-rights, is licenced to use the rights. In case the operating entity goes bankrupt, the bankruptcy does not affect the holding. This construction allows the IP-rights to remain protected.  

Protecting IP-rights

It is recommendable to consider protecting your IP-rights should a bankruptcy occur. Mapping out which IP-rights you have, should in this regard not be forgotten. Examples of IP-rights are trademarks, patents, copyrights and design rights. Consider incorporating your IP-rights somewhere where they are safe, for example in a separate entity. Do not forget to arrange for a licence. After all, the ownership of the IP-rights now lies in the holding, while in practice the operating entity will use the rights. The licence should arrange safety of the IP-rights in case of bankruptcy of the operating company. This can be done by adding a clause that arranges termination of the licence in case of bankruptcy of the licensee.

Selling your IP-rights right before bankruptcy

You may think that another option is just selling the IP-rights right when you sense a bankruptcy is going to occur. However, agreements entered into right before bankruptcy, can be terminated by the insolvency practitioner. The conditions for this so-called “Actio Pauliana”, a dogma in Dutch Insolvency law, is that the creditors are adversely affected by the agreement and that you as the debtor, could have foreseen this. Transferring your IP-rights right before bankruptcy, therefore will not help you and is not recommendable. 

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