Mortgaging IPR_ A Conflict between the Legislature and the Judiciary

Generally, the financial institutions in India have focused on creating security interest over tangible property such as land, house, machinery, etc. However, with the recent development of intellectual property rights (IPR), there has been a considerable shift in the bank’s traditional system of granting loans; Banks have gone from creating security interest only over tangible property to allowing creditors to assign, mortgage or license intellectual property such as trademark, copyright, patent or designs.

 

The Government has also shown keen interest in favouring the growth of IP as a valuable asset and enabling it to be securitised through its Intellectual Rights Policy of 2016. Financial institutions are now increasingly granting loans against the Property assignment or hypothecation of IP rights. In India, future receivables on licensing of musical works, trademarks and patents have been used as security against loans. This practice of creating security interest over intangible property is legitimised by a set of general and specific laws. Chapter VI of The Companies Act, 2013 allows a company to create a charge “within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India…”Further, schedule III to the Act classifies intangible objects under clause (j), therefore contemplating a creation of charge on intangible assets. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, also entails detailed provisions which reflect positively on the creation of security interest on intellectual property. Under this Act, property as defined under Section 2(1)(t)(v) includes intangible assets such as ‘know-how’, ‘copyright’, ‘trademark’, ‘licence’, ‘franchise’ or other ‘business or commercial right’. Further, Section 2(1)(zi) defines security interest as aright, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, or assignment. Specific laws such as The Patents Act, 1970 and The Trademarks Act, 1999, contains provisions dealing with creation of security interest over IP by way of assignment, mortgage, or license. 

 

This was however not regarded by the Supreme Court in the judgment of Canara Bank v. N.G. Subbaraya Setty (Civil Appeal No. 4233 of 2018). In this case, a borrower had entered into some credit facilities with the bank and on default of payment, signed an assignment deed for the trademark EENADU in respect of agarbattis. The Court opined that a trademark cannot be assigned to the creditor by a borrower who has defaulted on a loan. It took the view that the trademark EENADU assigned by the borrower for the satisfaction of the outstanding loan amount, cannot be said to be a property under the terms of The Trademarks Act, 1999 and The Banking Regulation Act, 1949. Hon’ble Justice Nariman said that the bank cannot venture out of its business and use the trademark to sell agarbattis.

 

It is respectfully submitted that the parties to the litigation should have viewed the entire matter in the context of provisions contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Section 2(1)(t) of the SARFAESI Act defines the expression property and specifically includes intangible assets being knowhow, trademark, copyright, licence or franchise. Further section 2(1)(zf) defines “security interest” as a right, title or interest of any kind upon property created in favour of secured creditor and includes such right title or interest in intangible assets. Further, the expression secured creditor is defined to include any bank or financial institution holding any right, title or interest upon any tangible asset or intangible asset as a secured creditor. It is respectfully submitted that in terms of the above provisions of the SARFAESI Act, the bank accepting assignment of any trademark as the security for a loan outstanding is the secured creditor having security interest over the trademark and is entitled to sell or assign the trademark for a royalty and recover the defaulted loan. 

 

It is further submitted that all security interests created over property rights in favour of banks and financial institutions are transfer of interest or rights in the property and in the event of default in repayment of the loans secured by the security interest, the lenders have a right to sell the property and realise their defaulted loans. The same principles are applicable in respect of intangible property rights such as trademarks or copyrights or patents and licence to use the intangible property rights such as trademarks or copyrights or patents and licence to use the intangible property for a specified royalty has to be treated as equivalent to sale of secured assets to recover loan. 

 

The object of making a clear provision facilitating creation of security rights over intangible properties is to facilitate availability of credit to intellectual property owners and other intellectual property rights holders, thereby enhancing the value of the intellectual property rights as security for credit. The intellectual property rights (e.g. translation rights of a bestseller book or patent for a drug for treatment of cancer or a well-established trademark for a best-selling product), have substantial value and the law needs to permit creation of security rights over such valuable properties to raise funds. The United Nations Commission on International Trade Law (UNCITRAL) has undertaken an elaborate exercise to prepare a legislative guide on secured transactions along with a supplement on security rights in intellectual property. The objective of the guide with respect to intellectual property is to promote secured credit for businesses that own or have the right to use intellectual property, by permitting them to use rights pertaining to intellectual property as encumbered assets without interfering with the legitimate rights of the owners, licensors and licensees of the intangible property.  Section 6(1)(f) & (g) of the Banking Regulation Act, clearly provides for dealing with any property or any right, title or interest in such property which forms the security for the loan. It is unfortunate that the above aspects of the legal status of creation of security or intellectual property rights were not brought to the attention of the Supreme Court while considering the assignment of trademark in favour of the bank. It is hoped that in a suitable case, the view taken by the Supreme Court is reviewed in the context of the provisions of the SARFAESI Act, so that lending against the security of intangible properties is facilitated. The UNCITRAL has also approved a model law on secured transactions for adoption by the member countries and India needs to consider enactment of Secured Transactions Law based on the UNCITRAL model, applicable to all secured lenders.

– Pritthish Roy