Tuesday, 16 June 2009

What is the (Copy)right way to Maximise IP Rights upon Insolvency?

When a company associated with the arts goes into liquidation it is easy to think of their copyright works as some of the most valuable potential assets in their portfolio. But with the cost of registered IP rights out of the reach of many smaller start-up, technology-rich businesses, copyright is increasingly used as a cheaper alternative to traditional registered IP Rights. There are potentially hundreds of ‘works’ that might vest in a company that could be sold to the highest bidder. For instance, the liquidated company may have a wealth of tender documents, developed and built up over a number of years, the format of which could be sold to a former competitor. As a result, anyone dealing with a company facing liquidation should be mindful that there may be a number of copyright works that are valuable assets that can be easily overlooked in favour of its more easily identifiable IP rights like trade marks and patents.

Copyright as an asset

Copyright is property and, by virtue of s.283 and s.306 of the Insolvency Act 1986 (“IA 1986”), any work created by an insolvent prior to the making of an insolvency order vests in the liquidation estate or trustee of the bankruptcy estate, subject to certain exclusions relating to the creation of copyright works. For instance s.11 of the Copyright, Designs and Patents Act 1988 (“CDPA 1988”) provides that, subject to any agreement to the contrary, the author of the work is the first owner of any copyright subsisting in it (except where the work is created by an employee during the course of employment when, unless otherwise agreed, the ownership passes to the employer). And, by virtue of s.145 IA 1986 and Schedule 4A, copyright can pass to a company in liquidation or a bankrupt on the same basis, i.e., if the liquidated company still has employees. S.307 IA 1986 is also a useful provision as it states that the copyright relating to a work created by a person whilst in bankruptcy may be claimed by the trustee as after-acquired property. Again, this is subject to the exceptions relating to works created in the course of employment.

When the copyright of an insolvent vests in the liquidation estate, the copyright can be sold and the assignment signed by the liquidator as assignor. If the insolvent is a licensee and owes outstanding royalties to the author the liquidator may still, subject to the terms of the original assignment, sell the copyright licence with the outstanding royalties being a provable debt in the insolvency.


Royalties may be paid by a publisher or other organisation under licence to the copyright owner in exchange for exploitation of that right, with the owner retaining the copyright.

In circumstances where a winding up order is made against the owner of a copyright, the official receiver should try to make contact with the publisher or other organisation paying the royalties to ensure they pay any future royalties directly to the liquidator.

It may be the case that the copyright itself does not vest in the liquidated company but the liquidated company is entitled to royalties. If so these payments should be treated as income and can be claimed under an income payments agreement or an income payments order. If a liquidated company is in receipt of royalties as a condition of the sale of a copyright, it should be noted that royalties are treated as income for corporation or income tax purposes and cannot be claimed as an asset.

Assignment and licensing of copyright

Copyright is an asset that can be freely transferred by assignment, disposition under a will, or by operation of law as personal property (s.90(1) CDPA 1988). S.90 CDPA requires assignments to be in writing, and failure to ensure that the assignment is effected in writing can undermine the validity of the transaction. S.92 CDPA provides that a copyright owner who does not wish to transfer the copyright outright, may instead choose to licence its use. But whilst there are no requirements for licences to be in writing, an exclusive licensee will have no right to sue infringers unless it is signed by the owner of the copyright in issue.

Sale of a copyright licence

A company in liquidation may hold a licence in respect of a work subject to copyright. Depending upon the terms of the licence (and upon the availability of any potential buyers) it may be possible to sell the licence as an asset in the insolvency. Often though, the licensee may have been chosen specifically for their personal skill or reputation and this may make the licence agreement one of a personal nature, which cannot be transferred or sold.

It has been decided that an author may have a personal contract with a company notwithstanding that the constitution of the company or its directors may change (Griffith v Tower Publishing Co Ltd (1897) 1 Ch 21). Where an author is to be paid either by a share of profits or royalties, it is likely to be assumed by the courts, in the absence of contrary evidence, that the payment of the author by share of profits or royalties indicates that the agreement was intended to be of a personal (and therefore non-assignable) nature. Alternatively, if the author was instead paid a fixed sum, the opposite may be assumed and it is much more probable that the publisher would have the right to assign the agreement. Licenses which are not of a personal nature may be assigned.

In circumstances where the official receiver wishes to sell a licence a copy of the original agreement to establish the nature of the licence and whether or not it is realisable should be obtained.

Disclaimer of copyright

Returns relating to copyright licensing or exploitation are often very low and, obviously, unpublished works will generate no royalties at all. Unless the work is a real hit the returns are likely to be minimal and In these circumstances it may be appropriate for the official receiver to consider disclaiming any interest in the copyright as onerous property (s.178 and 315 IA 1986). Particularly when it is considered that copyright can continue for 70 years after the death of the author and would have to be administered for a long period.


Unknown said...

LO'C is one of the leading bloggers on IP issues and her articles are prescient, readable and comprehensive. Essential reading for any aspiring, budding or actual IP lawyer.

CEP said...

This is an interesting, and fascinating, contrast to US bankruptcy practice. I need say only one word as an example:


(And, in fact, due to the confidentiality provisions in several settlements, that's literally all I can say on the subject of ownership of rights including copyright to the script for the film of that name.)

I'd like to point out two complications in US practice that do not appear to be so significant in UK practice... or maybe I'm just not sophisticated enough in the UK's insolvency proceedings, which is more than possible!

(1) The UK is fortunate in not having a statutory work for hire doctrine in its copyright law, which changes the identity of the "author" to the patron. Now imagine trying to determine who has the right to allow derivative works to be made after that "author" dies through a bankruptcy (insolvency) proceeding, but the natural person who (but for the WFH doctrine) actually "created" the work in question is still alive... and the paperwork is as sloppy as things usually are in a company that went under through court proceedings...

(2) Speaking of sloppy paperwork, it can be maddening to figure out where literary rights and copyrights ended up when the bankruptcy attorney who handles things for the debtor doesn't schedule those rights anywhere in the bankruptcy petition (they ordinarily belong as executory contracts or assets/liabilities).