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IP Financing: Vindicating the Ruling in Canara Bank v/s NG Subbaraya Setty

As companies continue to look forward to improving their current levels of operations and expanding their activities, it becomes crucial for their asset values to stay high enough for strengthening their bargaining powers as they access credit facilities or negotiate lower interest rates on credits (link). Intangible assets, including intellectual property rights (IPR), have been utilized to bolster companies' asset values in the recent years, by what is commonly known as intellectual property (IP) financing – increasing collateral value for successfully acquiring a loan with lowered interest rates.
 
Contrary to the ruling in the Canara Bank case,[1] numerous Indian statutes allow IPR to be securitized to receive loans, even if the type of charge created on different IPs may differ. For greater clarity, the general legislations shall first be analyzed to determine if property upon which a security interest may be created includes IPR, and then specialized legislations relating to patents, trademarks, copyright, and designs would be elaborated upon. Even if a concern exists that the legislations are potentially being interpreted beyond their scope just to accommodate securitization of IPR, the National IPR Policy of 2016 is a clear governmental recognition of the fact that securitization of IPR needs to be facilitated by creating suitable legislative, administrative and market frameworks.
 
Despite the legality of IP financing amply supported by the legislations, Canara Bank's ruling has thrown a scare – it has triggered doubts regarding the validity of securitization of IP. However, the author endeavors to vindicate the judgment and justify that the ruling does not go against the legislative intent but is misconstrued due to its peculiar set of facts.
 
To state the facts briefly, Setty had availed credit facility from Canara Bank, and upon his failure to repay the entire principal amount with interest, he signed an assignment deed with the Chief Manager of Canara Bank (Bank), assigning his trademark for agarbathis for a period of ten years. As per the deed, the Bank was to pay him certain amounts of amount every year, part of which would be reserved for repayment of the loan. Later, upon instructions from their superiors, the Bank canceled the assignment deed.
 
It was also noted that the Bank had applied to the Registrar for registration of the assignment of the trademark as per section 45 of the Trade Marks Act, 1999 (TM Act). However, the Registrar notified that the deed can be registered only after the assignor or the registered owner of the trademark to file an affidavit to confirm the trademark assignment. Since the Bank took no steps to comply with the affidavit requirement, the assignment could not be registered. It was held that if the assignment deed is unenforced, it cannot be admissible in courts as proof of title to the trademark by assignment the courts themselves direct otherwise (prior to the 2010 amendment to the Banking Regulations Act [BR Act]).
 
The controversy lay in the part of the judgment that maintained that the Bank could not use the trademark to sell incense sticks as that would interdict Section 8 of the BR Act (banking companies are prohibited from dealing in buying/selling/bartering of goods unless it is in connection to realising the security held by them). Moreover, the court held that the Bank cannot permit third parties to use the trademark and earn royalties as that would violate Section 6 of the BR Act, which provides an exhaustive list of permitted businesses for banking companies). Finally, it was declared that the trademark was not a part of, or connected with, any security for loans made to the respondent and that it could not be property that came into possession of the Bank while satisfying the claims of the Bank.

The facts, in this case, are peculiar, and the ruling has been heavily criticized for going against the relevant legislative provisions. While it may be logical to consider it prohibited to let third-parties use the trademark and earn royalties from it because it was not connected with security for loans made, it would be problematic to not hold section 6 of the BR Act to favour Setty. Section 6(f) of the BR Act allows the bank to realise any property [interpreting to include IPR] which comes to its possession in satisfaction of any of the bank's claims.[2]

This indicates that if the debtor/borrower has defaulted in repayment of the loan, and if the bank gets to possess his IPR to satisfy their claim of repayment, then the bank should be permitted to realise such IPR – that would necessarily mean dealing with the rights.

The bank claimed repayment of the loan, and to satisfy this claim the bank signed the assignment deed. Consequently, the bank came in possession of the trademark, an intangible property, and as a part of its management and realisation, permitted its use by third parties. The fact that selling is mentioned separately in addition to realization, it implies that there can be other ways to realise the property in possession apart from selling it.
Moreover, this case cannot be understood to mean that a trademark cannot be assignable as loan security.

It merely rules that unless the court clears it, an unregistered assignment deed will not be admissible as evidence. Extending it to preclude assignment of trademarks as security for loans/advances would run afoul of the TM Act, which allows any registered trademark to be assignable. In fact, while this matter started from 2007, in 2010 there was an amendment to the TMA, which removed the clause that mandated that an unregistered assignment deed cannot be admissible unless the court directs otherwise.[3] Thus, if the present wording of the legislation were to apply, that fact that the deed is unregistered could not preclude its admissibility.

In sum, even if it were held that the trademark EENADU was not a security for the loan taken as it was assigned only after Setty defaulted on the repayment, it would be unjustified to construe it as preluding securitisation of trademarks altogether. Doing so, even for any other IP, would be both against the letter and spirit of the laws.
  The case presents no adversity to the interpretation of various legislations in favour of creating security interests in IP, though it is in the interests of the lender that the IP being given as security is operational, viable, maintainable, and enforceable to preserve its value to the greatest extent possible.

End-Notes:
  1. Canara Bank v NG Subbaraya Setty (2018) 16 SCC 228 (Canara Bank)
  2. Banking Regulations Act 1949, s 6(1)(f)
  3. Trade Marks (Amendment) Act 2010, s 6

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