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