2. Trademark – A valuable asset
“What's in a name? That which we call a rose By any other name would smell as
sweet.“
- REALLY THOUGH?
WHAT ARE TRADEMARKS?
- “Sign capable of distinguishing the goods or services of one enterprise from
those of others.” – WIPO.
CHALLENGES IN REALISING TRADEMARKS’ VALUE –
• Generally held by companies.
• Mostly considered as discreet assets.
• Not often traded and hence, not even the owners realise the exact value.
Since it is an intangible asset, it is difficult to quantify its worth.
3. NEED FOR SECURITISATION AND COLLATERALISATION OF
TRADEMARKS
• For bolstering businesses in an emerging market.
• Tangible assets such as land, building, machinery etc. are conventionally used
as collateral.
• Intangible assets can be an alternative, providing further flexibility and ease in
obtaining such financial assistance.
• Such a shift in practice is already seen in the West.
• In India however, it has still not gained traction, as there is a clear lacuna in the
legal framework governing it.
4. - The term “property” as used in the SARFAESI Act, S.2(1)(zf) in the context of
“Security interest” includes intangible assets including IP.
- Similarly, in Companies Act, S.77 mandates company to register the particulars
of any “charge” signed by the company, which may be tangible or otherwise.
- Patents Act and Designs Act explicitly contemplates creation of security interest
by way of mortgage, assignment or licence. However, Trade Marks Act remain
silent in this regard.
- But does that necessarily mean trademarks cannot be made subject to a
security interest? – The law remains unclear and largely absent.
Scope
5. ENFORCING SECURITY INTEREST – APPLICABILITY ON
TRADEMARKS
• SARFAESI Act
• It lays down procedures for initiating actions for remedy against an
account holder once declared NPA. S.13(4) lays down recourses, including
taking over possession, management of business, require any person who
has acquired the secured asset from the borrower to repay the loan etc.
• The borrower is barred from transferring the secured asset once a notice is
served under the SARFAESI Act.
• Though it lays down such specific procedures, it fails to specifically deal
with intangible assets, though it is included within the scope of security
interest. S.13’s scope is limited to movable and immovable properties. The
prescribed procedure does not take into account the need for trademark
valuation.
6. • Recovery of debts due to Banks and Financial Institutions Act, 1993
• The Act prescribes modes for recovery for enforcing security interest,
including that of attachment and sale of the movable and immovable
properties of the defendant, or appointing a receiver for management
of such properties.
• This falls in line with the procedures laid in SARFAESI Act.
• However, similarly, only accounts for movable and immovable
properties and falls short in taking IP valuation into account and has not
till date notified any rules to that effect.
• Also, it is applicable only when the subject matter is above 10 Lakh
Rupees. Hence, a proper valuation of trademark is all the more a
prerequisite, the mechanism for which is not prescribed.
7. • The Contract Act
• If setting a trademark as a security/collateral against a loan can be
construed as a “pledge”, it could be governed by the Contracts Act, 1872.
• The pawnee is entitled for relief when the pawnor has defaulted payment
on the date stipulated for repayment.
• The pawnee may in such case, bring a suit, retain, or sell the pledged
goods towards the satisfaction of the amount due.
• This works for conventional properties.
• However, even a civil suit may not yield result in case of trademark, as
valuation itself is a challenge, and moreover, finding a third party buyer
for the trademark of a rather failing company through a conventional
approach could lead to exploitative bids.
• Retaining the trademark is of no good to the pawnee as the trademark is
useful only for the business associated with it.
8. • Trademarks are intangible assets – transfer of ownership is
procedurally more difficult, particularly in the context of as a
collateral. Mere transfer of certificate of registration does not
constitute transfer of possession. It has to be specifically assigned.
Lenders will prefer security interest created by hypothecation
wherein a charge attaches to the asset without transfer of
possession or title.
• Trademark’s value can greatly fluctuate with the liabilities attached
to it. Hence, indirectly it becomes the lender’s interest that the
associated business remains operational. On default, the lender will
have little to no option to realise the amount, as the trademark is of
value only with the business associated with it. Selling such
trademark can pose additional challenges.
Challenges
9. • Trademarks need to be renewed every 10 years. Hence, it becomes the
lenders prerogative that it is done promptly.
• Trademark litigation by 3rd parties can pose additional detriment in its
value.
• The National IPR Policy intends to commercialise IPR. One of its
objectives is to formulate methodologies and guidelines for valuation
of IP, so as to facilitate securitisation and use as collateral. However, no
legislative action has yet been taken.
10. Canara Bank v. N.G. Subbaraya Setty
• This was a case that involved assignment of trademark to a bank as a mode
to repay the loan.
• Provisions of the Trade Marks Act and Banking Regulations Act was
scrutinised.
• The defendant had entered into a assignment deed with the Chief Manager
of the Bank for the trademark ”Eenadu” of Agarbattis for a period of 10
years.
• The assignee was to pay Rs. 76,000/- p.m. for a period of 6 years of which,
Rs. 40,000/- was to be credited directly to repay the loan amount and the
rest was to be paid to the assignor.
• Later, raising the provisions of the Banking Regulations Act, which barred the
bank to be holders of such IPR, the bank intended to cancel the deed.
• The court ruled that trademark cannot be said to be a property for the
purpose of satisfaction of the claims of the bank. Trademarks were noted to
be not part of any securities for loans.
11. Conclusion
The existing laws contemplates the possibility of creating a security interest over trademarks.
However, the legal framework on enforcing the same is inadequate.
There exist practical challenges that deter lenders from accepting trademarks as collateral.
There exists huge scope in securitisation of IPR, including that of trademarks, as is envisaged
in the National IPR Policy as well.
Robust framework on valuation of IP, amendments in the Banking regulations and allied
legislations, rules and regulations on enforcing security interests on IP are needed.
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Fin.!
