Question Q241 National Group: India Title: IP Licenses and Insolvency Contributors: Himanshu W. Kane Reporter within Working Committee: Himanshu W. Kane Date: 12 th September 2014 Questions I. Current law and practice Groups are invited to answer the following questions under their national laws. If both national and regional laws apply to a set of questions, please answer the questions separately for each set of laws. 1) Does your country have a registration system for IP licenses? If yes, please describe this system. Indian IP Statutes have a registration system for IP licenses. Registration of the license in respect of a patent or a design is mandatory. Registration of the license granted by the Breeder to any person under the Plant Varieties and Farmer s Rights Act, 2001 is also mandatory. However, registration of other IP licenses is not mandatory. The Licensee has to apply for registration of license (reduced to writing, embodying all the terms and conditions governing rights and obligations) in the prescribed form together with the prescribed fee, accompanied by the supporting documents. On being satisfied, the Controller/Registrar registers the license.
2) Describe the type or types of bankruptcy and insolvency proceedings that are available in your country. Insolvency Proceedings In India, the term Insolvency Proceedings applies only to natural person/s and not a corporate entity. The Insolvency laws in India are primarily governed by two statutes, viz.: - i) Presidency Towns Insolvency Act, 1909; and ii) Provincial Insolvency Act, 1920 The Presidency Towns Insolvency Act applies to the Presidency Towns of Bombay (now Mumbai), Madras (now Chennai) and Calcutta (now Kolkata) and the Provincial Insolvency Act applies to the rest of India. The applicability of both these statutes are limited only to natural persons and under the said statutes no insolvency petition can be presented against any corporation or against any association or company registered under any enactment for the time being in force. 1 The Presidency Towns Insolvency Act, 1909 as well as the Provincial Insolvency Act, 1920 provide that if a debtor commits an act of insolvency, then an insolvency petition may be presented either: i) by a creditor; or ii) by the debtor. 2 The administrator under the Presidency Towns Insolvency Act, 1909 is known as Official Assignee 3 while the administrator under the Provincial Insolvency Act, 1920 is known as Official Receiver. 4 Further the appointment of Official Receiver under the Provincial Insolvency Act, 1920 is not obligatory. Where an Official Receiver is not appointed, the Court generally appoints a member of the Bar or a ministerial Officer of the Court as ad hoc member to discharge the functions of the receiver for each insolvency 5. Further, when no receiver is appointed, the Court has the rights of and may exercise all the powers conferred upon a receiver under the Act. 6 Bankruptcy Proceedings In India, Bankruptcy Proceedings of a company incorporated under the Companies Act, 1956 is known as Winding Up Proceedings. The said term denotes the liquidation 1 Section 107 of the Presidency Towns Insolvency Act, 1909; & Section 8 of the Provincial Insolvency Act, 1920. 2 Section 10 of the Presidency Towns Insolvency Act, 1909; & Section 7 of the Provincial Insolvency Act, 1920 3 Section 77 of the Presidency Towns Insolvency Act, 1909 4 Section 57 of Provincial Insolvency Act, 1920 5 26 th Report of the Law Commission of India, Report on Insolvency Laws February 1964. 6 Section 58 of the Provincial Insolvency Act, 1920
proceedings of a registered company. The procedure relating to the winding up of companies are governed by the provisions of Companies Act, 1956. There are two modes for winding up a company: i) by the Tribunal; and ii) voluntary. 7 The winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up. 8 A voluntary winding up commences at the time when the resolution for voluntary winding up is passed by the board members of the Company. 9 The administrator appointed to facilitate the winding up proceedings is called the Liquidator. A partnership firm does not have separate legal existence apart from its partners. Indian Partnership Act, 1932 provides for voluntary and compulsory dissolution and winding up of partnership firms. The insolvency of all the partners or all but one partner leads to the compulsory dissolution of the partnership firm. 10 Every partner of a dissolved firm is vested with the right as against all other partners of the firm to have the property of the firm applied in the payment of the debts and liabilities of the firm and to have the surplus distributed among the partners according to their rights. 11 During the process of winding up of the partnership firm, the Court is empowered to appoint an administrator known as Receiver to facilitate the winding up of the partnership firm. 3) Does the law that governs bankruptcy and insolvency proceedings in your country address IP rights or IP licenses as distinct from other types of contracts, assets, and property rights? If yes, is the law statutory, regulatory, or based on precedent? Please identify any relevant statutes or regulations. No. 4) Please answer the following sub-questions based upon the law and jurisprudence in your country that governs bankruptcy and insolvency proceedings: a) Describe the law and its effects on a bankruptcy administrator s ability to adopt, assign, modify, or terminate an IP license. 7 Section 425 of the Companies Act, 1956 8 Section 441 of the Companies Act, 1956 9 Section 486 of the Companies Act, 1956 10 Section 41 of Indian Partnership Act, 1932 11 Section 46 of Indian Partnership Act, 1932
Subject to the provisions of the license agreement and subject to the sanction/control of the Court where the insolvency/bankruptcy proceedings are pending, the Liquidator/ Receiver has the power to adopt, assign, modify or terminate IP licenses. The Liquidator/Receiver has the power to carry on the business of the company/ partnership firm as may be necessary for the beneficial winding up of the company/ firm and this includes the power to sell the immovable and movable property and actionable claim of the company/ firm by public auction or private contract with power to transfer the whole property to any person or body corporate, or to sell the same in parcels. The Liquidator also has the power, by the leave of the Court, to disclaim onerous properties which includes inter alia unsaleable or not readily saleable property because of obligations attached to it and unprofitable contracts, within 12 months after the commencement of the winding up. Such disclaimer once validly made cannot be revoked. The Court may require notices to be given to the persons interested and may impose terms and conditions before or on granting leave to disclaim. On the winding up of a company, outstanding contracts do not become ipso facto inoperative. They are binding until disclaimed by the Liquidator or rescinded. On winding up, third parties are not automatically released from performing their obligations under pending contracts. b) Are equitable or public policy considerations relevant to how an IP license is treated? Given that the winding up proceedings in India do not distinguish between IP rights or IP licenses on one hand and other types of contracts, assets and property rights on the other hand, there are no specific public policy considerations which would be relevant for treatment of IP licenses during winding up proceedings. The interest and claims of the creditors and workers of the Company which is under winding up is of paramount importance. However, depending upon the nature of Intellectual Property involved in the IP licenses and if there are exceptional circumstances, the Court may treat an IP license differently by considering the aspects of public policy. c) Is the law different for different types of bankruptcy and insolvency proceedings in your country? Please refer to the answers to Q2 d) Does the law require, or give preference to, IP licenses that have been registered according to a registration scheme? The law dealing with the winding up proceedings does not give any preference to the IP licenses that are registered.
e) Would the existence of a pledge of or security interest in the IP rights for the benefit of the licensee affect application of the law in the case of an insolvent licensor? Yes. A Pawnee would have same rights as a secured creditor. f) Is the law limited to or applied differently among certain types of IP rights (e.g., patents versus trademarks or copyrights)? If yes, please explain. Generally, No. However, a trade mark because of its nature is likely to be treated differently e.g. a trade mark license given by a Company in liquidation (Licensor) may be cancelled/ terminated due to loss of control/ connection in the course of trade by the Proprietor/ Licensor. g) Does the law apply differently to sub-licenses versus main licenses? No. h) Does the law apply differently to sole or exclusive licenses versus nonexclusive licenses? No. i) Does the law apply differently if the bankrupt party is the licensee versus the licensor? No. 5) Would a choice of law provision in an IP license agreement be considered during a bankruptcy or insolvency proceeding in your country? Is this affected by the nationalities of the parties to the IP license or by the physical location of the assets involved? The domicile of the insolvent party will determine whether the winding up proceedings would be invoked under the Indian Companies Act, 1956 or the law of another jurisdiction. The physical location of the assets would be irrelevant to such proceedings. If there is a choice of law provision in the IP license agreement, the Liquidator may consider the said law, as provided in the IP license agreement, in so far as the contractual rights of the parties are concerned.
6) Would a clause providing the solvent party in an IP license agreement the right to terminate or alter an IP license be considered enforceable during a bankruptcy or insolvency proceeding in your country? Would the answer be different if the clause provides for automatic termination as opposed to an optional right to terminate? A clause that gives the right to the solvent party to terminate or alter the IP license shall be enforceable during the winding up proceeding. Similarly, a clause that provides for automatic termination of an IP license agreement upon insolvency of either party shall be enforceable during the winding up proceeding. 7) Would a clause in an IP license agreement that restricts or prohibits transfer or assignment of the IP license be considered enforceable during a bankruptcy or insolvency proceeding in your country? A clause in the IP license agreement that restricts or prohibits transfer or assignment of the IP license would be enforceable during a winding up proceeding. 8) In the event of a transfer or assignment of an IP license resulting from a bankruptcy or insolvency proceeding, what are the rights and obligations between the transferee and the remaining, original party or parties to the IP license? Does it matter if the insolvent party is a licensor, a licensee, or a sub-licensee? Subject to the terms and conditions of the IP license agreement, the transferee would enjoy the same rights and be liable for the same obligations as the transferor. It does not matter if the insolvent party is a Licensor, a Licensee or a Sub-Licensee. 9) In the event an IP license is terminated during a bankruptcy or insolvency proceeding in your country, would the licensee be able to continue using the underlying IP rights (and if so, are there any limitations on such use)? Does the (former) licensee have a claim to obtaining a new license? In the event of termination of an IP license agreement, the Licensee would not be entitled to use the underlying IP and/or claiming right, title or interest in the IP so licensed. The former Licensee would not have a claim to obtain a new license. 10) If IP rights that are jointly owned by two parties have been licensed to a licensee by one or both of the joint owners, and one of the joint owners becomes insolvent, how would the IP license be treated in a bankruptcy or insolvency proceeding in your country? Could the IP license be terminated even if this would result in termination of an agreement between the solvent, joint rights owner and the solvent licensee?
If a trade mark is jointly owned by two parties and one of the joint owner becomes insolvent, IP license shall stand cancelled/ revoked. Under Section 24 of the Trade Marks Act, 1999, a trade mark is required to be used on behalf of both or all the joint owners or in relation to an article or service with which both or all of them are connected in the course of trade. Hence, on one of the joint owners becoming insolvent, the IP license shall stand cancelled/ revoked because the trade mark no longer would be used on behalf of both the joint owners. A joint owner of copyright cannot, without the consent of the other joint owner grant a license or interest in the copyright and if a license is granted by one joint owner without the consent of the other, it does not bind the former. A joint owner cannot, without the consent of the other joint owner, grant a license or interest in the copyright. If a license is granted by one joint owner without the consent of the other, it does not bind the former and the other joint owner can sue the licensee for infringement 12. Therefore, if copyright is jointly owned and one of the owners becomes insolvent, the IP license shall stand cancelled/ revoked. As regards other IP rights, the treatment of IP license would depend on the terms and conditions of IP license. 11) Are there non-statutory based steps that licensors and licensees should consider in your country to protect themselves in insolvency scenarios, e.g., the creation of a dedicated IP holding company, creation of a pledge or security interest in the licensed IP for the benefit of the licensee, registration of the license, and/or inclusion of certain transfer or license clauses? The Licensor and Licensee may consider inter alia the following options to protect themselves against insolvency of one of them: i) The IP rights may be held by the IP holding company. ii) The license may provide for a substantial damage to the Licensee in case the Licensor becomes insolvent, coupled with the creation of a pledge or security interest in the licensed IP for the benefit of the Licensee. iii) The terms of license may be made commercially attractive, so that the Liquidator/ Court will, in the interest of creditors/ workers of the Company in liquidation, continue the license. iv) Assignment of rights under the IP license may be made subject to consent of the other party. II. Policy considerations and proposals for improvements to your current system 12 Nav Sahitya Prakash And Ors. Vs. Anand Kumar and Ors. reported in AIR 1981 ALL 200 at 205
12) If your country has a registration system for IP licenses, is it considered useful? Is it considered burdensome? Are there aspects of the system that could be improved? The registration system for IP licenses is useful and is not burdensome. However, it can be made more efficient. Register of IP being a public document, upon registration of IP license, third party is deemed to have a notice thereof and therefore registration of IP licenses should be encouraged. However, registration of IP licenses should not be made mandatory. It is pertinent to note that registration of a license of some IP confers additional rights upon the Licensee. For example a registered user of a trade mark is entitled to institute proceedings for infringement of the subject trade mark. An acquirer of IP will also find it useful to know prior rights, if any, in the subject IP. 13) If the law that governs bankruptcy and insolvency proceedings in your country does not address IP rights or IP licenses as distinct from other types of contracts, assets, and property rights, should it do so? If yes, should the law be statutory? The law that governs bankruptcy and insolvency proceedings does not address IP rights or IP licenses as distinct from other types of contracts, assets and property rights. However, the said laws and system thereunder has been functioning well and no difficulty is faced while applying the said laws to IP rights and/or IP licenses. There is no reason as to why the IP rights or IP licenses should be treated distinctly or as a special case and no change to the existing law is suggested. 14) With regard to a bankruptcy administrator s ability to adopt, assign, modify, or terminate an IP license under the current law of your country, are there aspects of this law that could or should be improved to limit this ability? Should equitable or public policy considerations be taken into account? The existing limitation on the bankruptcy administrator s (liquidator s) ability to adopt, assign, modify or terminate an IP license are adequate. In most cases the Liquidator cannot take action without the Court s prior sanction. Further, the Liquidator has to act in the best interest of the creditors/ workers of the Company and all his actions are subject to the control/ supervision by the Court. The Court would, if necessary, take into consideration the principles of equity and public interest. No change in the existing system is therefore suggested. 15) Are there other changes to the law in your country that you believe would be advisable to protect IP licenses in bankruptcy? If yes, please explain. No
III. Proposals for substantive harmonization The Groups are invited to put forward proposals for the adoption of harmonized laws in relation to treatment of IP licenses in bankruptcy and insolvency proceedings. More specifically, the Groups are invited to answer the following questions without regard to their existing national laws. 16) Is harmonization of laws relating to treatment of IP licensing in bankruptcy and insolvency proceedings desirable? In today s era of globalization and trans-border commerce, harmonization of laws relating to IP license in bankruptcy and insolvency proceedings is desirable. Minimum conflict in the provisions of national laws will generate higher legal and commercial clarity and certainty. 17) Please provide a standard that you consider to be best in each of the following areas: a) What restrictions, if any, should be placed on a bankruptcy administrator s ability to adopt, assign, modify, or terminate an IP license in the event of bankruptcy of a party to that license? Should these restrictions be statutory? A limited restriction should be placed upon the ability of the Liquidator to adopt, assign, modify or terminate an IP license. A unilateral assignment, modification or termination of an IP license by the Liquidator might adversely affect the rights and interests of the Licensor/Licensee e.g. where the Licensee has paid/ agreed to pay a lump sum consideration to the Licensor to secure a license to use/ exploit the Licensor s intellectual property for a long period. The Liquidator should have a discretion, which must be exercised judiciously, depending on facts of each case and subject to the Court s supervision/ control. b) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon pre-bankruptcy registration of the IP license? No. The restriction referred to in answer to Q17(a) should not depend upon prebankruptcy registration of the IP license and should apply to both registered and unregistered IP licenses. c) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the bankrupt party is the licensor or a licensee?
The restriction referred to in answer to Q17(a) should apply irrespective of the fact whether the bankrupt party is the Licensor or a Licensee. d) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the licensee has a security interest in the underlying IP rights? The restriction referred to in answer to Q17(a) should not depend upon whether the Licensee has a security interest in the underlying IP rights. At the same time, the Liquidator will give due regard to the fact that the Licensee has a security interest in the underlying IP rights. e) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the license is a sub-license or a main license? It should make no difference to the restrictions whether the license is a sub-license or a main license. f) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the license is sole, exclusive or nonexclusive? The restriction referred to in answer to Q17(a) should not make any difference whether the license is sole, exclusive or non-exclusive. g) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon the type or types of IP rights that are licensed in the IP license? Save and except trade mark, the restriction referred to in answer to Q17(a) should not depend on the type of IP rights that are licensed in the IP license. h) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon equitable or public policy considerations? The restriction referred to in answer to Q17(a) may take into consideration equitable or public policy considerations. However, the interest and claims of the creditors and workers of the Company which is under winding up should be of paramount importance. i) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon the language of the license itself, e.g., a right to terminate upon insolvency or a prohibition against assignment?
The restriction referred to in answer to Q17(a) should be subject to the language of the specific clauses mentioned in the IP license agreement. j) In the event a bankruptcy or insolvency proceeding in your country involves treatment of an IP license between a domestic entity and a foreign entity, which national bankruptcy laws should be applied? Should this depend on the choice of law clause in the IP license? Should this depend on the physical location of the entities or the assets involved? The domicile of the insolvent party will determine the law that would govern the winding up proceedings. This should not depend upon choice of law clause in IP license. The physical location of the assets would also be irrelevant to such proceedings. 18) To the extent not already stated above, please propose any other standards that you believe would be appropriate for harmonization of laws relating to treatment of IP licenses in bankruptcy and insolvency proceedings. No other standards are proposed.