In general, the goal of insolvency proceedings is to satisfy the creditor(s)’ claims, thus, the sale of assets will follow in many instances. The value of a company’s intellectual property portfolio can be a determining factor in the outcome of insolvency proceedings. This portfolio also includes intangible assets – classical intellectual property (IP) rights, trade secrets, etc.
Of course, in Latvia other alternatives to the classical insolvency proceedings exist under certain conditions – the so-called “legal protection proceedings” (LPP). The LPP aims to attempt to cover the creditor claims while continuing the operation of the company – i.e. if successful, the company is not liquidated.
However, during insolvency, third parties can try to illegally appropriate the debtor’s IP rights. The initiation of insolvency proceedings is public information and heavily impacts the value of IP assets (the public is informed about the monetary difficulties faced by the IP asset owner), along with other numerous aspects affiliated with insolvency.
In light of these problems, my research aims to focus on the following aspects:
- The nature of IP rights;
- IP rights as intangible assets during insolvency;
- IP asset problems in connection to insolvency.
The nature of IP rights
With the term “IP rights”, we typically understand patents, trademarks, industrial designs and author rights. However, during insolvency proceedings, the following question arises: “Are trade secrets and know-how IP rights too?” These assets can also impact the total company asset value and they can be franchised together with trademarks and other classical IP assets, meaning that they can create monetary value that can impact the result of the insolvency. Therefore, when dealing with insolvency, IP assets are in essence intangible assets with (potential) monetary value, including trade secrets and know-how IP rights.
Selected IP asset problems in connection to insolvency
First, some IP assets, such as trademarks, may be closely connected to the insolvent company and its brand(s)’ image, so they may tend to drop in value alongside the company’s descent into financial difficulties. The initiation of insolvency proceedings is public information, thus, the monetary difficulties of the company will have a major impact on the image of the company, its affiliated IP assets and its reputation in the eyes of its consumers and business partners. This impact is severe, especially in regard to trademarks pertaining to the luxury goods sector – as insolvency may distressingly impact the status of goods linked to prosperity and wealth (for example, fashion brand “MATCHESFASHION LIMITED” insolvency (Designer brands owed millions after Matchesfashion collapse. “The Guardian”. 24.04.2024. Available: https://www.theguardian.com/business/2024/apr/24/designer-brands-owed-millions-after-matchesfashion-collapse [viewed: 04.02.2025])). Additionally, during insolvency proceedings, with the insolvency administrator operating and dealing with other matters, third parties can try to illegally appropriate a company’s IP rights by unauthorised use.
However, there is no mechanism to protect the reputation of these companies, as, in Latvia, the normative acts for insolvency proceedings do not provide for such an option in detail, merely stating the obligation for the insolvency administrator to pursue and continue the needed activities in the interests of the company, which does include the protection of the IP assets and other company’s property, meaning that the company is at the mercy of the insolvency administrator’s diligence. This highlights the need for the insolvent company’s owners and officials to follow the trends in the sector, news and to stay vigilant in regard to the actions of the competitors and other individuals in order with the assistance of the insolvency administrator to pursue claims for any breaches of the IP rights or defamation in press or any other form.
Additionally, the IP assets are typically more valuable when registered, as registration reduces potential disputes, allows the sale of IP rights, and provides greater protection against third parties. However, the domain name troll problem (i.e., the bad faith registration of domain names matching third-party parties’ registered IP rights in order to extort money or otherwise harm the original IP right owner) in connection to trademark bad faith registration is still another issue that insolvent companies may face. One of the possible solutions to the problems that arise during the insolvency in relation to IP rights is to use a quick sale option (i.e., a sped-up auction) in jurisdictions where this is possible as a method of minimising the bad publicity linked to the company’s insolvency and preserving the earlier trademark reputation. However, in practice, a quick sale is rarely an option, as the insolvency administrator follows an official auction process and generally provides services to multiple companies facing insolvency proceedings at the same time.
Thus, insolvency proceedings are often lengthy and inefficient. However, it is also possible to search for an angel investor – to re-design and re-invest or sell the company completely before insolvency proceedings are initiated, if IP assets have a long-term valuable reputation in the relevant jurisdictions.
“Dzintars” insolvency proceedings
An example of the depreciation of IP assets during insolvency can be found in the Latvian cosmetics brand “Dzintars”. On October 17, 2016, the Riga City Zemgale Suburbs Court initiated legal protection proceedings against “Dzintars”. On November 12, 2019 “Dzintars” was declared insolvent. The claims of the unsecured creditors of Dzintars amounted to EUR 12.957 million.
The insolvency proceedings were initiated based on an application by the company’s creditor, as a prior payment plan had not been complied with during the legal protection proceedings and no amendments to the plan, accepted and agreed by the majority of creditors, had been submitted to the court. In September 2020, the Estonian group of companies “Skinest Group” signed an agreement to acquire the assets of “Dzintars” for EUR 5.5 million. The insolvency proceedings were closed on December 1, 2023, based on the court’s decision, as the creditors’ claims repayment plan had been fulfilled. The company was removed from the Register of Companies on December 8, 2023. This case shows that the insolvency proceedings depreciated Dzintars’ IP assets during the insolvency auction despite Dzintars’ established reputation and recognition in Latvian society, as the “Dzintars” brand was very well known and loved by the locals the brand itself has been present in the Latvian market since the Soviet times, and the real estate on its own even without the IP rights in the asset package itself provided major value with the construction of fourth chapter of the Southbridge project nearby.
IP licensing agreements
While one of the problems that insolvent companies face is the depreciation of the value of their IP assets, another issue is the IP licensing agreements problem. What happens if the licensee or the licensor becomes insolvent? This is a particularly major issue during legal protection proceedings when the insolvent company attempts to return to fiscal stability by restructuring its operations, but its attempts are impacted by the automatic termination of IP licensing agreements due to insolvency.
Typically, licensing or franchise agreements contain clauses terminating the agreement if the other party becomes insolvent or initiates legal protection proceedings. However, such termination can diminish the chances of the company’s recovery through legal protection proceedings or of satisfying the creditor(s)’ claims during the classical insolvency proceedings. Thus, it is important to negotiate the agreement terms at the contract drafting stage, as well as later on when facing difficulties and to register IP rights, as this typically increases the asset value, in addition to other benefits it offers.
Insolvency will typically impact the IP asset portfolio value because of its effects on the perception of consumers and other stakeholders. IP rights also require efficient protection against third-party unauthorized uses. Thus, it is crucial to ensure reputation preservation in the case of a sale of IP assets. This includes reputation in regards to the insolvency fact-depiction in media (e.g. articles and news, etc). Despite it not being possible to legally forbid the disclosure of the insolvency fact, the beginning of the classical insolvency proceedings or legal protection proceedings to the public or to mandate a certain depiction in the media, it is possible to legally prevent the publication of misleading or defamatory content. However, insolvency administrators rarely are proactive enough in regards to the reputation matters protection, thus the company’s officials should collaborate with the insolvency administrator, requesting him to file a claim in court in defamation cases. Furthermore, the insolvency administrator and the company’s officials can organise press meetings to clarify the data and ensure the protection of the company’s reputation.
*This research blog was written by Stella Kaprāne, doctoral student at the University of Latvia.
About BWILC and the PhD Workshop
This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.
Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised in alternately in Leiden and another city, prizes are awarded for the best presentations.