Australia: The Personal Property and Securities Act ("PPSA") and Intellectual Property

Last Updated: 31 March 2012
Article by Lisa Vanderwal

1. Introduction

With the commencement of the Personal Properties and Securities Register ("PPSR") from 30 January 2012, some care needs to be taken in relation to whether or not security interests can be granted over personal property. This is particularly the case for intellectual property, where a number of different security interests may potentially be granted over the same intellectual property.

2. General

The PPSA applies to personal property. Both intellectual property ("IP") and IP licences are specifically included as a type of personal property.

As an IP licence is personal property, it can be used as collateral, so a security interest can be granted over it. The most likely security interest will be a general security agreement, such as a security interest over all present and after-acquired property (previously a fixed and floating charge).

Either the licensor or licensee can grant a security interest over the licence, unless it is specifically prohibited in the licence.

In addition, the owner of the IP the subject of the IP licence (such as a trade mark, patent or design) can also grant a separate security interest over the IP itself, unless it is specifically prohibited in the licence.

Accordingly, each party should be prevented from creating a security interest over an IP licence. A breach of this obligation could be grounds for termination, and consideration should be paid as to whether the breaching party should indemnify the other party for its costs and losses arising as a result of the breach.

It should be remembered that the IP licence itself cannot be registered as a security interest, as the licence to use specific IP under licence is not necessarily a property right. Only a security interest granted over the IP license can be registered. This means that a trade mark, patent or design licence should still be recorded with IP Australia.

3. Registration issues

Although there is nothing express in the PPSA itself, the trend seems to be that the costs of registering a security interest on the PPSR will be paid for by the grantor (the person giving the security), rather than the security holder (the person taking the security). However, unless this is specifically included in the security agreement, the presumption is that the security holder will pay for the registration of the security interest.

It is also the case that registration on the PPSR will only be effective to the extent that the relevant information is correct. Accordingly, if a grantor changes its name and this is not reflected in the registered security interest, the security interest may not be valid. Security holders should therefore always include a positive obligation on grantors to notify it of any change in name or address, along with an appropriate indemnity.

Also of particular importance with intellectual property is the inclusion of the relevant serial number. Because trade marks, patents and designs have specific registration numbers to identify them, that registration number (known as a serial number) must be used to register the security holder's interest in the PPSR. If the correct serial number is not used, then the security interest, even though it has been registered, may not be valid.

4. Used on goods

An IP licence can allow the use of specific IP on goods, such as promotional goods or designer clothing or accessories.

Those goods can themselves be the subject of a completely separate security interest. However, under Part 3.5 of the PPSA, any IP required to be used in relation to those goods is subject to the same security interest, unless the security agreement relating to the goods specifically provides otherwise.

This can this give rise to competing security interests – if for example there is a general security granted over the IP licence as a result of a loan taken out by the grantor, and a deemed security interest pursuant to Part 4.5 of the PPSA.

The grantor can find that its IP is being used in a way never contemplated by it, and which may be potentially damaging. This could be the case where an administrator decides to sell trade marked goods at a fire sale price to recover whatever costs it can.

Accordingly, where an IP licence allows specific IP to be used in relation to goods, licensors should consider requiring licensees to ensure that section 105 of the PPSA is excluded from any security interest they may grant over the goods. Failure to do so could be a material breach of the licence, and an indemnity may also be considered.

5. Royalty Streams

Yet another type of security interest that may be placed over an IP licence is a security interest over the proceeds from the IP licence.

The term "Proceeds" is defined under the PPSA. While it has a broader definition under the PPSA, which this paper does not go into, the definition includes the right of a licensor to receive payments under an IP licence. While it would be normal to include the proceeds in the security agreement over the IP licence itself, there may be times when this is not the case.

Again, some care should be taken to ensure that several competing interests aren't placed over the same IP licence.

6. Transfer of an intellectual property licence

The PPSA also provides that where an IP licence is transferred to another licensor, security interests in the IP licence will continue to bind each successor in title. In other words, assignees of IP will take the personal property subject to any security interest registered on the PPSR.

There are some exceptions to this, but they don't apply where the purchaser had "constructive knowledge" that that the assignment is a breach of a security interest. The PPSA deems a person to have "constructive knowledge" of the security if they had made the inquiries that would ordinarily have been made by an honest and prudent person.

Accordingly, if a security interest has been correctly registered on the PPSR, it will be difficult to claim a lack of knowledge. Conversely, if IP has not been identified with the correct serial number (see section 3 above), and an assignee searches for the correct serial number, the assignee may be able to successfully argue that it did not have either actual or constructive knowledge of the security interest, as it was not validly registered.

7. Reversionary rights

Although an IP licence itself cannot be registered as a security interest, there are some instances where other IP-specific documents can give rise to a registrable security interest. While not a licence, it is worth noting an assignment of IP may include a reversionary right - for example where the trade mark will be reassigned if the owner goes into liquidation, or breaches a specific provision of the assignment.

The obligation to re-assign the IP is an obligation to perform, and can be the subject of a security interest over the IP. There should be provisions in the assignment itself to that effect, and the security holder should consider registering its interest on the PPSR.

8. Priority of competing interests

As there may potentially be several competing security interests over the same IP or IP licence, Part 2.6 of the PPSA sets out the priority between competing security interests.

At the most basic level:

  1. a purchase money security interest ("PMSI") takes precedence over any other type of security;
  2. a perfected security (a security agreement which has been validly registered) takes precedence over an unperfected security (a security agreement which hasn't been registered, or hasn't been validly registered); and
  3. if there are two or more competing PMSIs, or 2 or more competing perfected security interests, the first in time takes precedence.

Please note that the above is a very broad summary of the priority of competing interests, and may not apply in the specific circumstances – Part 2.6 of the PPSA sets out specific rules that should be consulted if there is a priority issue.

9. Enforcement

The PPSA has extensive rules about notices of enforcement and actual enforcement of a security interest.

However, the parties can contract out of many of the enforcement provisions, including in particular the notice provisions. The notice provisions require the secured party to provide various notices to the grantor if the grantor is in breach of the security agreement (for example a failure to re-pay a loan instalment) and the security holder intends to enforce the security interest by seizing collateral. Once seized, the collateral must be disposed of to a third party, or retained by the secured party.

As intangibles can't be physically seized, notice of the seizure in accordance with the PPSA is sufficient to effect seizure. Disposal of the intellectual property can also be by way of licence, rather than actual sale. Pursuant to section 128 of the PPSA, the disposal of an IP licence itself must be in accordance with the terms of the IP licence.

A security holder will want to contract out of the notice requirement as much as possible, the grantor will want as many as possible to remain in. The extent of the exclusions under contract will always be a matter of negotiation, and in some cases the exclusion will not be an issue in the particular circumstances – for example those that relate to accessions, or mixed personal property and land are unlikely to be relevant in relation to IP licences.

The golden rule therefore will always be to specifically check which notice and enforcement provisions have been excluded from the security interest - don't assume that the exclusions will be fine. It should be noted that there are also some areas where notice can only be waived after the debtor (who is often also the grantor) has actually defaulted, but in practice waiver is being sought at the time of the formation of the security agreement.

The PPSA also states that the reasonable costs of enforcement will be paid for by the grantor, unless the parties otherwise agree. The costs of enforcement are normally taken out as part of the distribution order specified in section 140 of the PPSA. The costs of enforcement may therefore also be a matter of negotiation when entering into a security agreement.

10. Confidentiality

Once a security interest is registered, the security agreement that created the security interest can lose any confidentiality. This is because a person with another security interest in the same property, or an execution creditor with an interest in the property, can ask the secured party for a copy of the security agreement, and the secured party must provide it unless the parties have agreed that it will remain confidential.

Confidentiality must be agreed at the same time as the security agreement - confidentiality agreements entered into after the creation of the security agreement are invalid for this purpose. In addition, the secured party can't rely on the exception if the debtor is in default at the time of the request.

If the debtor is in default at the time of the request, the only other exceptions that will apply are if the disclosure would breach a law (for example the security agreement contains personal information), or there is some other duty of confidence.

11. Interpretation

Canada, New Zealand and the US have had a similar registration system in place for several years. It is therefore likely that case law from those jurisdictions will be persuasive until Australia builds its own body of case law.

12. Transitional period

There is a 2 year transitional period from 30 January 2012 for existing arrangements that would give rise to a security interest. Accordingly, any right over an IP licence, or the IP itself, must be registered within this transitional period or the security interest may be lost.

It is arguable that any transitional security interest in IP or an IP licence where the grantor has also granted a fixed and floating charge (now known as a general charge) over its property may already be lost. This is because charges have been automatically transferred into the PPSR. Because of the priority rules, and because previously IP and IP licences were not considered personal property and able to be the subject of security agreements, any security interest that could be registered in relation to the IP or IP licence may already have lost its priority date. It may therefore be a case therefore that some negotiation will have to be entered into with the holder of the general charge to carve out the relevant IP or the IP licence from the scope of the general charge.

Placing new security interests over IP or IP licences where there is also an existing general charge may also be problematic, and security holders should carefully check the PPSR before taking security interests in IP or IP licences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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