Canada: Its IP Licensee Is Insolvent

When a licensee of intellectual property becomes insolvent and enters, either voluntarily or involuntarily, into a restructuring or insolvency process, there arise two key issues.  First is the issue of the fate of the licence itself.  Can the licensee sell and assign the licence as an asset, or at the very least, retain the licence in the case of a restructuring to be used by that licensee upon "exiting" its restructuring?  The licensor would often prefer in these circumstances, to terminate the license and regain control over its intellectual property.  Of prime importance to most licensors would be to control the fate of the license.  Should the licensor not be able to prevent the assignment of the license to a competitor or undesirable third party without its consent?  Unfortunately, from the point of view of the licensor, the answer to that seems, in general, to be no.  This paper explains why below.

The second issue is whether the licensee who is restructuring can continue to use the IP that is the subject of the licence during the restructuring, and if so, do they have to pay for said use?  It seems unfair that the debtor licensee retains the benefit of continued use of the license without payment.  However, as set out below, the law on this issue is also not clearly in favour of the licensor.

Given the less than satisfactory answer to the above two issues (from the licensor's perspective) this paper sets out certain options which the licensor can consider when it enters into a license to try to address these issues.  Conversely, the licensee should be aware of these issues to ensure that they maintain as much flexibility as possible in the event they are forced to restructure and they wish to make the best possible use of these licenses.

Some may hope to rely on the fact that on September 18, 2009, amendments to the Companies' Creditors Arrangement Act1, (CCAA) and the Bankruptcy Insolvency Act2, (BIA) (the "Amendments") came into force, which were to address these issues.  The new IP provisions in the Amendments were applauded by many as a remedy to the issues involving IP in the context of insolvency.  However, there is still relatively little case law to determine whether or not this is the case.

Restructuring by the Licensee:

In either a BIA proposal or CCAA restructuring, a stay of proceedings is triggered or typically ordered at the outset.  The stay of proceedings prevents the usual remedy which exists in all licence agreements to terminate the licence if payments are outstanding and are not made when due.  It also prevents the licensor from terminating the licence solely because the licensee has become insolvent and filed for insolvency protection, notwithstanding the usual clause in the licence agreement that would allow the licensor to do so.

However, it is not all doom and gloom for the licensor.  Both the CCAA and BIA grant the licensor the power to require that payments be made by the debtor for the ongoing "use" of licensed property after filing for protection.  This allows the licensor to unilaterally alter the terms of the license agreement so as to require payment on a C.O.D. basis for duration of the licensee's restructuring.3

It seems that a licensor also has protection against a debtor licensee who not only does not want to pay C.O.D but does not want to pay at all, or wants to use the CCAA proceedings to unilaterally alter the terms of the license agreement.  In the case of Re Allarco Entertainment the Allarco Entertainment Companies ("Allarco") operated a pay television cable movie channel, "Super Channel" and had Program Licence Agreements ("PLAs") with hundreds of program suppliers, one of whom was Alliance Films Inc. ("Alliance").4 In order to solve its cash flow problems Allarco sought to impose, by way of an initial order presented to the court, a payment regime whereby Allarco would only be required to pay for any programming actually broadcast during the CCAA proceeding (the "Pay-Per-View" regime), effectively altering the terms of the PLA.  However, after a finding that Allarco had advertised its ability to broadcast Alliance programming post-filing (which it could only do under the rights granted under the PLA), the court found that: (i) there had been use of the IP; (ii) it (the court) did not have jurisdiction to alter the Alliance contract to change the amount it was paid for such use or the timing of such payment, as the initial order purported to do; (iii) the Pay-Per-Play regime must fall and Alliance could require immediate payment for the use of their licensed property during the CCAA restricting of Allarco.  To do otherwise, the Court found would impose an obligation on Alliance to provide a service and benefit to Allarco free of charge.5

Allarco stands for the proposition that there is no authority under the CCAA for the court to grant an order that alters a licence agreement to create payment terms more favourable to the licensee if the licensee is using the IP post-filing.  If the IP is used, the licensor can demand immediate payment for such use.  If confronted, as Allarco was, with a regime that it cannot afford, the licensee's has only two options, either to terminate the licence, as it did in the case of Alliance following good faith negotiations, or to reach an agreement as it did with others.

The remaining question is what constitutes "use" of IP under licence.  Is it "use" to merely hold an exclusive licence, without making "active" post-restructuring use of the IP to which that licence relates?  Does the fact that the licensor is unable to terminate its agreement with the licensee and re-licence that IP to a third party entitle the licensor to payment in accordance with the licence, regardless of what active or actual use the licensee makes of the licensed IP during the restructuring?  Based on the court's findings in Allarco that the IP had been "used" as a result of advertising by Allarco it appears the court was searching for some form of "active use" beyond mere existence of the licence, to enforce the obligation to make payments under the license.  However, in this author's opinion this question was not expressly answered.

Assignment of the Licence without Consent of Licensor:

While some licensees that enter CCAA protection continue their businesses and wish to renegotiate or continue to use the licensed IP during their restructuring, other licensees may wish to assign their licence to a third party.  Any licensee wishing to assign their rights and obligations under a licence will have to apply to the courts for such approval.

The recent Amendments to the CCAA and BIA give courts the power to order a forced assignment of a licence agreement in a CCAA proceeding, a proposal under the BIA, or a bankruptcy. Section 84.1(1) of the BIA states that

"On application by a trustee and on notice to every party to an agreement, a court may make an order assigning the rights and obligations of a bankrupt under the agreement to any person who is specified by the court and agrees to the assignment."

Section 11.3(1) of the CCAA mirrors this section of the BIA with respect to the assignment of a debtor company's agreement.

When determining whether to authorize approval of the assignment, the court is required to consider: (i) the appropriateness of the assignment; (ii) whether the assignee of such rights and obligations is able to perform the obligations assigned; (iii) in the case of a CCAA proceeding or a BIA proposal, whether the monitor or the proposal trustee, respectively, approved the proposed assignment.6 Moreover, there can be no assignment of any rights or obligations arising under any agreement entered into on or after the date of bankruptcy, an eligible financial contract, or a collective agreement.7

In addition, section 11.3(4) of the ates

"The court may not make the order unless it is satisfied that all monetary defaults in relation to the agreement — other than those arising by reason only of the company's insolvency, the commencement of proceedings under this Act or the company's failure to perform a non-monetary obligation — will be remedied on or before the day fixed by the court."

Unfortunately, no case has as yet provided guidance on the question as to what constitutes payment in full of outstanding monetary obligations.

While it is reasonable to assume that a sale of assets in a CCAA proceeding in which it is acknowledged that there is no intent to make a plan of arrangement (a "liquidating CCAA") is a case where the Court would require payment of any outstanding license fees prior to the assignment of any agreements, what about where there is an intent to make a plan?  Why, in that circumstance is it reasonable that a licensee should receive 100 cent dollars for its claim when other unsecured creditors would not?  An open question remains as to whether or not, if there has been a compromise of the debts owed to the licensor in an approved CCAA plan of arrangement it will negate the requirement to pay in full those debts on an assignment.  What of the situation where the sale arises prior to the plan of arrangement being voted on or approved (as is often the case)?  Would the ruling be different?  If the debtor undertakes to deal with the outstanding obligations in a plan which has yet to be voted on, will that suffice to meet the test in section 11(4) or 84.1(5)?  Perhaps this is what is contemplated by the provision in 11.3(4) that allows a future date to be fixed by the Court.  It is uncertain at this time.

Only one case has been found in which the right to make a forced assignment under the amendments has received any substantial consideration.  This was in the case of Ford Credit Canada Ltd. v. Welcome Ford Sales Ltd. by the Alberta Court of Appeal.8 The case dealt with the forced assignment of a dealer agreement over the objection of Ford.  It did not refer to s.84.1 (5), which is analogous to section 11.3 (4)

Although not a case dealing with intellectual property, it is worth noting that the Alberta Court of Appeal made some comments about how this section was to be considered.  The Court said,

"Prior to the coming into force of 84.1 in 2009, a trustee in bankruptcy could not assign (sell) a contract to a third party where the counterparty to that contract opposed the assignment.  As a result, a bankrupt estate was vulnerable in losing the benefit of a valuable contract to the detriment of the estate and often to the detriment of third parties.

The estate of the bankrupt may include various forms of property.  Sometimes the most valuable property in an estate will be the contractual rights possessed by the bankrupt as of the date of bankruptcy.  Those rights maybe embodied in, for example, a Franchise Agreement, a Purchase Agreement, a License Agreement, a Lease, a Supply Agreement or an Auto Dealership Agreement.

The clear intent of Parliament in an acting section 84.1 of the BIA was to address this vulnerability; it made a policy decision that a Court ought to have the discretion to authorize a Trustee to assign (sell) the rights and obligations of a bankrupt under such an agreement notwithstanding the objections of the counterparty."9

The Court went on to say the following:

"...section 84.1 of the BIA allows the Court to approve the assignment (sale) of any agreement to obtain maximum benefit for creditors upon payment of any monetary breaches and upon concluding that the rights and remedies of the counterparty will be preserved."10

The Court then ultimately made a somewhat fact specific assessment as to whether or not it was appropriate for the contract to be assigned to the assignee in this case over its objection.  Ultimately they concluded that there was no reason not to do so.  In particular, the Court turned its mind to whether or not it was inappropriate to assign the agreement on the basis that the rights in that the agreements by their nature are "personal".  The Court ultimately concluded that it was not and that therefore the assignment was appropriate.  The Court held

"parties to a contract cannot insulate it from the effect of section 84.1 simply by including a clause describing it as creating "personal" obligations where the contract is, in fact, a commercial one which could be performed by many other than the contracting parties."11

Rather, the Court formulated and re-stated the following test to determine whether or not an agreement is personal:

"agreements are said to be personal in this sense when they are based on confidences, or considerations applicable to special personal characteristics, and so cannot be usefully performed to or by another".12

ultimately, the Court found that this was not the case in this case

It is not clear whether or not similar reasoning would be upheld in the context of a license agreement.  However, this case does support the fact that if it is appropriate for the agreement to be assigned, the Court now has the discretion and authority to do so.  The question of whether or not to grant that authority in the context of a restructuring may however be different then in the context of a bankruptcy as was the case in the Ford company.  In the Nexient case, discussed below, the Court did have to consider the exercise of its discretion to grant an assignment in the context of a CCAA restructuring.

In 2009 the Ontario Superior Court had to deal with the purported assignment of a licence agreement by the insolvent licensee to a competitor of the licensor.13 In Nexient, ESI licensed Nexient to provide two courses in corporate training, the Project Management ("PM") program and the Business Analysis ("BA") program.  The focus was predominantly on the BA program materials, which were subject to copyright and also contained proprietary information owned by ESI.  The BA program materials were licensed to Nexient, which provided Nexient with a perpetual, exclusive royalty free right to use the materials in Canada (the "BA Agreement").  The BA Agreement contained a clause that allowed ESI to terminate the agreement upon any act of insolvency.  It also contained a clause prohibiting assignment, except in the event of a merger, reorganization, change of control or sale of all or substantially all of the assets of Nexient's business.  Upon the insolvency of Nexient, Global Knowledge, the third party and a competitor of ESI, elected to take an assignment of the BA agreement only.  ESI terminated the BA agreement upon being made aware of the insolvency but this action was stayed pending the conclusion of the CCAA proceedings.  The court in Nexient found that neither the vesting order nor the definition of "Claims" contained any language which permanently stayed ESI's rights of termination based on the insolvency defaults.

The court in Nexient concluded that it had the authority to

"...authorize an assignment of an agreement to which a debtor under CCAA protection is a party and to permanently stay termination of the agreement by the other party to the contract by reason of either the assignment or any insolvency defaults that arose in the context of the CCAA proceedings."14

effectively stating the court did have power to exercise the assignment with the restriction of a permanent stay which Global Knowledge was seeking.

With respect to the test that must be met in order to obtain authorization to assign the contract, the court in Nexient refined the test in Playdium, which held that assignment must be necessary for the sale of the debtor's assets under the CCAA to be completed.15 In Nexient the court adopted the following test:

"It is clear from Playdium and Woodwards that the authority of the Court to interfere with contractual rights in the context of CCAA proceedings, whether it is founded in section 11(4) of the CCAA or the Court's inherent jurisdiction, must be exercised sparingly.  Before exercising the Court's jurisdiction in this manner, the Court should be satisfied that the purpose and spirit of the CCAA proceedings will be furthered by the proposed assignment by analyzing the factors identified by Spence J. [in Playdium] and any other factors that address the equity of the proposed assignment.  The Court must also be satisfied that the requested relief does not adversely affect the third party's contractual rights beyond what is absolutely required to further the reorganization process and that such interference does not entail an inappropriate imposition upon the third party or an inappropriate loss of claims of the third party."16

The "other factors" mentioned in the test refer to whether the relief was consistent with the purpose and spirit of the CCAA, such as:  whether sufficient efforts had been made to obtain the best price such that the debtor was not acting improvidently; whether the proposal takes into consideration the interests of the parties; the efficacy and integrity of the process by which the offers were obtained; and whether there had been unfairness in the working out process.

After applying the test in Nexient, the court ultimately declined to grant the order sought by Global Knowledge, even though they had authority.  The court recognized that providing such an order would not assist the restructuring based on the following factors: (i) the CCAA proceedings had effectively been completed at the time that the business was sold to Global Knowledge; (ii) Global Knowledge had paid the full purchase price (which had indeed already been distributed to the creditors at the time of the motion); (iii) there was no mechanism in the Asset Purchase Agreement requiring an adjustment of the purchase price in the event a contract or licence (such as the BA Agreement) could not be assigned to Global Knowledge; and (iv) that there was no value to the CCAA proceedings in granting the proposed order,  notwithstanding that it was clearly of value to Global Knowledge and that the assignment was clearly intended by the parties at the time the transaction was approved.

In applying the second part of the revised Playdium test (i.e. whether it was consistent with the purpose and spirit of the CCAA), the court had concerns regarding a purchaser, Global Knowledge, seeking to assume less than all of the contracts between the debtor and the third party (in the case of the Asset Purchase Agreement, this would be ESI).  That when a purchaser seeks to discriminate among contracts with the third party, the court will not exercise its authority under the CCAA, or its inherent jurisdiction, to authorize an assignment and/or permanently stay termination rights based on insolvency defaults.  Here, the purchaser must assume all contracts.17 Furthermore, that it would be inappropriate to authorize the assignment where it would involve the assignment of less than all of the debtor's contracts with a third party where the contracts were interconnected either expressly or through an operational relationship (as was the case in Nexient), in situations where there are set-off rights between contracts, or where the assignment of only select contracts would leave the third party adversely affected.

The court also confirmed that while the stay in the Initial Order prevented ESI from terminating the BA Agreement during the CCAA proceedings, the stay did not extinguish ESI's right to terminate the agreement once the stay was lifted in the absence of a further order of the court.18 Allowing a permanent stay of the insolvency termination rights in the contract in these circumstances would essentially "rewrite" the contract which the licensor had negotiated with the licensee.  Therefore, in much the same way as in Allarco, the court declined to interfere with those negotiated terms or to put itself in the position of renegotiating those terms.

Although Nexient dealt with whether or not a court could override a provision in a contract which expressly allowed for termination of that contract in the event of insolvency, it would seem to us that the same argument could be applied in determining when a court will or will not force the assignment of a contract.

Any parties rejoicing upon reading the foregoing believing that it provides support to licensors who object to the assignment of their licences, and will help prevent the assignment of their licences over their objection should note that it is not certain that the outcome of a Nexient-like fact scenario will be the same in future proceedings.  Indeed, in Nexient it was noted that if Nexient or Global Knowledge had made the request at the negotiation of the APA or the Sale Order for an order akin to the one they were seeking at this later motion, the determination may have been different.

In summary, both Nexient and Allarco illustrate the difficulties licensors can face in the insolvency proceedings of a licensee, as well as the factors the court will consider in whether to grant an assignment of a licence agreement, amend the terms of the licence agreement or terminate the licence agreement.  Although the Amendments confirm that it is possible for a licensee to assign and, to the extent necessary to effect that assignment, to renegotiate the terms of the licence agreement during CCAA proceedings, it is suggested that the court's authorization will only be granted in situations where the test set out in Nexient is met.  On the other hand, the Ford case demonstrates that, at least in the context of a bankruptcy, the Court is setting a relatively high bar for the licensor to climb over in order to prevent an assignment which benefits the estate.

Lessons for the Licensor:

From the foregoing analysis, there are certain Reasons for the Licensor to consider when drafting its license:

  1. The Licensor may wish to maintain certain reporting obligations or automatic termination clauses based on early warning signs of insolvency, such as reduced working capital, EBITDA calculations or reduction in debt ratings.  This information could provide the licensor with the ability to terminate the licence prior to the debtor obtaining a stay of proceedings at the commencement of its insolvency proceeding which would interfere with the licensor's termination rights.
  2. The licensor may also wish to negotiate a free-standing right of first refusal on the sale or assignment of IP so that a licensor can regain control of its IP should the licensee become insolvent.
  3. In light of the Amendments, a licensor may wish to separate the licence agreement from the agreement for the licensor's ongoing obligations to allow the licensor to terminate the support agreement without worrying that such termination is prevented by those sections of the CCAA or BIA which protect licensees and which may be interpreted as preventing the termination of licence agreements.
  4. The licence could also include a requirement that the licensee agrees to make a minimum amount of "use" of the IP during every month of the term of the licence and that such use will be acknowledged in any event to have occurred, in order to make it easier to argue that the licence is in fact being used during any possible period of restructuring and to ensure that the licensor can require C.O.D. payment during that term.
  5. Licensors should consider drafting over-arching agreements that connect any co-dependent licence agreements, as ESI ideally would have done in Nexient, by creating formal "umbrella agreements" or partnership arrangements under which the licensee acknowledges that the various licence agreements must be considered as a whole.  This may prevent a future purchaser of the licence agreements to pick and choose which agreements suit its interests best at the expense of the licensor's interests.

Notes for the Insolvency Professional:

If there is to be an assignment of a licence over the objection of the licensor, it seems that Nexient, even though it pre-dates the coming into force of the Amendments by a few months, provides a guide as to how the court in a CCAA case (and likely in a BIA proposal as well) may exercise its newly granted statutory power to determine the "appropriateness" of the proposed forced assignment of a contract.  When considering that in Nexient there was a single sale of the whole business to one purchaser, the appointed monitor had an enhanced role with a great degree of control over the process, all proceeds were paid to the secured creditors, and there was no plan for arrangement, one might expect the lessons from Nexient could perhaps also be applied in considering when a receiver or even a trustee might ask the court to force the assignment of a license.

Nexient makes it clear that in a CCAA proceeding one can expect that an assignment will only be made in the event that it serves to enhance the goals of the restructuring.  If the restructuring is not benefited by the proposed assignment or by the proposed changes to the terms of the contract upon the assignment, the court may decline to grant the assignment.  Second, the assignment must be in keeping with the spirit of the CCAA and the impact on third parties, which may include the court looking at what the purchaser is attempting to achieve and how the assignment may unfairly prejudice the licensor or how it may deviate from the terms of the contract which the licensor had negotiated with the licensee.

One can further expect, as proved in Nexient and Allarco that the court will be loath to interfere with the terms of the contract, unless absolutely required to do so and that the timing of the request to alter the terms of the contract will be a critical factor in this regard.  A proposed assignment must be sought no later than the time of the approval of the proposed transaction and not as an afterthought.

Finally, given the uncertainty as to how the obligation to make good on all outstanding payments will be treated on a forced assignment, the insolvency professional acting for the licensee would be well advised to consider attending to the approval of the plan of arrangement prior to the sale of the assets which would include the forced sale of the license.  If the licensee attempts to sell the license prior to the plan being approved, the licensor would have a good argument that they would be entitled to payment in full for their outstanding arrears, which in a circumstance like Allarco (where the outstanding license fees were in the multiple millions), could dramatically effect the sale price for the assets or the viability of the restructuring.  The same would hold true for any corporate reorganization to be undertaken by the licensee in its CCAA process which might require the assignment of the license to a new company incorporated for the purpose of that reorganization.


1. Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 [CCAA].

2. Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [BIA].

3. CCAA, supra, note 1, s. 11.01(a); and BIA, supra note 2, s. 84.2(4).

4. Re Allarco Entertainment Inc. (2009), 2009 ABQB 503, 12 Alta. L.R. (5th) 341, [2010] 4 W.W.R. 299 (Alta. Q.B.) [Allarco]

5. Allarco, supra, note 15 at para. 55

6. CCAA, supra, note 1, s. 11.3(3); BIA, supra note 2, ss. 66(1.1) and 84.1(4)

7. BIA, supra, note 2, s. 84.1(3)

8. 77 C.B.R. (5th) 278 [2011] (Alta, Ca)

9. Ford, 37 - 39

10. Ford, 41

11. Ford, 52

12. Ford, 55

13. Re Nexient Learning Inc. (2009), 62 C.B.R. (5th) 248 (Ont. S.C.J.) [Nexient]

14. Ibid, at para. 53.

15. Re Playdium Entertainment Corp. (2001), 31 C.B.R. (4th) 309 (Ont. S.C.J. [Commercial List]) [Playdium].

16. Nexient, supra, note 9 at para 59.

17. Nexient, supra, note 9 at para. 62

18. Nexient, supra, note 9 at para. 98

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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    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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