The general principle is that security granted on tangible
property also charges the property's accessories. That is not
the case however when intellectual property ("IP") rights
belonging to a third party attach to inventory1. For
such rights are not considered to be accessories and thus are not
charged by the security, unless the holder of the IP rights has
If the grantor of the security goes bankrupt, enforcement of the
creditor's security could thus be compromised because of the
third-party IP rights.
Close attention must be paid to the contract between the grantor
of the security and the holder of the IP rights, as it may contain
significant restrictions on assignability and the enforceability of
security on patented merchandise and equipment. The enforcement of
a hypothec on patented merchandise could be compromised or
contested, notwithstanding the provisions of the Bankruptcy and
If the grantor goes bankrupt, such contractual restrictions can
be set up against the trustee-in-bankruptcy by the manufacturer or
vendor by notifying the trustee in writing of its rights before the
property is sold by the trustee. Once on notice, the trustee is
obliged to acquire the property at its depreciated invoice
A hypothecary creditor who enforces its security on merchandise
to which copyright applies does not have to pay royalties to the
However, in a bankruptcy situation, section 83 of the
Bankruptcy and Insolvency Act provides that in the case of
works of literature, they must either be returned to the author, or
royalties must be paid to the latter, depending on whether or not
copies of the work have been published and put on the market at the
time of the bankruptcy.
Trademarks and licences
When inventory is covered by a licence to use, the licencee may
be denied the right to grant security in that inventory. Licence
agreements often contain a non-assignability clause that prohibits
the granting of security in the licensed property.
Even where the licence does not prohibit the granting of
security in the property, it will still be necessary to review the
licensing agreement carefully to see whether there are any
conditions that apply to how the property can be
The Bankruptcy and Insolvency Act surprisingly does not
deal with the enforcement of security on trademarked property.
Courts must therefore take into account any contractual provisions
binding the owner of the property and the holder of the
In the matter of Scanwood Canada Ltd. (Re)3,
a bankrupt furniture manufacturer had entered into a contract with
IKEA which provided that once manufactured, the furniture could
only be sold to IKEA or one of its authorized distributors. IKEA
had no obligation to purchase the furniture in the event of the
manufacturer's bankruptcy however, and in this particular case
it refused to do so. The receiver accordingly asked the Court for
permission to sell the property for the benefit of the creditors.
The Court refused (albeit reluctantly) and ordered the property
destroyed! The Court pointed out that it could not supersede the
contract between the debtor and IKEA.
In the absence of clear contractual provisions, however, courts
tend to favour the interests of creditors generally. For example,
in the matter of 185107 Canada Inc. (Groupe de compagnies
Bennett Little ltée–Bennett Little Group of Companies)
(Trustee of)4, the Superior Court of Quebec
authorized the sale of a bankrupt's inventory distributed under
the trademark of a third party. A bank with security in the
inventory applied for and obtained the appointment of a receiver.
The licensor then sent a notice of cancellation of the licence with
both immediate and retroactive effect. By then the receiver had
found a purchaser for the disputed inventory.
The receiver then applied to the Court for authorization to sell
the inventory. The Court acquiesced, citing the absence of any
provisions in the licensing agreement regarding the disposition of
the trademarked inventory in the event of cancellation of the
It is thus evident that before taking security in inventory, it
is important to check whether there are any rights attaching to the
merchandise that may compromise the creditor's rights in the
event of enforcement and/or the cancellation of an IP licence.
1. Louis Payette, Les sûretés et la
propriété intellectuelle, in
Développements récents en droit de la
propriété intellectuelle 2002, Yvon Blais,
Cowansville, 2002, p. 14
2. Louis Payette, Les sûretés
réelles dans le Code civil du Québec, Yvon
Blais, Cowansville, 2001, pp. 570-571
3. 2011 NSSC 495 (CanLII)
4. 2014 QCCS 4066
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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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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