The recent amendments to the Bankruptcy and Insolvency Act (the "BIA") and the Companies' Creditors Arrangement Act (the "CCAA") have sought to address contractual rights amongst parties during restructuring. These amendments have codified the common law principle that an insolvent debtor has the power to disclaim agreements. Still, it is important to recognize that the amendments have also legislated that some agreements cannot be disclaimed during a restructuring. The resulting implications can have unexpected consequences on the restructuring process, particularly with respect to intellectual property.
Historically, the general principle was that receivers or trustees in bankruptcy were free to disclaim license agreements not in the interests of the estate, subject to applications for relief from the disclaimer. However, innocent licensees will now have some protection under the BIA and CCAA. After the amendments are proclaimed in force1, an insolvent licensor who has granted a right, including an exclusive right, to use intellectual property to a licensee will not be able to disclaim the agreement during a restructuring. Any attempted disclaimer will not affect the licensee's right to use the intellectual property, so long as the licensee continues to perform its obligations under the agreement.
While the amendments provide a safeguard for a licensee during a restructuring, there are several cautionary points to note. First, the term "intellectual property" is not defined within either the BIA or the CCAA, making it unclear what falls under the provision's protection. Similarly, the extent of the "obligations" required to be performed by the licensee is unclear. Is the licensee limited to making royalty payments, or can other obligations be enforced, such as the obligation not to sue for damages arising as a result of using the intellectual property?
Additionally, the wording of the amendment states that the licensee's "use" of the intellectual property is protected, not the license agreement itself. For example, whether the term "use" encompasses the right to copy, modify or sublease will be important, because it could severely limit a licensee's rights upon the insolvency of the debtor.
The implication is that careful drafting of license agreements is more necessary than ever to avoid being excluded from (or included in) such ambiguous legislative terms. In any license agreement, it will be essential to clearly define what the "intellectual property" consists of, what "use" the licensee is acquiring under the agreement, and what "obligations" must be performed.
Footnote
1.At the time of writing, the operative provisions of the BIA (s. 65.11) and the CCAA (s. 32) had not been proclaimed in force.
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