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What rights need to be considered in an insolvency process?

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What rights need to be considered in an insolvency process?

The value of tangible assets such as plant and machinery, property, and company vehicles is a major factor when considering a company’s progression through an insolvency process. But it’s easy to overlook the importance of intangible assets such as the intellectual property and contractual rights held by a company.

Within these contracts, patents and trademarks, lies significant value that can underpin the outcome of insolvency for the company, and provide a considerable boost to returns for unsecured creditors if liquidation is the only option.

Intellectual property rights

Intellectual property (IP) plays a fundamental part in a company’s success. Familiar logos and advertising styles build consumer confidence over time, and become key to achieving ongoing sales targets.

They can also significantly increase the overall value of a business in an insolvency situation. If the company is sold as a going concern, or the underlying business purchased by a new company under pre pack administration, for example, owning the title to intellectual property can attract new buyers who may not otherwise be interested.

So what exactly is intellectual property?

Patents, trademarks, and copyrights, are the most obvious examples of intellectual property - intangible assets that appear on the company’s balance sheet alongside ‘tangible’ assets such as plant and machinery.

Intellectual property includes goodwill, and also online assets such as domain names, website content, artwork, and other creative works attributed to the company. When insolvency strikes, however, directors need to be aware of the inherent value of this intellectual property, and also able to prove the company’s right to use it.

Verifying a company’s IP rights

Verification of a company’s rights to intellectual property isn’t always straightforward – ownership can be unclear, and it’s sometimes impossible to prove categorically that the company owns certain intangible assets.

If the title to trademarks and patents is publicly registered, ownership cannot be disputed, but the office-holder still needs to identify which rights are valuable to the insolvent company. In other cases, company directors may not have realised the importance of registering certain assets, or even understood their value to the company.  

Enforcing the company’s rights to goodwill is another area where issues can arise during an insolvency process. An accurate valuation of goodwill depends on having full access to sensitive data about the company, its customers, and other key confidential information. 

Contractual rights

When insolvency strikes, the appointed administrator will consider the contractual arrangements made by the company. Contracts may contain a clause providing the counterparty with the right to automatically terminate in the event of insolvency, or conversely, to continue with the arrangement regardless.

This may appear to present little problem, but an office-holder can also decide to disclaim any contracts deemed ‘onerous,’ and whose existence is regarded as being outside the best interests of the insolvent company.

If onerous contracts are disclaimed by the administrator, the other party generally becomes a creditor, and makes a claim alongside other unsecured creditors. But what happens when continuing the insolvent company’s contracts is a positive outcome due to their significant value?

Pre pack administration

Pre pack administration involves the quick sale of an insolvent company’s underlying business to third-party buyers, or sometimes to the existing company directors. Speed is of the essence with this procedure, and the business is marketed before an administrator is appointed.

In this case, contracts that add value to an insolvent company can be used to attract purchasers, who are assigned the contractual rights before the counterparty can terminate. The sale process is carried out as soon as an administrator is appointed, preserving value in the underlying business, and within the existing contractual arrangements in particular.

Litigation

When a company pursues a claim for compensation, if successful, the resulting payout can be significant. Should the company enter insolvency during the litigation process, the administrator is generally within their rights to pursue the claim on behalf of the company.

An issue can arise, however, if the case is lost, and the defendant has made an arrangement whereby they can reclaim their costs from the plaintiff. This would place further pressure on the company’s limited resources, so the administrator may choose to discontinue the claim and assign it to a third party.

Real Business Rescue can provide detailed professional advice on intellectual property and contractual rights in insolvency, or indeed any other issues surrounding company debt and insolvency. We’re able to offer a same-day consultation in complete confidence, Real Business Rescue provide director advice online, over the phone, or in-person at one of our 55 UK offices or a place of your convenience.


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