Using IP as security is now easier after change to laws
The new rules are likely to have a big impact, writess Ross Nicol
A company’s intellectual property rights (IP), which may patents or design rights, copyright in software or relate to the company’s branding and trademarks, may often be a key asset and indeed more valuable than any physical asset it owns. However, to date there have been challenges when a company seeks to use its IP as security for funding.
Unlike in England, where a fixed security over IP has been readily available, a company seeking to grant a fixed security over its IP in Scotland requires the IP to be transferred (“assigned”) to the lender. Since it is likely that the company will need to continue to use its IP post-transfer to the lender, the parties also require to enter into a licence-back to allow for this. In addition there are issues to be addressed regarding ongoing process and costs for prosecuting and maintaining registered IP rights and enforcement of IP in the event of a dispute regarding those rights. This complexity and the associated costs has traditionally made an assignation in security a less attractive basis for security in Scotland.
Furthermore, whilst a floating charge over assets, including IP, is possible this is not considered as strong as a fixed security – there can be issues regarding ranking of lenders. Finally, other contractual arrangements which may seek to delay and trigger the assignation only upon the occurrence of certain events is not a preferred option as it is not a true security and lacks certainty from an enforcement perspective.
From 1 April 2025 the law in Scotland changed, making taking security over IP much easier. This is expected to transform the landscape for taking security over IP.
The Moveable Transactions (Scotland) Act 2023 introduces the statutory pledge, which permits a borrower to retain possession of a secured asset. Whilst the new statutory pledge will apply to security over moveable property more generally (that is assets other than land and buildings), one key area where the change will impact is securing IP, as it provides a fixed security that does not require assignation of the IP to the lender.
To create a statutory pledge over its IP, a company (referred to as the “provider”) must execute a written document or authenticate an electronic form known as the “constitutive document”. This document must identify the provider and lender, the IP as the subject of the pledge, and respective obligations being secured. To perfect the statutory pledge, the provider must register the constitutive document in the Register of Statutory Pledges – another creation of the Act. Finally, albeit not required to perfect the statutory pledge, it must also be registered in Companies House within 21 days of creation.
The statutory pledge offers Scottish companies possessing strong IP rights an easier way to use the value of their IP as collateral for funding. It will be interesting to watch the impact that the introduction of this change has on the behaviour of lenders. Whilst an assessment of a borrower’s IP assets has likely always formed part of a lending decision, the ability of the borrower to provide effective security over those assets may well result in a positive outcome for applications. Indeed, such statutory pledges may become an essential feature of obtaining finance.
Whilst obtaining IP protection will always be driven by the need for companies to protect their innovation and product “crown jewels”, it is also important to bear in mind the potential for future security requirements and ensure company IP is appropriately protected where possible.
Ross Nicol is a partner, Addleshaw Goddard
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