Smelling like roses

Call a rose by any other name and it may not smell as sweet; but manage the transfer and sale of a company name in liquidation properly and you could come up smelling like roses.

According to The Insolvency Service, in Q1 2008 there were 3,210 liquidations in England and Wales, an increase of 4% from Q1 2007. By comparison in Q1 2009 there were 4,941 liquidations which, by the Insolvency Service’s calculations, is an increase of a massive 56% on the same period in 2008 (although according to my calculation it’s marginally lower at 53.9%).

As almost every commercial entity owns intellectual property of some description it does not take a rocket scientist (or the lawyer protecting his patents) to realise that legal practitioners dealing with valuable assets such as IP rights are much more likely to come into contact with insolvency practitioners than in previous years. And, in order for insolvency practitioners to maximise the potential assets from insolvent companies they should pay heed to fully exploiting such assets.

Once a company has been wound up it is commonplace that the official receiver gives notice of the bankruptcy order to courts, sheriffs, bailiffs, HM Revenue and Customs, the Land Registry and other professional bodies; which should include IP rights’ registries. One of the most common IP rights any company is likely to hold is that of its name, and registered names can be found in the registrar’s index of company names at Companies House. This name may or may not also be a registered trade mark, but we will save trade marks for another day. Even if the company name does not have significant goodwill in the market place remember, it may have significant financial value to other persons involved with the company and should never be overlooked as a potentially valuable asset.

The insolvent company must adopt a new name if its old one is to be sold

Importantly for the practitioner dealing with the sale of a company name to a third party, it will be necessary to change the name of the company in liquidation with Companies House so that the name can actually be used by the party purchasing it. This is because by virtue of s.26(1)(c) of the Companies Act 1985 (“CA 1985”) a limited company may not have a name which is the same as another registered companies’ name.

How do you change a company’s name?

For a name change to be made possible, a company requires a special resolution of shareholders (s.28 (1) CA 1985). If the purchasers are also the shareholders of the company in liquidation, then there should be no problem in obtaining a special resolution. However for reasons discussed below, issues may arise if directors or shadow-directors of the company in liquidation plan to be involved in the management of the new company.

If purchasers are not shareholders in the company in liquidation it may be possible for them to buy shares so they can pass the necessary special resolution. But beware of s.127 Insolvency Act 1986, which states that any transfer of shares after the commencement of winding-up is void unless otherwise ordered by the court.

If the shareholders cannot be found, do not agree to a resolution, or the court does not agree to a post winding-up transfer of shares, the purchaser may be satisfied if they can simply call their company by a similar name; in fact a little re-branding signifying a change in ownership may be beneficial to the value of the brand. Again, there may be certain restrictions if the directors of the insolvent company are involved and these are discussed below. The Registrar of Companies does have the power to direct a company to change its name if it is too similar to another company name on the register, so before adopting the new name a purchaser should gain permission from the Registrar. The official receiver should be aware of any attempts to register a name which is similar to that of the company in liquidation and inform the Registrar should they become aware that such an attempt is being made. The official receiver may not actually want to block such a move, but simply to ensure that adequate payment is made for the use of that name.

Restrictions on transfer and s.216 of the Insolvency Act 1986 (“IA 1986”)

When transferring the registered or trading name of a company, the consequences of s.216 IA 1986 should be considered. S.216 deals with restrictions on re-use of company names. It applies to directors or shadow directors of a company who were practicing as such any time in the year preceding the liquidation of that company. A person who is, or has been in the 12 months prior to the date of liquidation, a director or shadow director of the company in liquidation is prohibited from using, for a period of five years, a name which is the same or similar to the registered or trading name of the company in liquidation.

If the company name embodies the whole of the company in liquidation, or if the name is being sold as part of the entire business, then the purchaser must adhere to the procedure outlined in r.4.228 of the Insolvency (Amendment) Rules 2007 (“I(A)R 2007”). If the name does not represent wholly or substantially the business then r.4288 will not apply and leave of the court will be required. In this instance prospective purchasers should then provide the official receiver with evidence that such application has been made and there should be no sale of the name until leave has been granted.

The rule itself states that prior to the sale of the business and before the purchaser is likely to contravene the prohibition, they must give notice to every creditor whose name and address is known, or potentially available through reasonable enquiries, and then publish the notice in the Gazette. The purchaser may give and publish such notice prior to the sale of the business, but must do so no later than 28 days after that sale is completed. Such a notice cannot be retrospective and must specify

* the name and registered number of the insolvent company;

* the name of the person subject to the prohibition;

* that it is their intention to act in ways which would otherwise be subject to prohibition in connection with, or for the purposes of, the carrying on of the whole or substantially the whole of the business of the insolvent company; and

* the prohibited name.

As long as this procedure is correctly followed then leave of court as required under s.216(3) is not required. This is a very important provision to adhere to and if there are plans to sell a company name a conditional provision should be entered into the contract for sale to reflect this.

Unauthorised changes and problems an official receiver may encounter

Unauthorised change of a company name can happen and when it does it often causes problems. Members of a company have been known to attempt to bypass the official receiver when transferring the registered name of a company in return for payment. This is achieved by passing a resolution to change the name of the company in liquidation without the knowledge of the official receiver and then using the vacated name for another company. In such circumstances s.208 IA 1986, which deals with misconduct in the course of a winding-up, might be relevant if an officer of the company, having knowledge of the passing of a resolution, conceals the information from the official receiver. Those making unauthorised changes should also watch out for s.207 IA 1986, which deals with transactions in fraud of creditors and is particularly relevant if the company name is valuable and the shareholders who effect the change of name are also officers of the company.

Although the directors’ powers to act in the company’s affairs cease upon the making of the winding-up order, shareholders in a company acting unanimously have common law powers to waive irregularities to achieve informally a result which would otherwise require the observance of a specified procedure. To effect the change of name without the official receiver’s knowledge the members of the company will have met, passed the appropriate resolution and had the company’s name changed by Companies House. In this instance there might be nothing the official receiver can do to halt the process as the name of the company may have already been lawfully changed. Before the application is registered, Companies House do have a procedure whereby, in compulsory liquidations, they may contact the liquidator to establish whether such a name change has indeed been proved; but they are under no obligation to do so.

In circumstances where the official receiver becomes aware that such a change has occurred, it is important that they make an application (which can be made without notice) to change the title of the proceedings and a direction that this form of title be used in the future winding up of the company. A short report explaining how the change of name occurred should be annexed to such an application and the resolution and change of name certificate should also be attached as exhibits. If this is not done the official receiver may be vulnerable to defamation claims, as from that point on they will be referring to a certain company name as being in liquidation when it is not.

If the official receiver is asked to consent to change of the company name for consideration of a sum, they should avoid entering into a contract which binds the company in liquidation to change its name because, as discussed, that can only be done by special resolution and the official receiver has no control over that process.

If the official receiver, or purchaser of a company name, adheres to the provisions and is aware of the potential pitfalls, then the sale of a company name can be a lucrative and beneficial sale for all parties concerned. And besides, everybody likes to see a familiar high street name survive liquidation!

The war on counterfeits: how much would you spend?

Quoted in a press release today, the UK's Minister of State for Intellectual Property David Lammy has emphasised the Government’s commitment to fighting counterfeiting and piracy with the launch of guidance designed to highlight the Proceeds of Crime Act 2002.

Right: at present the sums lost annually to counterfeits dwarf the sums spent in reducing or recouping that loss.

The guidance leaflet

" ... seeks to raise consumer and market trader awareness of IP crime as well as warning would-be buyers and traders of counterfeit goods of the real cost – not only in terms of economic damage but also the risks to health and safety".

Says David Lammy:

"Counterfeiting and piracy rob our economy of millions of pounds every year - intellectual property crime is worth £1.3 billion in the UK with £900 million of this flowing to organised crime. It affects people in their day-to-day lives presenting not just bad value for money but also posing a real risk to public safety.

"Legislation alone will not combat counterfeiting and piracy. Laws must be fit for purpose but effective enforcement is key. The Proceeds of Crime leaflet sends a clear message that we are all serious about tackling this problem."

The press release adds that developments in technology and communications have led to increases in intellectual property crime over the past decade, with estimates that the international trade in fake goods is worth around $200 billion - higher than the GDP of more than 150 countries.

These figures - an annual loss of £1.3 billion to the UK, and $200 billion worldwide - may be right or wrong, but it is impossible to determine them with any accuracy. Figures that can be determined with some accuracy, however, are the sums of money that are spent by the public sector specifically for the purpose of reducing or recouping this loss. Does anyone have such figures, or at least an estimate of them? Given the loss to the revenue of vast sums in value-added tax , corporation tax and income tax which results from trade in counterfeits and pirate product, it might be expected that the UK government, nationally and locally, would get a decent return on its investment if it spent something like £130 million a year on tackling it -- rather than leaving IP owners to struggle on their own initiative and at their own expense.

(Brand) Paradise Lost

Permit me to recount a personal tale of brand lost, brand gained, unexpected consequences and the interweaving of products in our daily lives. The story starts with a present, the gift of a well-known brand of MP3 player from my family on the occasion of a birthday milestone that I would rather forget. The problem (for me) from the beginning were the earphones that came with the unit, those ear buds that always seem to slip out of my ears and provide only adequate sound reproduction.

OK, I said to myself, the MP3 manufacturer doesn't really specialize in earphones, so let me trade them in for an up-scale set made by someone who specializes in earphones. So I trundled to a local outlet of a leading U.S. retailer of consumer electronics. Surely I must be able to rely on the service brand goodwill of this chain to rely on its ability to stock earphones of good quality and reasonable price. I found the section displaying earphones, and I took a fancy to a set bearing a leading international brand for consumer electronic products. Surely I must be able to rely on this double dose of strong service mark and strong trademark to safely purchase a quality set of earphones. And so I did.

The earphones were fine, obviously the reliance of strong service mark and strong trademark had proven itself. Still, there was one odd feature: the ear-phone cord was in fact divided into two parts. I guess the idea is that if you want to put the MP3 device in a shirt pocket or to purchase an add-on that enables on to carry it on your shoulder, you can simply detach the two parts to the cord and use only one of them. But I liked to use the entire length of the double cord, so I could put the MP3 device in my jogging pants front pocket as I listened to podcasts while gamboling through the back-ways of my neighborhood. That worked fine, until one day I separated the cord into two so I could listen to the podcasts in the train. The problem was that I then left the detached cord on the train. How was I to solve the problem?

Ideally, I would have liked to have been able to buy a replacement cord under the brand of the ear phones, after all, it was the ear phone manufacturer that had sold the unusual double cord with the ear phones themselves. That did not work however; it seems that the manufacture did not sell a replacement for the long-gone detached cord. "A flaw in product design or product execution," I said to myself, the goodwill armour of this world-known brand having been pierced.

I then visited a series of speciality stores, big and small, to look for a replacement cord of appropriate length and configuration, but to no ultimate avail. At least in my part of town, all that the stores carried was a standard 3-foot cord, each bearing an unknown mark, and none short enough to meet my needs. Equally disappointing, the well-known chain on which I had relied had apparently not considered what happens to a customer that wanted to buy a replacement cord. More goodwill armour pierced.

Now I really face a series of unpalatable solutions. I can simply put the MP3 device in the front pocket of my jogging shirt. The only problem is that only one of my shirts has a front pocket, and that means that I have to stock up on new shirts, each replete with a pocket. To do so however will mean expending more than the cost of the earphones themselves. I could also buy the arm accessory from the MP3 manufacturer, but I reminded myself that they are are not really in the accessory business, and besides, this arrangement is simply uncomfortable. I could also buy a new set of ear phones, properly branded (but certainly not the brand of my current ear phones).

Thinking about this tale from the trademark point of view, what is the scorecard? The MP3 manufacturer gets a passing mark, the device is excellent but the ear-phone add-on was the ultimate reason for trading up to another brand, for whom ear phones are closer to their core business. The retail chain gets a barely passing mark, selling a product for which replacement parts appear to not have been considered. The ear phone manufacturer gets a failing grade, the reasonable quality of its sound outweighed by the frustration and bother of its inaccessible replacement part. The only winner, and a potential one at that, is the manufacturer of the new set of earphones, if and when I chose to buy them.

Brands are delicate creatures--lest we forget. All it took was one misplaced cord to remind me of this fact.

Brand paradise -- over yonder

PETA Takes on the Colonel: KFC and Potholes Redux

It turns out the KFC campaign to repair potholes has yet another twist. While not mentioned in the Business Week article (one wonders why), a reader alerted me to the fact that PETA (People for the Ethical Treatment of Animals) reportedly offered to cover potholes in selected cities and to contribute twice as a much ($6,000) as that contributed by KFC. In exchange, PETA would include the following chalk message--"KFC Tortures Animals" (that instead of the message--"Re-Freshed by KFC.").

PETA has been waging a vigorous campaign for several years against what PETA describes as abuse by KFC of chickens in the process of providing its poultry products to consumers. No city, it seems, has taken PETA up on its offer. That position was well-stated by the Media Relations Director of Chattanooga, Tennessee as follows:

"The City of Chattanooga receives donations from a variety of sources and is grateful for all of them, including that of KFC. While we appreciate PETA's dedication and passion towards their mission, it would be inappropriate to accept their offer with the awkward requirement that would effectively use the City of Chattanooga to malign a particular corporation."

And so the question: What exactly was the motivation of the KFC campaign to repair potholes? Was it primarily intended as a means to counter PETA's attacks on KFC, or was the message of good citizenry less concerned with PETA and more intended to burnish KFC's image with the ultimate purpose of reaping commercial benefit?

If the former, then KFC could have expected PETA to try and mount a counterattack. If so, one wonders how great a risk KFC viewed the likelihood of such a counterattack actually being carried out. Recall the words of the Chattanooga Media Director, which emphasized the negative aspect of the proposed PETA message as a major reason for rejecting PETA's offer (despite the fact that it was apparently more attractive financially). When weighing the positive message of KFC and the negative message of PETA, the advantage would seem to like with KFC. If so, the risk that KFC could be bested by PETA in this battle for the hearts and minds of the local citizenry seems moderate at best.

If the latter motivation was paramount for KFC, the risk that PETA would prevail seems even more remote. This is because, in such a situation, it appears even more unlikely that a city would accept PETA's offer. Under the KFC offer, the city is able to add to its coffers (albeit in a modest amount) while KFC ultimately benefits financially from the positive image that it fosters. Under such a view, the PETA counter-offer seems fundamentally out of place, and to accept it would involve the city in an unnecessary public controversy.

If the foregoing analysis is correct, then it suggests one more conclusion. PETA did not ab initio consider its likelihood of successfully convincing a city to accept its counter-offer to be high. From the beginning, PETA viewed its ultimate platform as the press, especially the on-line press, which would cover the proposed PETA counter-offer and thereby provide PETA with free media coverage. Such coverage would be welcomed by PETA supporters and might even succeed in adding new converts to the PETA clause.

See in this way, the KFC-PETA point/counter-point was win-win situation, each winning in a different arena and each directed towards a different audience.

Win-win: a view from the pasture

New web service for sale of registered trade marks

According to information received last week, a new website, USTrademarkExchange.com, has been launched in order to connect United States trade mark buyers and sellers. The idea is this:

"Owners can list and promote their registered trademarks, while potential buyers including investors can search through a variety of available trademarks in one location. ...

Service marks, a specific type of trademark, are also represented. For example, one service mark currently being offered for sale on the portal is IF NOT NOW, WHEN?® which was granted registration by the US. Patent and Trademark Office on February 10, 2009, Reg. No. 3,573,658 in Class 35 (U.S. Cls, 100, 101, and 102) for advertising, marketing and promotion services. “We currently offer a free two-month basic listing,” says the website. “After that time there is a charge for continuing a basic listing or upgrading to a premium listing.” USTrademarkExchange.com does not get involved as a mediator or broker in any transaction, and therefore receives no commission in the event of a sale. However, ... the service cannot guarantee the accuracy of the information provided by the seller. “It is the responsibility of the buyer to do their own due diligence,” they note".

As usual, we'd love to hear of any interesting experiences which readers of this blog have had, or may have in the future, in relation to the use of this service.

Introducing the Tuesday Articles on IP and Insolvency

The aim of the Tuesday Articles on IP and Insolvency is to bridge the gap between what is generally regarded as two separate legal disciplines. Legal practitioners tend to specialise in one area only, whether it be Intellectual Property or Insolvency Law and each of these areas is covered by its own distinct legal literature. The division of specialisations tends to mean that difficulties can arise at the stage when the two areas meet. This series of articles plans to concentrate on corporate insolvency and its impact on IP rights and owners users of those rights. The Tuesday Articles on IP and Insolvency will take a primarily UK standpoint; although reference to other jurisdictions will be made.

Insolvency

The statutory insolvency regime in the UK was largely consolidated in the Insolvency Act 1986. There are also a number of accompanying statutory instruments, in particular: the Insolvency Rules 1986 as amended; the Law of Property Act 1925 (which includes various provisions relating to receiverships); and the Companies Act 1985 (which has particular importance with regard to the registration (s.395) and priority (s.196) of charges).

The regime provides for a number of outcomes for a company that is facing financial difficulty, these include; liquidation (termination of a company); enforcement of security by a creditor; an attempt to rescue the company by way of administrators and voluntary arrangements; and equitable division of a company’s assets.

The outcome that best suits the company may then shape the possible ways that IP assets are disposed of. When a company is facing insolvency there are a number of parties who may be involved in the process, each of whom will have a different objectives and aims. These include, but are not limited to: the company; the insolvency practitioner; creditors; licensees; and other third parties, including those who may have an interest in buying IP assets at reduced prices.

IP

There are a number of IP rights to which parties should pay attention when a company is facing liquidation. These include registered rights (such as patents and trade marks); pending registrations; unregistered rights (such as copyright, unregistered design rights and employee know-how); and goodwill.

Over the coming weeks I will attempt to analyse the effect of insolvency on a company which is IP asset rich. The ‘hot-topic’ in terms of disposing of IP assets seems to be their valuation and the difficulties associated with getting it right. However, I will seek to address a number of other issues including protection of IP assets, whether from the viewpoint of a liquidator, who may want to disclaim onerous property, or from the standpoint of a licensee whose licence has been breached, with no more of a remedy than an unsecured creditor. I will analyse what can be done to protect IP assets, from negotiating a contract at the outset of a relationship, to registration of securities and charges over IP assets and assignment and transfer of rights. I will also consider how the role of shared ownership of IP rights, co-operation agreements and separate companies (such as Joint Ventures), can further assist in the protection of rights in the liquidation process.

Third parties should also be aware of the pitfalls of purchasing IP assets from liquidators. There are very few protective measure in place to ensure that IP rights are disposed of correctly and, as liquidators often do not provide warranties regarding assets sold, due diligence becomes an important step in the process for any buyer.

Throughout the series I will provide regular updates and items of interest from the world of IP and Insolvency and if you, the reader, come across any interesting tit-bits, or have any questions, you can contact me by email at louise.ocallaghan@hardwicke.co.uk.

New team member

IP Finance is pleased to welcome a new member to its blogging team: Louise O'Callaghan.  Louise is currently a pupil in Hardwicke Building. Louise studied Law with Politics (and Geology) (LLB) at Keele University and was called to the bar at Gray’s Inn in 2006. Prior to starting at Hardwicke Building she worked for Shell International Petroleum Company, assisting in the management of large value international tenders and participating in the development of a number of safeguards for the protection of IP software assets in the retail sector of the business. Louise has also been involved in Arts pro bono work for a number of years. In her capacity as a pupil Louise has worked on IP, insolvency, contract, general commercial and other matters and has published on Intellectual Property Law issues.