IP in Liquidation: What Happens to Trademarks, Patents and Licences When a Company Fails

When a Kenyan company fails, its trademarks, patents, copyright and licences are among the assets a liquidator must deal with, and they behave differently from cash or stock. Registrations lapse if fees are not paid, marks can be removed for non-use, and licensees and secured lenders have their own claims. This article on IP in liquidation sets out what the Insolvency Act, 2015 says and where it is silent, and what the Trade Marks Act and the Industrial Property Act add. We found no IP-specific provisions in the Insolvency Act and no Kenyan decision on the subject, so the general rules and the IP statutes do the work.

IP in liquidation: control, vesting and recordal

Under section 444 of the Insolvency Act, when a liquidation order is made, or a provisional liquidator is appointed, the liquidator assumes control of all the property to which the company is or appears to be entitled. Under section 445, when a company is being liquidated by the Court, the Court may on the liquidator’s application direct that the company’s property vest in the liquidator. Vesting or a sale changes who can deal with the IP, and the IP statutes require the change to be recorded: section 28 of the Trade Marks Act requires a person who becomes entitled by assignment or transmission to a registered mark to apply to register the title, and section 62 of the Industrial Property Act provides that an unrecorded change in ownership of a patent application or patent cannot be admitted as evidence of title. See our article on recording changes at KIPI.

Keeping the assets alive

A liquidation does not stop the renewal clocks. A trademark needs renewal on Form TM 10 within the window and can be removed if it is not renewed; see trademark renewal at KIPI. A patent lapses if an annual fee is not paid within the grace period; see patent annuities at KIPI, where the fee for the twentieth year is KES 50,000 or USD 2,500. A mark that stops being used is exposed to removal after five years of non-use; see removal for non-use under section 29. Before deciding what to sell, a liquidator should list every registration, its next due date and its licensees.

When marks are sold, section 25(7) of the Trade Marks Act matters. Where a mark is used in a business and is assigned otherwise than with the goodwill of that business, as often happens in a break-up sale, the assignment does not take effect until the assignee applies for directions and advertises as directed. A buyer should build that step into the timetable.

Disclaimer of onerous property

Section 476 allows a liquidator to disclaim onerous property, even if the liquidator has taken control of it or tried to sell it. Onerous property is an unprofitable contract, or other company property that is unsalable, not readily saleable, or such that it may give rise to a liability to pay money or perform another onerous act. A disclaimer ends the company’s rights, interests and liabilities in the property from its date, but does not otherwise affect the rights or liabilities of other people. A person who suffers loss because of a disclaimer is a creditor and may prove for the loss, and under section 479 a person claiming an interest in disclaimed property may ask the Court to vest it in them.

For IP, the likely candidates are an unprofitable licence and a patent whose rising annual fees make it unsalable. A licensee, a registered user or a lender with a security right should watch for a disclaimer notice and consider a vesting application. We have not found authority on how a Kenyan court treats a disclaimed registration.

Licensees and registered users

The Insolvency Act does not say what happens to IP licences when a licensor or licensee is liquidated. The outcome depends on the licence terms and general law. Two IP statutes are relevant to the licensee’s position. Section 31(8) of the Trade Marks Act allows the registration of a licensee to be cancelled on the application of the proprietor, the licensee or another licensee; see trademark licensing and assignment. And under section 45(6) of the Movable Property Security Rights Act, a non-exclusive licensee of intangible collateral, licensed in the ordinary course of the licensor’s business, is not affected by a security right if it had no knowledge that the licence violated the creditor’s rights.

Secured lenders and administration

If the company is placed in administration rather than liquidated, section 560(1)(a) of the Insolvency Act allows a person to enforce a security over the company’s property only with the administrator’s consent or the Court’s approval. A lender holding IP as security therefore cannot simply sell or license the collateral; see our article on IP as loan security. For wider background, see what happens to employees and creditors when a Kenyan company is wound up.

Tax on a liquidator’s sale

A sale of IP by a liquidator is a transfer for tax purposes and can attract stamp duty and, for a non-resident buyer or seller, withholding tax; see IP assignment tax. Paragraph 6(2)(e) of the Eighth Schedule to the Income Tax Act excludes a court-ordered vesting of a company’s property in a liquidator from capital gains tax, but it still cites section 240 of the former Companies Act, so its application to a vesting under section 445 of the Insolvency Act should be confirmed.

A checklist for liquidators and counterparties

• Liquidators: list registrations, renewal and annuity dates, licensees and security notices; pay the fees that preserve saleable assets; consider disclaimer only for genuinely onerous items.
• Buyers: search KIPI and the collateral registry, check fee status and use, and allow for the section 25(7) directions step and recordal.
• Licensees: check the termination clause, record the licence, and watch for a disclaimer notice.
• Lenders: register the notice, watch the administration moratorium, and be ready to fund fees to keep the asset alive.