August 3, 2018:

Conventionally, the financial institutions have always focused on creating security interest over tangible property such as land, house, machinery, etc.However, with the recent development of intellectual property rights (IPR), there has been a considerable shift in the bank’s traditional system of granting loans; Banks have gone from creating security interest only over tangible property to allowing creditors to assign, mortgage or license intellectual property such as trademark, copyright, patent or designs.

The Government has also shown keen interest in favouring the growth of IP as a valuable asset and enabling it to be securitized through its Intellectual Rights Policy of 2016.Financial institutions are now increasingly granting loans against the Property assignment or hypothecation of IP rights.

In India, future receivables on licensing of musical works, trademarks and patents have been used as security against loans. This practice of creating security interest over intangible property is legitimized by a set of general and specific laws.

Chapter VI of The Companies Act, 2013 allows a company to create a charge “within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India…”Further, schedule III to the Act classifies intangible objects under clause (j), therefore contemplating a creation of charge on intangible assets.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, also entails detailed provisions which reflect positively on the creation of security interest on intellectual property.

Under this Act, property as defined under Section 2(1)(t)(v) includes intangible assets such as ‘know-how’, ‘copyright’, ‘trademark’, ‘licence’, ‘franchise’ or other ‘business or commercial right’. Further, Section 2(1)(zi) defines security interest as aright, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, or assignment.

Specific laws such as The Patents Act, 1970 and The Trademarks Act, 1999, contains provisions dealing with creation of security interest over IP by way of assignment, mortgage, or license.

This was however not regarded by the Supreme Court in the judgment of Canara Bank v. N.G. Subbaraya Setty (Civil Appeal No. 4233 of 2018)

In this case, a borrower had entered into some credit facilities with the bank and on default of payment, signed an assignment deed for the trademark EENADU in respect of agarbatties. The Court opined that a trademark cannot be assigned to the creditor by a borrower who has defaulted on a loan.

It took the view that the trademark EENADU assigned by the borrower for the satisfaction of the outstanding loan amount, cannot be said to be a property under the terms of The Trademarks Act, 1999 and The Banking Regulation Act, 1949.

Hon’ble Justice Nariman said that the bank cannot venture out of its business and use the trademark to sell agarbattis.

It also cannot allow third parties to use the trademark and collect royalty against it. This would be in contravention ofSections 6 and 8 of the Banking Regulation Act, 1949. Section 6(1)(f) and (g) as well as Section 8 allow a bank to deal with any property which forms the security for a loan which the borrower has defaulted to repay.

The Court gave the view that trademarks are not a part of any security for loans or advances and hence cannot be supported by Sections 6 and 8.

Creating security interest on trademarks and using it to realize the defaulted loan amount is not only popular now, it has a concrete backing in the Indian legal system.

It is only unfortunate that the provisions of the SARFAESI Act, 2002 and the other ancillary provisions were not brought before the consideration of the Supreme Court.

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