Liquidation of Intellectual Property Assets during CIRP under the Insolvency and Bankruptcy Code

Introduction : Intellectual-property assets can represent a company’s most important source of value. Patents may protect commercially successful technology, trademarks may embody years of consumer goodwill, copyright may subsist in software and databases, and trade secrets may contain the operational knowledge necessary to compete. Unlike machinery or land, these assets are intangible and their value often depends on continuing commercial use.

When a company enters corporate insolvency resolution process under the Insolvency and Bankruptcy Code 2016, its intellectual property must therefore be treated as part of the insolvency estate and not as an incidental legal concern. The resolution professional must identify and preserve the rights, assess their commercial significance and determine whether they support a resolution plan. If CIRP fails and liquidation follows, the liquidator must realise the assets in a manner that maximises value and then distribute the proceeds through the statutory waterfall.

The IBC does not provide a separate liquidation code exclusively for intellectual property. Instead, IP is dealt with through the Code’s general provisions concerning assets, custody, valuation, sale and distribution, supported by the Insolvency and Bankruptcy Board of India’s regulations. The practical difficulty lies in adapting those general rules to assets whose value may depend upon reputation, confidentiality, licensing, technical expertise and the continued operation of the business.

Intellectual Property during CIRP

On commencement of CIRP, management of the corporate debtor’s affairs is taken over by the interim resolution professional and subsequently the resolution professional. The board’s powers are suspended, and the resolution professional assumes responsibility for preserving the company’s assets and operations. 

Section 18 requires the interim resolution professional to take custody and control of the assets of the corporate debtor. The provision expressly includes intangible assets, including intellectual property. This covers registered and unregistered rights owned by the company, such as patents, trademarks, designs, copyright, software, databases, domain names, trade secrets and contractual technology rights. 

The first task is an IP audit. The professional must identify what the company owns, what it merely licenses and what it has developed jointly with third parties. A patent registered in the corporate debtor’s name may be straightforward, but software may have been developed by employees, contractors or a group company. A trademark may be used by the company under a licence rather than owned by it. A trade secret may exist only through confidentiality practices and contractual restrictions.

The professional must also preserve the rights. Patent and trademark renewals must be monitored, applications must be prosecuted, source code must be secured and confidential information must not be disclosed unnecessarily. Failure to renew a patent or protect confidential know-how may destroy value before the resolution process reaches its conclusion.

IP in a Resolution Plan

CIRP is intended to preserve and maximise the value of the corporate debtor, preferably through a resolution plan rather than piecemeal asset disposal. Intellectual property may therefore be transferred, licensed or reorganised under a resolution plan.

A resolution applicant may acquire the company as a going concern and receive its IP portfolio as part of the transaction. This may be the most valuable structure where the IP depends on employees, manufacturing capacity, customer relationships, regulatory approvals and technical support. A patent may have limited standalone value if the company lacks the resources to commercialise it. Similarly, software may be worthless without developers who can maintain and improve it.

A plan may also provide for the sale of selected IP assets, continuation of licences, settlement of infringement claims, transfer of domain names or grant of exclusive rights to use a brand. The resolution applicant must conduct due diligence regarding ownership, validity, renewal, territorial scope, co-ownership, infringement proceedings and contractual restrictions.

Third-party licences require particular attention. A software or patent licence may prohibit assignment, terminate upon insolvency or require the licensor’s consent to a change in control. The resolution applicant cannot obtain a better interest than the corporate debtor possessed. The plan must therefore disclose these restrictions and, where necessary, provide for negotiations with licensors.

Transition to Liquidation

If no resolution plan is approved within the statutory period, or if the adjudicating authority rejects the plan, liquidation may be ordered under Section 33 of the IBC. The liquidator then takes custody and control of the corporate debtor’s assets and forms the liquidation estate under Section 36. 

Section 36 expressly includes intangible assets, including intellectual property, securities, insurance policies and contractual rights. This means that patents, trademarks, copyrights, software, databases, trade secrets and transferable licences ordinarily form part of the liquidation estate where the corporate debtor holds ownership rights. 

The liquidator must distinguish these assets from third-party property. If the company possesses software under a non-transferable licence, the software itself may belong to the licensor and may not be sold as an owned asset. Similarly, confidential information belonging to a customer or joint-venture partner cannot automatically be treated as part of the estate.

The liquidator must prepare an inventory and verify the corporate debtor’s title. This requires examination of registration certificates, assignment deeds, employment agreements, development contracts, licence agreements, renewal records, security interests and pending litigation. The value of an asset cannot be realised effectively if the purchaser cannot establish a clear chain of title.

Valuation of IP

Valuation is one of the most difficult aspects of IP liquidation. The book value of an intangible asset may not reflect its market value. A patent developed at a low cost may generate considerable licensing revenue, while a costly technology may have little value because it is obsolete or legally vulnerable.

The income approach estimates future revenue attributable to the IP, including royalties, licence fees, cost savings and brand premiums, discounted for commercial and legal risk. This approach may suit an established patent or trademark with identifiable income.

The market approach compares the asset with comparable transactions. It is useful where reliable licensing or sale data exist, but IP transactions are often confidential and technically dissimilar.

The cost approach considers the cost of creating or replacing the asset. This may help value software, databases and technical documentation, but it may understate the value of a successful brand or a patent with strong market potential.

The valuation must consider the remaining term of protection, scope of the patent claims, trademark reputation, validity challenges, infringement exposure, technological obsolescence, regulatory dependence, availability of complementary assets and restrictions on transfer. A liquidator should ordinarily obtain specialised valuation advice rather than rely solely on general financial statements.

How IP Is Sold

Regulation 32 of the Liquidation Process Regulations identifies the forms in which assets may be sold, including sale on a standalone basis, sale of a set of assets, sale of assets in a slump sale and sale of the corporate debtor as a going concern. The appropriate method depends on whether the IP generates greater value independently or as part of the operating business. 

Regulation 33 provides that assets should ordinarily be sold through auction in the manner specified in Schedule I. A public auction promotes transparency and competitive price discovery. The sale notice must describe the assets sufficiently for bidders to understand what is being offered. For IP, this should include registration numbers, jurisdictions, validity period, associated licences, technical documentation, domain names, pending disputes and any limitations on transfer. 

Private sale is permitted in specified circumstances, including where the asset is likely to deteriorate significantly if not sold immediately, where it is sold at a price higher than the reserve price of a failed auction or where the conditions in the regulations are satisfied. Although patents and trademarks do not physically deteriorate, their value may decline through expiry, loss of confidentiality, technological obsolescence or the departure of key personnel. The liquidator must nevertheless document why a private sale is appropriate and ensure that it does not sacrifice value or transparency. 

An IP sale agreement must specify whether the buyer receives an assignment of ownership, a licence, access to source code, rights in improvements, goodwill, domain names or related contractual benefits. Ambiguity can reduce the number of bidders and generate disputes after completion.

Licences, Security and Encumbrances

IP assets may be subject to security interests created in favour of lenders. A secured creditor may have security over patents, trademarks, receivables or the entire undertaking. Under Section 52, a secured creditor in liquidation may either relinquish its security interest to the liquidation estate or realise the security interest separately in accordance with the Code. 

If the creditor relinquishes the security, the liquidator realises the asset and distributes the proceeds under Section 53. If the creditor elects independent realisation, the creditor must comply with the statutory requirements and account for the resulting proceeds as prescribed.

The liquidator must also examine whether the IP is licensed to third parties. A licence may generate royalty income for the estate without requiring an outright sale. In some cases, licensing may preserve value better than transfer, particularly where the asset has multiple potential users or where ownership is disputed.

Confidentiality presents another challenge. Trade secrets and source code should be disclosed only under non-disclosure arrangements and through a controlled data room. Excessive disclosure during the sale process may destroy the very value that the liquidator is trying to realise.

Distribution of Proceeds

Once IP is sold or licensed, the proceeds become part of the liquidation estate. There is no separate distribution priority for intellectual property. Section 53 establishes the waterfall through which liquidation proceeds are distributed. 

Insolvency-resolution and liquidation costs are paid first. The Code then provides the order applicable to secured creditors, workmen, employees, unsecured financial creditors, government dues and other claims. The classification of the asset as a patent, trademark, copyright or trade secret affects valuation and sale, but not the statutory priority of the claimants.

Royalty income received from licensing IP during liquidation must likewise be accounted for as estate property. The liquidator must maintain records of receipts, expenses, taxes and payments to stakeholders.

Software, Data and Goodwill

Software requires special treatment because copyright protects the programme as a literary work under Sections 2(o) and 2(ffc) of the Copyright Act 1957. The liquidator should identify source code, object code, documentation, databases, development tools, open-source components and third-party dependencies. A buyer who acquires only executable software without the source code or maintenance rights may receive substantially reduced value. 

Data connected with the software may involve separate copyright, confidentiality, privacy and contractual issues. The sale of a database does not necessarily permit unrestricted use of personal or confidential information. The liquidator must distinguish the software, the database structure, raw data and derived analytics.

Trademarks should ordinarily be considered together with goodwill. A mark detached from the business that created its reputation may lose value or cause consumer confusion. A going-concern sale may preserve the brand more effectively than a standalone transfer. If separate sale is necessary, the agreement should identify the goodwill and quality-control arrangements attached to the mark.

Conclusion

When a company undergoes CIRP under the IBC 2016, its intellectual-property assets must be identified, protected and valued as intangible assets of the corporate debtor. The resolution professional should preserve registrations, confidentiality, software, licences and goodwill and should consider whether the IP can support a going-concern resolution plan.

If the company proceeds to liquidation, Section 36 brings owned IP into the liquidation estate. The liquidator verifies title, identifies encumbrances and third-party licences, obtains valuation, and chooses whether to sell the assets individually, as a portfolio, through a slump sale or together with the corporate debtor as a going concern. Regulation 33 ordinarily requires auction, while private sale is available only in prescribed circumstances.

Sale proceeds and licensing income are distributed through the Section 53 waterfall. The most effective realisation strategy is usually one that preserves the commercial relationship between the IP and the business that exploits it. Intellectual property is therefore not liquidated merely by transferring a registration certificate. It must be legally authenticated, commercially valued and conveyed with the rights, information and infrastructure necessary for the purchaser to use it.

Author: Amrita Pradhan in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

1. Insolvency and Bankruptcy Code 2016, Section(s) 17, 18 and 23.

2. Insolvency and Bankruptcy Code 2016, Section 18(1)(f).

3. Insolvency and Bankruptcy Code 2016, Section 33.

4. Insolvency and Bankruptcy Code 2016, Section 36(3)(d).

5. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, Regulation(s) 32, 33.

6. Insolvency and Bankruptcy Code 2016, Section 52.

7. Insolvency and Bankruptcy Code 2016, Section 53.

8. Copyright Act 1957, Section(s) 2(o), 2(ffc), 13 and 14.

9. Insolvency and Bankruptcy Code 2016, Section 25(2)(a).

10. Insolvency and Bankruptcy Code 2016, Section 35(1)(b).

11. Insolvency and Bankruptcy Board of India, Liquidation Process Regulations 2016 https://ibbi.gov.in/legal-framework/updated

12. Insolvency and Bankruptcy Code 2016, Section 238.

13. Insolvency and Bankruptcy Board of India, Handbook on Corporate Insolvency Resolution Process.