Trademark as a Form of Security Interest
It is no surprise that intangible assets such as intellectual property are becoming increasingly important as any other forms of tangible assets, i.e., lands and machinery, to the contemporary business concern. In view of the importance of the intellectual property, Trademarks Act 2019 (“TMA 2019”) that came into force on 27 December 2019 now recognises trademark as a form of security interest and regard it as an object of personal or movable property such as stocks and cars regardless of whether it is registered or pending.
What is a security interest?
“Security interest” refers to an enforceable legal right that has been pledged by the owner, usually, to a financier, to obtain a loan. In other words, a registered or pending trademark which is an intangible property can now be used as a form of collateral to secure a loan from a financier. In the event of default of repayment, the financier could take possession of the trademark pledged.
How does the grant of security over a trademark work?
There are generally 2 methods for brand owners (Trademark Owner) who wish to grant security interest over their trademarks in order to secure financing from a financier (Financier).
i. Assignment by way of security
An assignment by way of security is a type of mortgage and involves the transfer of ownership of the trademark from the assignor (Trademark Owner) to an assignee (Financier) as security for a loan, with the condition that the ownership of the trademark will be reassigned to the Trademark Owner upon discharging all obligations of the loan.
The assignment must be in writing and signed by or on behalf of the Trademark Owner and the Financier. Otherwise, it will not be effective. A written assignment shall then be recorded in the Trademarks Register; if not, it will be ineffective against any person acquiring a conflicting interest in the trademark without knowledge of the said assignment. In other words, if a trademark is being pledged twice to different financiers and the first financier did not record their assignment by way of security with the Trademarks Registry, the subsequent financier in ignorance of the creation of the first security interest, is not bound by the said first assignment. Therefore, in order to protect the security interest of a financier, it is advisable to record the assignment by way of security in the Trademarks Register as soon as it is created.
A charge does not involve transfer of ownership but the chargee (Financier) is given the rights over the trademark and vested priority over other creditors. Therefore, the chargee is conferred with the right to dispose or appropriate the trademark in the event the chargor (Trademark Owner) defaults on the repayment.
Likewise, a charge is not enforceable against another conflicting interest unless they have been recorded in the Trademarks Register.
Difficulty of Taking Security over Trademark
Pledging a trademark to secure a loan may not be easily achievable particularly for start-ups, or a new trademark which is not known to the public as valuation of a trademark may be a challenging task. A financier is usually cautious when evaluating the risk or approving a financing request. The value of the collateral, or trademark in this case, must be ascertained in order to determine whether it is worth providing the financing. This is a difficult practice as trademark demonstrates different value to different entities; a financier may not be equipped with the necessary skills/expertise to evaluate the value of the trademark and risk of accepting it as a security. In the event of default, it may also be a challenging task for the financier to dispose of the trademark for a value that could cover the finances provided. Nevertheless, there are professional valuers specialised in intellectual property valuation who can assist the financier in evaluating their risk.
Although financial institutions may not be ready to finance a business based on a newly coined trademark, trademarks that have garnered reputation and goodwill for years may reap the benefits from this. Owners of intellectual property may also collate all their intellectual property including trademark as a basket of rights in order to secure financing of a higher value.
Overall, TMA 2019 is the first step in recognising the brand owners’ rights and shifting the financier’s growing confidence in securitisation of trademarks. Nevertheless, improvements can be made in relation to awareness of the value of trademarks and the valuation of trademark as a good basis for providing security.