Patent as a Form of Collateral: Taking Security in Intellectual Property in the UK

1. Introduction

Patents are valuable intangible assets that confer exclusive rights to an invention. In the context of secured financing, patents can serve as collateral to secure loans, lines of credit, or other financial obligations.

In England, taking a security interest in a patent follows a complex but well-established set of legal principles, governed primarily by statute (such as the Patents Act 1977 and relevant provisions in the Companies Act 2006) as well as case law.

This article will delve into the key considerations involving patent as a form of collateral such that lenders and borrowers must keep in mind when creating, perfecting, and enforcing security interests in patents in England.

We will discuss the legal framework, the types of security that can be taken, the necessary registration requirements, and various practical and strategic considerations.

By the end, readers should have a general understanding of the legal and practical steps to secure a loan or financing arrangement against a patent registered in England.

2. Understanding Patents as Collateral

Patents serve as a powerful form of collateral due to their unique nature and economic potential. Essentially, a patent provides the owner with a monopoly right—granting exclusive authority to prevent others from making, using, selling, or importing the patented invention.

This monopoly can be particularly valuable for high-demand technologies or breakthrough innovations, as it creates a competitive edge in the market. Under the Patents Act 1977, these exclusive rights are legally enforceable, thereby enhancing the asset’s security value.

Patents offer several attractive benefits to lenders and borrowers. First, they can be licensed to third parties, creating a consistent revenue stream in the form of royalties. This revenue generation capability is crucial for servicing debt obligations and can improve a borrower’s credit profile.

For secured lenders, this means that even if the patent is not directly commercialised by the owner, the associated royalty income may serve as a cushion against potential losses.

Furthermore, a patented product or process provides significant market differentiation. In industries such as technology, pharmaceuticals, and manufacturing, possessing a patented invention can create a robust barrier to entry, safeguarding market share and increasing the asset’s overall value.

Such intangibles often attract favourable lending terms in secured financing arrangements, as they offer a level of stability in revenue projections.

However, the intangible nature of patents also introduces risks. The value of a patent may fluctuate based on market conditions, technological advancements, or changes in consumer demand. Additionally, patents can be challenged on grounds of validity or circumvented through design-around strategies, potentially diminishing their enforceability.

Lenders must be cautious and conduct comprehensive due diligence—verifying the patent’s status at the UK Intellectual Property Office (UK IPO) and ensuring that any licensing agreements or encumbrances are fully disclosed.

2.1 Practical Tips for Lenders and Borrowers:

• Registration: In line with the Companies Act 2006, promptly register any charges at Companies House to secure priority against third-party claims.transactions.

• Due Diligence: Confirm that the patent is valid, enforceable, and free of undisclosed encumbrances. Check for any pending litigation or challenges that might affect its value.

• Regular Monitoring: Ensure ongoing compliance with maintenance obligations, such as payment of renewal fees, to keep the patent in force.

• Proper Documentation: Clearly define the collateral in security agreements, incorporating detailed descriptions and including any associated royalty rights.

3. Legal Framework Governing Security Interests in Patents in England

Several key statutes and rules govern the creation and enforcement of security over patents in England. The most relevant are:

• Patents Act 1977: Governs the granting, ownership, and registrability of patents.

• Companies Act 2006: Provides the structure for company charges and outlines registration requirements at Companies House.

• Insolvency Act 1986: Governs the enforcement of security in insolvency situations and addresses priorities.

• The Patents Rules 2007 and Patents (Fee) Rules 2007: Details procedural regulations for registering transactions that affect patents at the UK Intellectual Property Office (UK IPO)

Taken together, these form the statutory bedrock for creating and perfecting security interests in patents. Additionally, parties are guided by English common law, which has built up around secured transactions and intellectual property.

4. Types of Security Interests Over Patents

When taking security over a patent, creditors typically choose between several forms of security, each with different legal implications and enforcement rights:

4.1 Fixed Charge

A fixed charge creates a direct security interest over the patent, meaning that the borrower is restricted from selling, licensing, or otherwise disposing of the patent without the chargeholder’s consent.

This arrangement is particularly attractive to lenders when the patent is a core asset of the borrower’s business. The lender gains robust control over the asset, which can be critical if the borrower defaults.

Under English law, a fixed charge must be carefully documented and registered—often with the UK Intellectual Property Office (UK IPO) and Companies House—to ensure it is enforceable against third parties.

Registration is essential under the Companies Act 2006, which mandates that charges over a company’s assets be registered within 21 days of creation to protect the lender’s priority rights.

Lenders should ensure that the security agreement clearly details the patent, including its registration number and title, and that the borrower’s obligations regarding maintenance and renewal fees are explicitly stated.

4.2 Floating Charge

A floating charge does not attach to a specific asset immediately. Instead, it “floats” over a class of assets—often including intellectual property—until a predefined “crystallisation” event occurs, such as default or insolvency.

Prior to crystallisation, the borrower can continue to use or dispose of the assets in the ordinary course of business. However, once crystallised, the floating charge converts into a fixed charge, and the lender’s rights become enforceable.

Floating charges rank behind fixed charges in insolvency, which was underscored in the landmark case Re Spectrum Plus Limited [2005] UKHL 41. This hierarchy means that in a bankruptcy, fixed charges are generally prioritised over floating charges.

Lenders should negotiate negative pledge clauses to limit the borrower’s ability to create further charges that might dilute the floating charge’s priority.

4.3 Mortgage or Assignment by Way of Security

This method involves the lender taking legal title of the patent, subject to the borrower’s right to redeem the asset upon full repayment of the secured obligation.

Although this offers strong control to the lender, it also introduces complexities—especially in circumstances where the patent is subject to existing licensing agreements or third-party rights. Registration is still necessary to perfect the security interest, ensuring it is enforceable against other creditors.

Under the Patents Act 1977, such transfers must be properly recorded at the UK IPO to give constructive notice to third parties.

When drafting the security documents, both parties should consider the potential impact on any existing licensing arrangements, ensuring that enforcement of the security does not unintentionally breach those agreements.

4.4 Pledge

Pledging is more commonly seen with tangible assets, as it involves transferring possession of the asset to the lender while the borrower retains ownership.

With intangible assets like patents, a pledge is less common due to the challenges in handling and storing intellectual property. The complexities of pledging patents typically make a fixed charge or assignment by way of security a more practical and preferred option.

If a pledge is considered, the lender should secure physical evidence of the patent’s registration documents and any related correspondence, as these will be critical in establishing control during enforcement.

In practice, fixed charges and assignments by way of security are the most common methods for English law-governed security interests in patents.

5. Creating Security Interests in a Patent

5.1 Drafting the Security Agreement

The process for creating security begins with drafting a robust security agreement. Key points for inclusion are:

5.1.1 Grant of Security

Include a clear clause stating that the borrower grants a security interest in the specified patent(s). This may be in the form of a mortgage, fixed charge, or another agreed method.

A well-drafted clause should leave no doubt about which assets are being encumbered. Specify whether the security interest is fixed or floating.

A fixed charge is typically more favourable to lenders in insolvency scenarios as it provides a proprietary interest, whereas a floating charge may rank lower against other creditors.

5.1.2 Description of Collateral

Provide a detailed description of the patent, including patent numbers, titles, registration details, and information on any pending applications.

This precision ensures that the collateral is unambiguously identified. Cross-check details with the UK Intellectual Property Office (UK IPO) records to avoid discrepancies that might later lead to disputes.

5.1.3 Covenants and Undertakings

The agreement should require the borrower to maintain the patent. This includes paying renewal fees, defending against infringement claims, and refraining from granting additional security interests without the lender’s consent.

Incorporate regular reporting obligations so that any changes in the status of the patent (such as disputes or litigation) are promptly communicated to the lender.

These covenants may be supported by broader principles under the Part 25 of the Companies Act 2006 when the borrower is a company.

5.1.4 Events of Default

Clearly define default triggers, such as non-payment or unauthorised encumbrance of the patent, and outline the lender’s remedies.

This might include crystallisation provisions—which convert a floating charge into a fixed one—or an automatic right to enforce the security.

Parties should use precise language to minimise ambiguity, thereby avoiding potential litigation over whether a default has occurred.

5.1.5 Obligations to Assist with Registration

Include a clause requiring the borrower to cooperate in registering the security interest promptly at both Companies House (if the borrower is a company) and the UK IPO.

Define clear timelines and responsibilities for registration because failure to register within statutory time limits (e.g., 21 days under the Companies Act 2006) can render the security interest void against other creditors.

5.2 Execution Formalities

Execution of the agreement will depend on whether the borrower is a company or an individual.

For a company, two authorised signatories or one director in the presence of a witness can validly execute a deed.

For an individual, execution as a deed must follow the standard requirements (signature in the presence of a witness, etc.).

Where the security is documented in a facility agreement (rather than in a separate deed), lenders often require a separate deed of assignment or fixed charge over the patent, as deeds provide certain legal advantages, such as an extended limitation period for claims under English law (12 years instead of 6).

6. Perfection and Registration of Security Interests in Patents

6.1 Registration at the UK IPO

Under the Patents Act 1977, the UK IPO maintains the official register of patents. Any assignment, charge, or other interest in a patent may be recorded on the Patent Register.

Although registration at the UK IPO is not strictly mandatory to create a valid security interest, timely registration ensures that third parties—such as subsequent lenders, buyers, or licensees—are on notice of the lender’s interest.

In many cases, failing to register can result in priority disputes or difficulties in enforcement against third parties.

Key points for UK IPO registration:

• The registration application should specify the patent(s) in question, the name of the parties, and the nature of the security.
• Registration should be completed as soon as possible after execution of the security agreement.
• The UK IPO will make the record publicly available, allowing interested parties to search the patent register.

6.2 Registration at Companies House

If the chargor (borrower) is an English company or LLP, registration of the security at Companies House is crucial for perfection against the company’s creditors and liquidators.

Pursuant to the Companies Act 2006, any charge over the company’s assets (including IP) must be registered within 21 days of creation. Failure to register within the 21-day window renders the security void (or “unperfected”) against a liquidator, administrator, or other creditors.

Practically:

• Form MR01 (for a company in England and Wales) is commonly used to notify Companies House of the creation of a charge.

• The security agreement (or a certified copy) must be sent together with the form and the registration fee.

• Companies House will issue a certificate of registration, confirming the date of registration, which is critical for determining priority against other charges.

6.3 Consequences of Failure to Register

If a lender fails to register its security interest (whether at the UK IPO or Companies House):

• At the UK IPO: The charge may remain valid as between the parties, but will be vulnerable to subsequent purchasers or mortgagees who act in good faith without notice.

• At Companies House: The security will be void against any liquidator, administrator, or creditor if it is not registered within 21 days. This essentially means the lender would be treated as an unsecured creditor in insolvency.

Given these high stakes, prudent lenders should check that both registrations (where required) are carried out promptly.

7. Priority of Security Interests as Applicable to Patents

7.1 Priority Rules in English Law

Under English law, the principle of “first in time, first in right” is key when determining the priority of competing security interests.

In practical terms, this means that the creditor who registers their charge first will generally have priority over later creditors.

For companies, the Companies Act 2006 mandates that charges must be registered on time. The registration date becomes the benchmark for determining priority among secured creditors.

Similarly, when dealing with patents, registering the charge or assignment with the UK Intellectual Property Office (UK IPO) can help establish notice and may be crucial in disputes over patent ownership or competing interests.

Practical Tip: Always register security interests promptly to avoid losing priority in insolvency situations.

7.2 Fixed vs Floating Charges

The distinction between fixed charge and floating charge is essential to make at this point.

• Fixed Charge:
  • A fixed charge over a patent grants the lender a “proprietary interest”, meaning the borrower cannot dispose of or deal with the patent without the lender’s consent.
  • Provided the fixed charge is validly created and properly registered, it will outrank any floating charge on the same patent.
  • Tip: Ensure all fixed charges are documented clearly and registered immediately to solidify the lender’s priority.

• Floating Charge:
  • floating charge, in contrast, is designed to cover a pool of assets and “floats” until a specified crystallisation event occurs, such as default or insolvency.
  • If a lender holds a floating charge over all assets, and a subsequent lender takes a fixed charge over a specific patent, the fixed charge typically takes precedence—unless there is a negative pledge clause in the floating charge that the later lender was aware of.
  • This principle was reinforced in cases such as Re Spectrum Plus Limited [2005] UKHL 41, which clarified how floating charges operate in insolvency scenarios.

7.3 Contractual Subordination and Intercreditor Arrangements

It is common for multiple creditors to enter into inter-creditor agreements that alter the usual statutory priority.

• Contractual Subordination:
  • Creditors may agree, through contractual arrangements, to subordinate their claims. For example, a senior lender might agree to subordinate its claim to a junior lender under pre-agreed conditions.
  • Such subordination must be clearly documented to ensure enforceability.

• Intercreditor Arrangements:
  • These arrangements detail how enforcement proceeds will be distributed among creditors if the borrower defaults.
  • They often include provisions to manage the exercise of enforcement rights and the sharing of any proceeds from the sale or licensing of the patent.

8. Enforcement of Security Interests in Patents

8.1 Default Triggers

Enforcement typically occurs when there is an event of default under the relevant security documentation. Common default triggers include:

• Non-payment of principal or interest.
• Insolvency of the borrower.
• Breach of financial covenants.
• Cross-default under other loan agreements.

8.2 Methods of Enforcement

Upon a valid event of default, a secured lender can enforce its security over the patent in various ways, depending on the type of security held:

1. Appointing a Receiver:
   • For a fixed charge or mortgage over a patent, the lender may have the right to appoint a receiver (or an administrator) to take control of the assets.
   • A receiver can license, sell, or otherwise dispose of the patent to realise value for the benefit of the lender.

2. Selling or Assigning the Patent:
   • Under a fixed charge or mortgage, the lender may sell or assign the patent to a third party.
   • This may require cooperation from the borrower or a court order, depending on the terms of the charge and the circumstances of default.

3. Licensing:
   • The lender (or its receiver) may choose to enter into one or more license agreements to generate royalties. This can be particularly effective for patents with significant revenue potential.

8.3 Court Involvement

If the borrower disputes the right of enforcement or if complications arise, the lender may need to seek a court order to enforce its security.

The court will look at whether the charge is valid and whether any steps taken by the lender are proportionate and in accordance with the loan documents.

Though direct enforcement without a court order is possible in many secured financing contexts, court intervention may be necessary to resolve disputes, especially if the borrower claims the patent is invalid or that there was a procedural irregularity in the creation of the charge.

9. Practical Considerations and Due Diligence

9.1 Verifying Patent Validity and Ownership

A patent only holds value if it is valid and enforceable. Lenders should conduct thorough due diligence to confirm:

1. The patent is properly registered and in force (i.e., no missed renewal fees).
2. The borrower is the registered proprietor of the patent.
3. No pending litigation or serious validity challenges are noted in official registers or known in the industry.
4. No existing licenses, security interests, or encumbrances conflict with the proposed security interest.

9.2 Valuation of the Patent

Unlike real estate or other tangible assets, patents can be difficult to value. Lenders may wish to consult patent attorneys, valuation experts, and market analysts to estimate:

1. The commercial viability of the patented invention.
2. The revenue generated from existing licenses or potential future licensing opportunities.
3. The patent’s expiration date and any related risk of obsolescence.

Because patents often have a limited lifespan (20 years from the filing date, subject to renewals), time-sensitive valuation is critical.

9.3 Monitoring

Because the borrower retains day-to-day control of the patent (even under a fixed charge, absent an event of default), lenders typically require regular reporting on:

1. Patent maintenance, including timely payment of renewal fees.
2. Potential infringements or litigation.
3. New licenses, sub-licenses, or other encumbrances the borrower proposes.

This monitoring can help preserve the patent’s value and alert the lender to potential issues early.

9.4 Relationship with Other Assets

A patent may be just one element in a suite of intellectual property assets (including trademarks, copyrights, and trade secrets).

In many cases, lenders take an “all-assets” security approach, covering the borrower’s entire IP portfolio.

Where the patent is especially valuable, lenders may want to carve it out for a separate fixed charge or assignment to ensure higher priority and better enforcement rights.

10. Cross-Border Considerations

Many businesses hold patents in multiple jurisdictions. For lenders, cross-border security raises additional complexities:

1. Jurisdiction of Registration: Patents are territorial rights. If the borrower has an equivalent European, US, or other foreign patent, separate security and registration procedures may be required under those jurisdictions’ laws.

2. Conflict of Laws: The choice of law clause in a security agreement may be overridden by mandatory local law provisions regarding the registrability and enforcement of security over local patents.

3. European Patents and the UPC: While the UK is no longer part of the EU, businesses may still hold European patents designating the UK. The Unitary Patent Court (UPC) system, though largely EU-centric, may still raise questions about enforcement and litigation strategies for patents in multiple participating jurisdictions.

4. Enforcement Risks: If the lender enforces its security in one jurisdiction, it may still need to take additional steps to enforce in other jurisdictions, complicating and lengthening the enforcement process.

11. Conclusion

Taking security over patents in England can be a powerful means of protecting a lender’s interest and providing a borrower with access to crucial financing.

The intangible yet potentially lucrative nature of patents makes them an attractive form of collateral, particularly in technology, pharmaceutical, and manufacturing sectors.

However, the process requires careful assessment of English law, from the initial drafting of the security agreement to the meticulous registration at Companies House and the UK IPO—each a critical step to ensure the security is valid and enforceable against third parties.

Key takeaways include:

1. Identify the Type of Security: Whether a fixed charge or assignment by way of security is used, ensure the borrower’s rights to use the patent are clarified alongside the lender’s enforcement rights.

2. Perfect the Security: Timely registration at Companies House for companies and at the UK IPO is essential for protecting the lender’s priority and ensuring effectiveness in insolvency scenarios.

3. Maintain Proper Priority: “First in time” typically wins, but pay attention to intercreditor arrangements and negative pledge clauses that may alter or restrict the borrower’s ability to grant subsequent security interests.

4. Consider Practical Enforcement: In an event of default, the lender’s remedies range from appointing a receiver to licensing or selling the patent—but the intangible nature of patents requires specialised knowledge and due diligence.

5. Conduct Thorough Due Diligence: Assessing the patent’s validity, ownership status, and market value is crucial for an effective security package. A patent that is subject to litigation or nearing the end of its term may not offer the security initially anticipated.

6. Stay Mindful of Cross-Border Aspects: In a globalised economy, patents rarely exist in isolation. If the borrower holds patent rights in multiple jurisdictions, consider local rules and cross-border enforcement complexities.

By addressing these legal, procedural, and practical concerns, lenders and borrowers alike can reap the mutual benefits of a well-structured patent-based security transaction.

As always, consultation with a qualified solicitor or other legal professional is recommended.