IP as Security (Canara Bank v NG Subbaraya Setty)

The cause of action for this case arose in 2003 on the assignment of the trademark ‘EENADU” by the defendant, NG Subbaraya Setty, in favor of the Petitioners, Canara Bank. This lead to two separate lawsuits: one by the borrower over cancellation of the assignment and another to recover the sum of money paid as royalty before the cancellation of the assignment deed with interests.

The case predominantly discusses whether the suit falls within the prohibition laid down under the principle of res judicata, also by sec 45 of the Trade Marks Act of 1999. The section specifies that any unregistered assignment cannot be presented as evidence in court of law. The assignment deed between the parties was never registered with the registry and thereby it cannot be accepted as a valid document under sec 45 of the TM Act. Furthermore, the party was of the opinion that the question of law was already decided by the courts by previously passed orders and therefore, the representation between the Supreme Court was barred by the doctrine of res judicata. However, the court in this matter held that if a question of law is wrongly decided by the other courts then that question being raised before the competent court between the same parties with the same cause of action is not barred by the doctrine of res judicata.

However, another important question in this case was whether the IP assignment was acceptable or not. The court held for this particular case that the assignment of IP was not valid. The reason for that was that the parties had not attached the IP as security or collateral at the time of entering into the loan agreement and the Court felt that subsequently an unrelated IP cannot be attached as collateral as a way to set off the claims of the banks. Furthermore, under Sec 6 and 8 of Banking Regulation Act a bank can only engage in certain types of business. And the selling of goods and obtaining royalty from the IP by way of a third party is not allowed as per Sec 6 and 8 of BR Act. Furthermore, the court clarified that a bank may sell the goods to set-off any claims it holds but it cannot do so by way of a third party and just obtain royalties from the goods which were never put as security or collateral before the bank. Therefore, in this particular case the assignment of IP was found invalid.

Now, ordinarily, the National IP Policy does allow for an IP to be attached as a security. However, the same is seen very skeptically by the banks since IP valuation can be tricky. Unless there is a system that makes registration mandatory, securitization will be very difficult in the Indian scenario. Any prior user who has not registered his trademark can challenge the claim of a registered IP owner as per current laws.[1] The banks would be left vulnerable in this case and the same can negate the whole purpose of allowing IP as security.

For example, in the much reported case of Vijay Mallya, his TM ‘Kingfisher’ was offered as collateral/security to the banks at the time of agreement and therefore did form part of security under sec 6 of BR Act. However, the auction of the TM was unsuccessful but it was a valid security nonetheless.

Therefore, it can be concluded that although IP as security is legally possible but it is a road less taken. The various aspects of the dynamic nature of the IP make it a very uncertain back-up for banks to realize their debts. However, if an appropriate method is introduced for valuation and registration then the banks may increasingly accept IP as collateral/security.

Author: Yashvi Padhya, at Khurana&Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at pratistha@iiprd.com.

References:

[1]//economictimes.indiatimes.com/articleshow/50194124.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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