The Collateralisation of Intellectual Property Rights

Introduction

The Moveable Property Security Rights Act (“the Act”), 2017 provides for the registration of security rights in moveable properties. Prior to 2017, individuals and entities with no tangible assets had difficulty in accessing credit facilities since they lacked the collateral required by financial institutions. With the enactment of the Act, it became possible to access credit by using moveable property as collateral. Additionally, the Act promotes the protection of intellectual property rights as envisioned in the Constitution of Kenya, 2010 which provides that the State shall support, promote and protect the intellectual property rights of the people of Kenya.[1]

The objects of the Act are to promote consistency and certainty in secured financing, enhance the ability of individuals and entities to access credit and facilitate registration of security rights in moveable assets through the office of the Registrar and the Registry.[2] Intellectual property is included under the definition of “intangible assets” and intangible assets are movable property. Therefore, the Act provides for the recognition of intellectual property[3] rights as a movable property.[4]

This article covers salient provisions of the Act which relate to the use of intellectual property rights as security, how an intellectual property security right is created, the enforcement of this right, the challenges presented in Kenya, and a jurisdictional comparison with Singapore.

Creation and Enforcement of an Intellectual Property Security Right

A security right is created by a security agreement[5] in accordance with part II of the Act. However, this is under the condition that the grantor of the security right has rights in the asset to be encumbered or the power to encumber it.[6] According to the Act, a security agreement should fulfil these requirements:

1. Be in writing and signed by the grantor[7];
2. Identify the secured creditor[8] and the grantor;
3. Describe the secured obligation[9] (except in the case of an agreement that provides for the outright transfer of a receivable); and
4. Describe the collateral.[10]

Where a debtor fails to perform their obligation, the grantor and the secured creditor may exercise any right under part vii of the Act, provided in the security agreement or any other written law.[11] These rights include, a creditor exercising the right to sue, right of redemption or right to dispose of the collateral.[12]

Challenges faced in Kenya

Despite the progressive nature of the Act, there are several challenges that are prevalent within the Kenyan jurisdiction. They are as follows:

a) Valuation of intellectual property rights

Generally, valuation of an asset is of utmost importance when dealing with the collateralisation of that asset. Consequently, the valuation of intellectual property is a fundamental aspect in ensuring access to credit. Unfortunately, this has created a significant impediment to owners of intellectual property. Kenya has very few professionals that can determine the value of intellectual property rights.[13] This is exacerbated by the intangible nature of intellectual property rights which causes financial institutions to shy away from lending.[14] Financial institutions prefer immoveable property as it is easier to determine the value of the property and they appreciate over time. Thus, they are deemed to be low-risk and ore commercially viable than intellectual property.[15]

b) Non-registration of intellectual property

Ownership or authorship over intellectual property is automatically created when the intellectual property is created. Therefore, it is not a requirement for one to register their intellectual property to be considered an owner of that property. However, the registration process fills financial institutions with more confidence as there exists proof of ownership and a sense of accountability.[16] Unfortunately, non-registered owners of intellectual property may be unable to gain access to credit due to non-registration of their intellectual property rights.

c) Unpredictability of income from royalties

Collective Management Organisations have contributed to fuelling the uncertainty surrounding accepting intellectual property as collateral.[17] They have been subject to controversy over a long period of time and have been occasionally accused of misappropriation of funds meant for owners of intellectual property.[18] Consequently, financial institutions may be sceptical to loan money due to the unpredictability of income from royalties.

d) Lack of awareness

Despite the inclusion of intellectual property rights to the Act, there exists a lack of awareness amongst creatives.[19] Creatives may have gotten used to the ‘traditional’ method of acquiring credit, which was to use immoveable assets. It would be beneficial to sensitize the community, and in particular the creatives community, of this alternative method of investing and access to credit.[20]

e) Lack of harmonization in intellectual property laws

There exists a myriad of laws relating to intellectual property such as the Copyright Act, Trademarks Act, Industrial Property Act and the Anti-Counterfeit Act.[21] This therefore creates a sense of volatility in using intellectual property as collateral, which in turn weakens the confidence of financial institutions. However, the Ministry of Industrialisation and Enterprise Development drafted an Intellectual Property Bill, 2020.[22] The Bill proposes to merge the various intellectual property institutions and harmonize all legislation relating to intellectual property.[23]

f) Lack of specific regulatory framework

Although the Act makes provisions for the creation and enforcement of moveable property security rights, there are no specific provisions for intellectual property. Intellectual property rights present unique challenges as compared to other moveable property.[24] This therefore creates uncertainty between the borrower and the financial institutions as there are little to no mechanisms in place to create accountability or checks and balances. In attempts to amend this, The Kenya Industrial Property Institute (“KIPI”) submitted to the Attorney General’s Office proposals and draft instructions to repeal the Trademark Act, Cap. 506.[25]

Although the Act recognizes the use of intellectual property as collateral security, there is no specific law or regulation that relates to the perfection of intellectual property security rights. This therefore creates uncertainty between the borrower and the financial institution as there is no mechanism that creates accountability or checks and balances. KIPI noted that the intellectual property laws do not have provisions for the securitisation of intellectual property.[26] Therefore, they submitted to the Attorney General’s Office, proposals and draft instructions to repeal the Trademark Act, CAP. 506. One of the main proposals under this draft Bill is the hypothecation of trademarks by deed of security or charge.[27] This would allow for a registered trademark to be pledged as security by a borrower to access credit without transferring property or possession to the borrower.

A Comparative Tale: Singapore

In April 2021, the Singapore Intellectual Property Strategy 2030 (“SIPS 2030”), built on Singapore’s 2013 IP Hub Master Plan was launched by the Intellectual Property Office of Singapore.[28] The SIPS 2030 aims to strengthen the intellectual property regime in Singapore while creating more job opportunities.[29] The SIPS 2030 therefore ensures to make Singapore an intellectual property hub by creating a conducive environment for the exercise of intellectual property rights, develop a next generation IP filing system and commercialize intellectual property assets amongst other measures.[30] It is evident that a conducive ecosystem must first be created in order to promote the use of intellectual property rights as collateral.

The SIPS 2030 recommendations aim to develop a unified intellectual property filing system, set up an online marketplace for intellectual property services which enhances commerce, build a pool of intellectual property valuation professionals and work with various stakeholders to ensure the proper implementation of this strategy.

Conclusion (How can Kenya improve?)

Kenya stands to benefit greatly by borrowing a leaf from Singapore by creating a unified intellectual property office, a national strategy and a conducive environment for the recognition and use of intellectual property rights as collateral. This would promote the Government’s objective as part of Kenya Vision 2030’s objective of developing an efficient and globally competitive financial sector.[31] The adoption of the amendment of the Trademark Act proposed by KIPI, the implementation of the IP Bill and the creation of a regulatory framework specifically meant for the collateralization of intellectual property will lead to a stronger and booming financial sector.

It is beneficial to use intellectual property as collateral because untapped source of collateral, securitisation offers a quick return on research and development and securitisation captures additional value.[32]