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Intellectual Property as a Security in Loan Transaction – Malaysia

Introduction

Security in a loan transaction or in its transacted terms known as ‘secured loan’ can be generally defined as a loan in which the borrower pledges in his/her/its assets (be it movable or non-movable) as a collateral for the loan lend by the creditor.

Such pledged assets will regards the loan between the parties as a secured loan i.e. in the event that the borrower defaults, all of the ownership of the pledged assets will be transferred to the creditor who may proceeds with the sale of the same to regain the loaned monies.

Secured loan in regards of Intellectual Property (“IP”) will involve the pledge of IP assets own by a registered proprietor to the creditor of the loan. The pledge of the IP assets for security interest is usually done through an assignment of the same from the registered proprietor to the creditor. The concept of assigning the IP for a security interest involving a financial transaction has started to emerge in Malaysia years ago.

There are tremendous efforts from the Malaysian Government to honour the contention of allowing the assignment by of security to be applicable in the subject matters involving IP assets. These include the act of the Malaysian Government to amend the relevant regulations and to produce numerous consultation papers to affect the same.

 

Development on Assignment of IP Assets for Security Interest in Malaysia

There are basically five (5) subject matters under IP in Malaysia that are relevant to the above issue which include the following:

  1. Trademark;
  2. Industrial design;
  3. Patent;
  4. Copyright; and
  5. Geographical indication.

Summarily, a registered industrial design can be the subject of a security interest in the same way as other personal or movable property i.e. as mentioned in Section 29(5), Industrial Designs Act 1996 – Act 552 (“Act 522”). An assignment of a registered industrial design is not effective unless it is in writing and signed by or on behalf of the assignor and the assignee.

The assignee must then apply to the Registrar of Industrial Designs to record his interest in the register. However, there is no equivalent legislation for patents, trademarks and copyright as of February, 2017. It appears that similar legislation to the Act 552 has been proposed and is in the drafting stage; however, it is many years away from becoming law.

 

Perfecting the Assignment of Industrial Design for Security Interest

There are two main types of assignments available when it comes about the IP assets i.e. absolute assignment and assignment by way of security.

Absolute assignment can be defined as an assignment in which all (and not merely a portion of) benefits, liabilities, and/or rights are transferred by the assignor to the assignee, without any pre-condition. On the other hand, assignment by way of security can be defined as an assignment in which ownership rights are transferred only as an additional security for a loan and will revert to the assignor when the loan is repaid.

Generally, to compare the basic concept between absolute assignment and the assignment by way of security, the absolute assignment prescribed for a heavier impact compare to the assignment by way of security. This is because, as it can be understood, when a party (i.e. the original owner of a property) agrees to let go his property by way of an absolute assignment to another party (i.e. the receiving party), the impact is that such property will be handed over to the receiving party absolutely.

This means that the original owner of the property will no longer has any right to deal with the property as the ownership of the property is now completely shifted to the receiving party.

On the other hand, for assignment by way of security, the original owner of the property can always regain his ownership over his property by way of discharging himself from all of the obligations agreed between him and the receiving party. For an ease of understanding, a hypothetical scenario can be drawn here. For example, Puan Aminah has a clothing business with numerous numbers of registered industrial designs concerning her designs of clothing.

She is now in the process of investing into a new line of business and would like to submit a loan with a company for such purpose.

Here, she may get an agreement with the company to secure the loan that she intends to make by way of assigning her registered industrial designs to the company with a condition that she will regain her ownership over such registered industrial designs upon the full payment of the loan. Here, upon the payment of the loan, she will regain her ownership on the registered industrial designs. On the other hand, if she fails to pay the loan, her ownership over the registered industrial designs will stay with the company and can be subjected to sale and others, to pay back the loan owed by her to the company.

In the above scenario, the flexibility in term of the shifting of ownership for assignment is more flexible for assignment by way of security in comparison with the absolute assignment. As such, one has really to understand the impact between the two (2) before concluding on the type of the assignment that they want to pledge against their property.

In Malaysia, summarily, a registered industrial design can be the subject of a security interest in the same way as other personal or movable property i.e. as mentioned in Section 29(5) of Act 552. While Sections 29(3) and (4) of the same Act make it clear that an assignment of a registered industrial design is not effective unless it is in writing and signed by or on behalf of the assignor and the assignee. The assignee must then apply to the Registrar of Industrial Designs to record his interest in the register of the Intellectual Property Corporation in Malaysia (“the MyIPO”) as mentioned in Section 30(1).

It is worth to be note that no assignment is valid unless the same is recorded in the Register as what has been highlighted in Section 30(3) of Act 552.

The prescribed procedures which to be adhered to perfect the assignment of industrial designs for security interest are as follows i.e. as highlighted in the Industrial Regulations 1999 (Part IV) (“the Regulations”):

1) Section 26(1) of the Regulations

a) application must be made in ID Form 5; and

b) the application must be accompanied with:

    • prescribed fee; and
    • certified copy of the assignment / security transaction; or
    • any evidence to prove the transaction.

2) Section 29(2) of the Regulations

The Registrar may require the relevant documents to be submitted accordingly within the specified time as the Registrar thinks fit.

3) Section 29(3) of the Regulations

The Applicant may applies for extension of time via the filing of Form ID 13 before the expiry of time specified by the Registrar.

4) Section 29(4) of the Regulations

If the transaction is affected by an instrument chargeable with duty, the application may only be granted if the Registrar satisfied that the instrument has been duly stamped.

The fee to apply for the above assignment application is Ringgit Malaysia Three Hundred (RM300.00) payable to the MyIPO.

 

Conclusion

Upon the perfection of the assignment of the IP assets for the security interest, the assignee will be regarded to hold the IP assets as a security for the financial transaction made with the assignor. The assignee owes an obligation to the assignor to reassign the rights on discharge of the secured liability. Unless agreed mutually between the assignor and the assignee, third party is restricted from dealing with the assigned property.

It has to be noted between the parties that termination of the assignment will be dependent to the agreement entered between the assignor and the assignee i.e. in usual occasion, the termination of the assignment (or in another word, the ‘re-assignment’) of the IP assets will takes place immediately after the fulfillment of the financial transaction’s condition, that is referring to the repayment of loan or any other relevant applicable conditions agreed between the assignor and the assignee.

 

Written by:

Azarith Sofia Aziz (Partner) azarith.sofia@azmilaw.com

Amera Mohd Yusof (general@azmilaw.com)