Introduction

The practice of leveraging intellectual property (IP) assets as collateral for financing is gaining momentum as businesses recognize the inherent value of intangible assets. Traditionally, financial institutions favored tangible assets as collateral; however, advancements in science and technology have elevated the importance of IP rights in financing endeavors. Unlike tangible assets, the value of IP assets, which include patents, copyrights, trademarks, trade secrets, geographical indications, and industrial designs, tends to appreciate over time, making them valuable security options for creditors. In India, the concept of IP financing in India is still in its nascent stage. Intellectual property financing involves creating security over IP rights while capitalizing on the innovative and creative ideas of a company. This approach proves particularly beneficial for Micro, Small, and Medium Enterprises (MSMEs) that may lack substantial tangible assets to secure traditional financing. Recognizing the potential of IP assets, the Department of Industrial Policy and Promotion included the commercialization of IP assets as one of the objectives in the ‘National IPR Policy 2016. As businesses navigate this evolving landscape, understanding the intricacies of IP asset securitization becomes imperative for leveraging intangible assets effectively.

Feasibility of Securitization of IP Assets in India

Examining the feasibility of securitizing requires a thorough analysis of the applicable laws governing commercial transactions and intellectual property. General commercial laws, such as the Companies Act 2013 and the Banking Regulation Act 1949, provide frameworks for creating security interests and engaging in various forms of business activities, including lending and borrowing. Additionally, specialized IP laws, such as the Patents Act 1970, Copyright Act 1957, Designs Act 2000, and Trade Marks Act 2000, offer provisions for creating security interests specifically over IP assets. Under the Companies Act 2013, companies have the authority to create charges on their assets, including intangible assets, and register them with the Registrar of Companies. The Banking Regulation Act 1949 empowers banks to engage in lending activities and acquire security interests in various forms, including intangible assets. Furthermore, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 recognizes security interests in intangible assets as part of its definition, albeit subject to certain exemptions. While specific IP laws allow for the creation of security interests in IP assets, challenges remain in harmonizing these laws with general commercial laws. Additionally, issues such as valuation, validity, fluctuation in value, and enforcement pose practical obstacles to accepting IP assets as collateral.

Challenges in Accepting IP Assets as Collateral

Valuation of IP assets presents a significant challenge due to the absence of uniform guidelines and the need for thorough due diligence. Unlike tangible assets, the value of IP assets is subject to fluctuation over time, making it challenging to predict their true worth. Additionally, the validity of IP assets relies on registration, which can be a time-consuming process. Lenders must navigate encumbrances and title issues associated with IP assets to ensure clear ownership rights. Enforcement and monitoring of IP assets pose challenges due to the risk of infringement and the complexity of IP laws. Legal issues such as jurisdictional variations and ownership disputes further complicate the enforcement process. Moreover, the lack of liquidity in the market for IP assets makes it difficult to find suitable buyers, especially if the assets require specialized markets for revenue generation.

Benefits of IP Financing

Despite the challenges, IP financing offers several benefits for businesses. It widens the scope of financing options, providing an alternative to traditional collateral such as real estate and equipment. By leveraging intangible assets, MSMEs can access additional funding to expand and improve their operations.

Conclusion

In conclusion, IP financing presents promising opportunities for businesses in India, particularly MSMEs. While legal frameworks allow for the securitization of IP assets, practical challenges hinder widespread adoption. To fully realize the potential of IP-backed financing, transparent mechanisms and risk assessment practices must be enhanced. Emulating successful models from other jurisdictions and conducting thorough due diligence are essential steps for lenders to mitigate risks and protect their interests in IP securitization transactions.

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Introduction: Scrutinizing Interest Claims in IBC

The NCLT Mumbai Bench’s decision in *Siddharth Enterprises Vs. Shapoorji Pallonji and Company Pvt. Ltd.*, dated 12 March 2024, casts a significant light on the contours of operational debt and interest claims within the framework of the Insolvency and Bankruptcy Code, 2016 (IBC), especially concerning Micro, Small, and Medium Enterprises (MSMEs). This case scrutinizes the operational creditor’s claim for interest in the absence of an explicit agreement, juxtaposed against the backdrop of the MSME Development Act’s stipulations.

The Dispute’s Background

*Siddharth Enterprises, an operational creditor, initiated the Corporate Insolvency Resolution Process (CIRP) against **Shapoorji Pallonji and Company Private Limited*, the corporate debtor, under Section 9 of the IBC. The bone of contention was the claim for interest on delayed payments, notwithstanding the absence of a specific clause in the purchase orders or invoices.

Operational Creditor’s Claim

The operational creditor’s application articulated a dual-fold claim comprising the principal amount and interest purportedly accruing on delayed payments. Despite partial payments by the corporate debtor, a contention arose over the remaining amount, primarily the interest component claimed by Siddharth Enterprises based on its MSME status.

“Besides the Operational Creditor has claimed Rs.1025953.94/- towards interest on the overdue amount of invoices in the Application.”

Judicial Deliberation and Findings

Analyzing ‘Operational Debt’ under Section 5(21) of IBC

The NCLT meticulously examined whether the claimed interest constitutes ‘operational debt’ under Section 5(21) of the IBC. It was concluded that the absence of an agreed-upon interest rate between the parties negates the inclusion of such interest within the ambit of ‘operational debt’.

“It is now settled in the context of the Code that if interest is not agreed upon between the parties, it cannot form a part of ‘operational debt’ within the meaning of Section 5(21) of the Code…”

MSME Act vs. IBC: The Jurisdiction for Interest Claims in IBC

The judgment highlighted that the MSME Development Act indeed mandates interest on delayed payments to MSME entities. However, it posited that the IBC is not the forum for adjudicating disputes over interest claims, especially when the principal debt is not contested.

“The correct forum for such claims is the MSEFC. It is settled that NCLT is not a forum to resolve the disputes pertaining to interest claims of a MSME entity.”

Implications of Interest Claims in IBC

Clarifying the Scope of Operational Debt

This ruling significantly clarifies the scope of ‘operational debt’ under the IBC, delineating that interest claims, in the absence of mutual agreement, fall outside this scope. This interpretation underscores the necessity for explicit contractual agreements regarding interest on delayed payments.

MSMEs and the IBC Framework

For MSMEs, this judgment delineates the procedural pathway for interest claims on delayed payments, redirecting them to the MSEFC rather than the insolvency courts. It preserves the IBC’s essence as a mechanism for insolvency resolution, not debt recovery.

A Caution against Forum Shopping

By highlighting that the NCLT is not the appropriate forum for interest disputes, especially for MSMEs, the judgment aims to prevent forum shopping, ensuring that entities utilize the correct legal avenues for their claims.

Conclusion: Balancing Interest Claim within the IBC Framework

*Siddharth Enterprises Vs. Shapoorji Pallonji* stands as a critical precedent in interpreting ‘operational debt’ under the IBC, especially concerning interest claims by MSMEs. It emphasizes the IBC’s role in insolvency resolution, safeguarding its mechanisms from becoming de facto debt recovery platforms. This judgment not only offers clarity to operational creditors, particularly MSMEs, regarding their recourse for interest claims but also reinforces the sanctity of contractual agreements in dictating the terms of debt under the IBC framework. By delineating the jurisdictional boundaries for interest claims, the NCLT Mumbai Bench ensures that the resolution process remains streamlined, equitable, and within the intended purview of the IBC.

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