CAN TRADEMARK BE MORTGAGED?

As we see many Entrepreneurs are building businesses, the trend of using Trademark as a collateral is also on the rise. However, it poses a risk to the Bank due to the volatile and dynamic nature of the Trademark. As we all know, Trademark is an intangible asset unlike real estate, machinery, or gold and therefore the risks associated with using Trademark as a collateral is unique and requires a different approach.

Do the regulations allow Trademark as a collateral?

Creating security interest on Trademark has a concrete backing in the Indian legal system.

(i)              Companies Act, 2013: The Companies Act, 2013 allows a company to create a charge on its property or assets, whether tangible or intangible.

(ii)             SARFAESI Act, 2016: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, also entails detailed provisions which reflect positively on the creation of security interest on the Trademark by including intangible assets in the definition of Property. The regulations further provide that the bank which is accepting the assignment of a Trademark as the security for such an outstanding loan would become the secured creditor.

(iii)           Banking Regulation Act, 1949: The Banking Regulation Act also permits assignment of Trademark as a security towards a loan. A security on a Trademark can also be created through the execution of a deed of hypothecation. While the provisions do permit the Banks to accept Trademark as a collateral, the Bank needs to ensure that the Trademark is a “security” against the loan sanctioned. In an interesting case of Canara Bank v. N.G. Subbaraya Setty (Civil Appeal No. 4233 of 2018), the Supreme Court has held that the assignment of Trademark “Eenadu” in favour of the Bank was impermissible under the provisions of the Banking Regulation Act, as the assignment was made after the Borrower had defaulted on the loan. In this case, a borrower had entered into some credit facilities with the bank and on default of payment, signed an assignment deed for the trademark EENADU in respect of agarbattis. The Court opined that a Trademark cannot be assigned to the Bank by a borrower who has defaulted on a loan as it was not part of the security while granting the loan. The Bank cannot allow third parties to use the Trademark and collect royalty against it, as this activity does not fall under the business that Banks are permitted to do under the Banking Regulation Act. The provisions of the Banking Regulation Act only allow a Bank to deal with the property (tangible or intangible), which forms the security of the loan and not otherwise.

Key elements for mortgaging Trademark

As the nature of a Trademark is different from assets which are tangible, it is important for the Borrower and the Bank to make note of the important elements before mortgaging a Trademark.

(i)              Registration of Trademark: One of the key elements is registration of the Trademarks with the Trademark registry. The registration of Trademark not only entails exclusive usage but also protects against infringement. It is also necessary to record the fact that the Trademark has been assigned as a security with the Bank, with the registrar of Trademarks. This is necessary to validate the authenticity of the transaction in the event of any dispute.

(ii)             Ownership: The ownership of the Trademark remains with the Borrower, but the Bank has the right to deal with the Trademark in the event of a default. This ensures that the Borrower can use the Trademark in the normal course of business.

(iii)           Valuation : The Bank should get a valuation report from an independent valuer to validate the brand value of the Trademark and ascertain that the loan to be sanctioned is well within the permissible limits, keeping in mind the valuation of the Trademark.

(iv)           Validity of the Trademark: The Bank should ensure that the Trademark is valid during the term of the Loan and insist on renewal of the Trademark for an extended term, if needed.

(v)             Terms of the Loan Agreement : The terms of the Loan Agreement should capture the fact that the Borrower warrants that there have been no prior dealings with the Trademark that may affect the security interest granted in favour of the Bank. The loan agreement should also have a clause prohibiting the disposal (by sale, lease, licence etc) of Trademark without the Bank’s consent.

(vi)           Consequences of default: In the event of default, the Bank can sell and transfer the legal title to the Trademark to any third party and use the proceeds towards repayment of loan. While the process stated above is legally valid, there are certain practical difficulties in recovering the amount by way of selling the Trademark to a third party. In 2009, the brand “Kingfisher” was offered as collateral against a loan with State Bank of India. The Bank did follow all the process before the loan was sanctioned, including the valuation of the brand, but the Bank was unable to recover anything during auction, as there was no buyer of the Trademark. While the process of creating the security was within the purview of law, there were no buyers at the auction. This is a risk that the Banks face due to the volatile and dynamic nature of Trademark and brand value. As the business took a hit, so did the brand value of Kingfisher.

Conclusion

Although each case needs to be reviewed in light of the specific transaction, the above listed elements apply for most scenarios. While the practice of using Trademark as a collateral is legally permitted, a lot more needs to be done in order to promote it. The biggest challenge remains the valuation of the Trademark and the ability to recover by selling the Trademark to a third party, in the event of a default. The nature of Trademark is such that the brand value diminishes with the business not doing well and in such circumstances the valuation assigned to a particular Trademark is redundant at the time of auction. This leads to inability of the Bank in selling it to a third party and recover the amount.

Article contributed by Surekha Rao, Triangulas.

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