Changes to Canada’s Bankruptcy and Restructuring Legislation Bolsters Protection for Licensees

It has been 10 years since the last major overhaul of Canada’s bankruptcy and restructuring legislation.

In 2009, those amendments established protections for licensees of intellectual property (“IP”). In short, where a debtor disclaimed a contract as part of its restructuring that impacted the rights of an IP license-holder, the disclaimer did not affect the license-holder’s right to use the IP during the term of the license – including any right to enforce an exclusive use. So long as the counterparty continued to fulfill its obligations under the agreement, its right of use was preserved.[i]

Practically, this codified special considerations around IP contracts in restructuring, notably among lenders, court-appointed monitors/trustees and potential purchasers/investors when considering value and the “transferable value” of the asset.

For licensees, although the “right to use” was protected, there were no protections for often critical go-forward elements of IP licenses such as licensed product updates and servicing. The protections afforded often amounted to rights to use licensed content “as is, where is” and to “keep paying license fees”. While balancing interests of license-holders and the remedial interest of facilitating restructurings, this system often had the result of IP license-holders needing to find alternatives to their licensed software, services, etc., to have greater operational certainty and security.

Further, also absent from the 2009 amendments was a comparable set of protections in “pure” bankruptcies and receiverships. Under Canadian law, “bankruptcy” is a legal status wherein the assets of a debtor vest in the trustee-in-bankruptcy to be liquidated for the benefit the creditors (akin to a Chapter 7 proceeding under the US Bankruptcy Code). A “receivership” is most often a secured creditor remedy where a receiver is appointed by the Court to oversee the undertakings and assets of a debtor and realize on the same for the initial benefit of the secured creditor(s). However, receiverships are often used in Canada to sell businesses as a going concern (many on a “pre-pack” basis, with a purchaser lined up before the filing).

Accordingly, under the 2009 amendments, IP license-holders were afforded certain protections where a debtor disclaimed its contract in a restructuring process but not in a conventional bankruptcy liquidation or a receivership sale. This “gap” in thelegislation allowed clever stakeholders to skirt the protections that might otherwise be available to IP licensees. Moreover, the law did not expressly address the sale or disposition of IP by a trustee, receiver or debtor.

On November 1, 2019, amendments[ii] to Canada’s two principle insolvency statues – the BIA and CCAA[iii] – were enacted and address this legislative gap. Under Bill C-86, the amendments do the following:

in a bankruptcy or receivership, a license-holder’s right of use are now protected where a contract is disclaimed or resiliated by a trustee in bankruptcy or a receiver; and

in a bankruptcy, receivership or restructuring process, where a sale or disposition of assets includes IP, the rights of license holders are likewise protected.

The first amendment above reflects a harmonization in the regimes allowing for the disclaimer of contracts in the context of restructurings and liquidations. The second amendment above represents a significant practice point as bankruptcy and insolvency sales in Canada typically proceed by why of Court Order, pursuant to which all interests and encumbrances in the subject assets are vested off (akin to a §363 sale under the US Bankruptcy Code). A license-holder would have to take a positive step in a proceeding to assert any residual rights. Under the amended law, presumably, the protection of IP license-holders will be contemplated in the standard Court forms.

These amendments are in force as of November 1, 2019 and will apply only to proceedings commenced on or after such date.

Prior to the November 1 deadline, there had been no groundswell of IP-centric filings to beat the new laws. In fact, the amendments have largely gone under the radar. However, the amendments will impact how the legal profession deals with IP rights both pre- and post-filing in insolvencies and bankruptcies. Lenders who count IP as a significant component of their security will need to consider the impact of these amendments on realizable value. License-holders may be advised to request separate contracts for IP licenses and other elements of their business dealings, so as safeguard against confusion in a bankruptcy scenario. And, finally, bankruptcy and restructuring professionals need to be aware of these amendments and prepared to address the inevitable uncertainty that will surround IP rights in proceedings going forward.

These amendments offer IP license-holders expanded protections in bankruptcy and restructuring scenarios in Canada but do not represent a complete code on the matter. They will need to be considered by the Courts to determine fully how they apply in practice. In IP-centric businesses, all stakeholders need to be prepared to navigate them, should the worst-case scenario present itself.