Software as security in bankruptcy

How specific must software be described in a deed of pledge in order to be able to offer a creditor security in the event of bankruptcy? This question was at stake in the judgement of the Dutch Supreme Court in the ING/Schepel-case of 3 April 2020 (ECLI:NL:HR:2020:590).

Case facts

CompLions is a software company. ING provided credit to CompLions in 2008, whereby CompLions pledged all its current and future business assets to ING (as far as possible in advance).

CompLions pledged (part of) its software to BDO on July 15, 2016. In this deed of pledge the software of CompLions is explicitly described.

CompLions is bankrupted on 16 May 2017. After the bankruptcy CompLions wanted to make a restart and to buy the aforementioned software from the bankruptcy receiver. After approval of ING and BDO the receiver sold and delivered the copyrights on the software to the re-started company CompLions-GRC B.V. A purchase price of € 155,000 was paid for this. After the sale, ING submitted a claim of € 140,951.13 to the receiver.

The receiver refused the claim. The receiver and BDO (hereinafter referred to as: receiver c.s.) stated that ING had no valid pledge on the software. As a result, ING would not be entitled to a priority claim on the income from the sale of the software. The receiver in the bankruptcy ultimately goes to court and claims a declaratory judgement that ING had not obtained a valid pledge on the copyrights on the sold software.

Case in first instance

The Court in first instance awarded by oral judgment the claim of the receiver c.s. and therefore declared that ING had not obtained a valid pledge on the copyrights to the software sold. According to the court, the description in the deed of pledge was so broad that it included not only goods on which a pledge can be established, but also goods on which this is not possible (e.g. registered goods). The Court considered that a description that boils down to the fact that all goods are pledged, including the copyrights to the software, is insufficiently determined and also insufficiently determinable (i.e.: not described specifically enough). In this respect, the court referred to HR 20 September 2002 (Mulder q.q./Rabobank).

In HR Mulder q.q./Rabobank, the question was how detailed the description of a claim should be in order to be validly pledged. In this ruling, the Supreme Court ruled that it is sufficient for a pledge to be established that the deed of pledge contains such information that, possibly afterwards, it can be used to determine which claim(s) it concerned.

In this case, however, the Court in first instance established that the Supreme Court in the Mulder q.q./Rabobank did not refer to a deed of pledge in which a lien has been established on “all assets”, but on a specific category of assets, namely claims against third parties. These claims are characterised by the fact that their existence and extent can be deduced from the pledgee’s administration. According to the Court, this is not the case with the software in this matter.

Directly to the Supreme Court

ING appealed the decision of the court in first instance directly at the Dutch Supreme Court (Hoge Raad) and thus skipped the Court of Appeal. ING complains in cassation that the court has misunderstood that the requirement of sufficient certainty of the description should also apply to the pledging of goods other than claims against third parties if the deed of pledge contains such information that, possibly afterwards, it can be used to determine which goods are involved.

The Supreme Court agrees with ING’s reasoning. In its ruling, the Supreme Court refers to HR 16 May 2003 (X/Rabobank). This judgment follows the same line of reasoning as HR Mulder q.q./Rabobank, but adds another part about the interpretation of the deed of pledge. With reference to the recent judgment: HR 22 November 2019 (Holding BV/Heijmans Infra BV), it subsequently rules that it cannot be excluded that copyright may also be pledged in a general deed of pledge for as long as the deed of pledge contains enough information to determine, possibly retrospectively, that this copyright belongs to the pledged property.

The Supreme Court concludes that the Court in first instance has misunderstood that (pledged) goods other than claims against third parties can also be pledged. This includes software copyright. The Supreme Court then explicitly states that it is not required that the existence and scope of the pledged copyright should be deductible from the records of the bankrupt company, or that this copyright should be mentioned on the balance sheet of the bankrupt company. Whether copyright belongs to “all present and future Business Assets”, as described in the deed of pledge between ING and CompLions, can also be determined on the basis of objective data other than the records and balance sheet of CompLions.

The Supreme Court overturned the court’s judgment and referred the case back for further consideration and decision.

Conclusions

The criterion as described in Mulder q.q./Rabobank also applies to copyrights. In fact, this criterion probably applies to intellectual property rights in general. A general pledge may therefore be sufficient to establish a security right on all intellectual property rights, provided that the deed of pledge contains sufficient objective data to determine what exactly has been pledged afterwards.

This judgement can also be important when assigning and transferring intellectual property rights. Especially when after such transfer discussion arises about what exactly has been transferred.

Would you like to know more about pledging, assigning or transferring software or IP rights in general? Please contact Ernst-Jan Louwers, Evelyn Peerboom-Gerrits of Frank Rutgers.

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