Using IP as Collateral in Thailand
by Suebsiri Taweepon and Ploynapa Julagasigorn (Tilleke & Gibbins - Thailand)
Thailand’s new Business Security Act (effective July 2016) allows borrowers to use their IP assets as collateral in securing loans, while retaining the right to possess and to put such collateral to commercial use during the secured period.
Thailand’s Business Security Act B.E. 2558 (2015) (“the Act”) became effective on July 2, 2016. Although the Act is sometimes called the “Secured Transaction Act” or the “Business Collateral Act” in English, these names all refer to the same legislation that provides tools to allow borrowers in Thailand to use their assets as collateral to secure their loans.
Background to the Act
Prior to the enactment of the Act, borrowers were not allowed to retain possession of movable assets pledged for a loan, as under the Civil and Commercial Code, the borrowers must deliver the security asset(s) to the creditor.
To facilitate increased access to funds for businesses, the Act allows borrowers to retain the right to possess collateral and to put the collateral to commercial use for the duration of the secured period. If a borrower defaults, the creditor may take title to the collateral or sell it at a public auction.
The Act allows both tangible and intangible assets to be used as collateral. New forms of collateral available under this law include businesses, accounts receivable, inventories, intellectual property (IP), and other assets prescribed by ministerial regulations.
In order to use an IP asset as collateral, after the borrower (the IP owner) executes a written agreement with their creditor (financial institutions), the creditor must take steps to register the security agreement with the Department of Business Development. The borrower can retain the right to possess the collateral (the IP asset) and to put the collateral to commercial use, unless both parties agree otherwise.
In practice, with limited experience and understanding in how to value IP assets, many Thai creditors prefer to accept tangible assets from borrowers, as opposed to intangible assets like IP. An IP valuation is therefore required to gather substantial information about that IP asset. To assist potential borrowers, IP lawyers can provide an analysis of each factor, which includes, for instance, qualitative characteristics or standards, validity of the protection for an IP asset, duration of said validity, the risk of infringement claims, and the strength of possible defenses. These factors can be determined on a case-by-case basis by IP professionals.
The Act does not provide a definition and/or specific parameters of IP that can be used as collateral. To illustrate, if IP owners would like to use their trademarks as collateral, it is possible that their trademarks can be registered, or the subject of pending applications, in several classifications of goods and services. It is still unclear whether the law allows an IP owner to use a pending application as collateral. This raises the same question for patents, which are known to take considerable time to register while the invention that will be patent-protected may be able to be commercialized immediately. In such a case, an IP owner might wish to use his/her pending application as proof of IP rights to the creditor.
On the other hand, some types of IP rights do not require registration. For example, some of the most valuable business assets include advanced software products, which are protected automatically under copyright law. Another example, trade secrets, or confidential information that has extremely high business value (e.g. the formula for a beverage or pharmaceutical product or process), are not currently provided recordation services by the Department of Intellectual Property.
It is perhaps these possibilities and challenges that have led many government agencies, IP practitioners, and IP owners to become fascinated with and actively discuss the Act, which undeniably poses important implications for businesses that are exploring opportunities to effectively use IP assets as collateral in Thailand.