What Happens to a Company's Intellectual Property (IP) When the Company is Dissolved?

When a company is dissolved, the fate of its intellectual property (IP) can vary significantly. This article explores the legal and practical implications, especially in the context of bankruptcy and liquidation.

Bankruptcy and Intellectual Property

In the event of a company's bankruptcy, a bankruptcy trustee takes control of all company assets, including valuable intellectual property (IP), in an attempt to convert them into revenue to repay creditors. This means that IP such as trademarks, patents, and software can be sold like any other asset.

While the company is under bankruptcy proceedings, other entities might attempt to steal rights to the bankrupt company's IP. This is a calculated risk, as the trustee might lack the financial resources to assert these rights effectively. Therefore, the bankruptcy trustee has to carefully evaluate the cost of losing these assets.

Software Source Code and Intellectual Property

One of the critical assets affected by a company's dissolution is software source code. These codes are essential for maintaining and updating the software. When a company goes defunct, the software source code may become part of the bankruptcy estate and change ownership as assets are sold off. As a result, savvy software users may place versions of the software source code in escrow with companies like Iron Mountain to ensure access in the event the provider goes into bankruptcy.

Administrators and Intellectual Property

When a company is under receivership, administrators have the authority to sell all assets, including intellectual property. Intellectual property is sold to satisfy the company's debts, emphasizing its value as a corporate asset.

After a company is officially dissolved, its assets, including IP rights, are typically distributed to shareholders or used to pay off the company's debts. If the IP rights are not transferred to a new owner through a purchase or assignment agreement, they may be sold to the bankruptcy trustee to settle the debt. In exceptional cases, a company's IP rights might be transferred to a successor in interest who takes over the business.

Bankruptcy Process

The term “bankrupt” became obsolete in 1979. In a Chapter 7 bankruptcy, the assets of the company, including its IP, are liquidated and sold by the bankruptcy trustee. The proceeds are used to pay administrative expenses and then creditors. In a Chapter 11 bankruptcy, unless the terms of the Chapter 11 plan provide otherwise, the company retains its assets, but the trustee can still manage and sell them to satisfy debts.

A bankruptcy is not an opportunity for individuals to steal the company's assets; this would constitute theft and be illegal. The bankruptcy process is designed to protect the interests of creditors and ensure that the company's assets are used to repay debts as fairly and efficiently as possible.

Understanding the legal and practical implications of a company's dissolution and the disposition of its IP is crucial for both business leaders and IP holders. Safeguarding IP, especially software source code, becomes essential in the face of potential dissolution. Consulting with legal and financial experts can provide valuable guidance in navigating these complex situations.