Contributors
The Intellectual Property Enterprise Court has dismissed[1] a claimant's application for summary judgment which alleged that a licensee had infringed its registered trade marks and had breached the terms of its licence.
Having heard about the circumstances under which the claimant had acquired the trade marks, His Honour Judge Hacon concluded that the defendant licensee could probably prove at a full trial that the trade marks had been sold at an undervalue from a proprietor whose solvency at the time would have been in doubt.
Accordingly, the judge ruled that the defendant had a real prospect of establishing that the assignment of the marks to the claimant, had never been effective and was void.
Background
The trade mark LUNAR is a well known brand in the UK caravanning sector and was associated for many years with Lunar Caravans Limited ("LCL"), a business based in Preston that designed and manufactured light touring caravans. LCL was wholly owned by Lunar Holdings Limited ("LHL"), a company whose focus is property rental.
In October 2018, LCL assigned to LHL all of its registered trade marks, including those for the LUNAR brand (the "Trade Marks"), for the sum of £380 (the "Assignment"). At the time of the Assignment, LCL had three directors – "BM", "DM" (BM's child) and "LR". BM owned more than 99% of the share capital of LHL (with BM's partner, "SM", owning the rest) and was also a director of LHL, along with SM and LR.
Nine months after the Assignment, in July 2019, an administrator was appointed in relation to the affairs of LCL. A few weeks later, the business of LCL was sold to a specialist engineering company based in South Africa which, by way of a licence granted by LHL (the "Licence"), was permitted to continue to trade in the UK under the LUNAR brand as Lunar Automotive Limited ("LAL").
Under the Licence, LAL agreed, inter alia: (i) to pay monthly to LHL a royalty of £1,667 for use of the Trade Marks; (ii) to indicate on any products or marketing materials that the Trade Marks were used under licence from LHL; and (iii) not to do any acts that may weaken, damage or be detrimental to the Trade Marks or their reputation. LAL also uses the domain name lunarcaravans.com. However, just a couple of months into the Licence, LAL ceased making the royalty payments to LHL.
In February 2020, the Licence was terminated. Nevertheless, LAL continued to use the LUNAR brand and name, so LHL issued proceedings alleging that LAL has infringed the Trade Marks by using identical and/or confusingly similar signs to the Trade Mark for identical goods, and has breached its obligations under the Licence.
By way of its defence and counterclaim, LAL pleaded that the Assignment was ineffective for being in breach of various statutory and common law duties and, as a result, LHL does not own the Trade Marks and no basis for bringing the proceedings.
Attacking the assignment
LAL advanced three reasons for why the Assignment is void, referring to sections of the Companies Act 2006 (the "Act"):
- The directors' failure to promote the success of LCL – section 172(1).
- The directors' abuse of their powers by the directors – section 171(b).
- The Assignment constituted an unlawful distribution – section 830.
Under s.172(1) of the Act, directors must act in the way they consider, in good faith, would be most likely to promote the success of the company "for the benefit of its members as a whole" [our emphasis]. Under s.171(b) of the Act, directors must only exercise powers for the purposes for which they are conferred.
The judge agreed with LAL's counsel that, as the consequences in law were the same, the Court could consider together the alleged breaches of s.172(1) and s.171(b).
Section 172(3) of the Act states that, in certain circumstances, the directors must consider or act in the interests of the company's creditors. One of those circumstances is where, at the date of a transaction, the solvency of the company is in doubt.
Referring to previous case law,[2] HHJ Hacon explained the resolution of the conflict which arises when the interests of creditors outweigh the interests of the members. In a solvent company, the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. However, when there is doubt over the solvency of a company, the interests of the creditors can "intrude" because at that point, creditors "become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets".
From this review, the judge concluded that quite simply, even if the Court were to hold that the Assignment was voidable rather than void, the shareholders of LCL could not ratify the Assignment where the company is of doubtful solvency. With regard as to what was the financial state of LCL at the time of the Assignment, there was contrary evidence submitted to the Court.
- BM, a director of LCL and LHL and the majority shareholder of the LHL, provided a statement about how LCL was solvent at the time operating at a small profit and with total assets exceeding liabilities by about £1.5 million. BM explained that, shortly after the Assignment, LCL experienced a substantial drop in sales as a result of LCL's customer base becoming anxious about the UK's imminent departure from the European Union
- In answer to this position, LAL submitted the administrator's initial progress report which contained draft accounts indicating that, at the time of the Assignment, LCL incurred a loss before tax of about £3 million and had creditors of about £9.8 million as against total equity of just £1.1 million.
LAL's case for why the Assignment was an unlawful distribution from LCL to LHL was based on both common law and the Act. Section 830(1) of the Act states that a company may only make a distribution out of profits available for the purpose. Section 830(2) defines such distributable profits as comprising "accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made".
Although the judge had doubts about the adequacy of the pleading on s.830, since the the application for summary judgment was dismissed, HHJ Hacon gave LAL the opportunity to review and amend its pleading as LAL had a real prospect of success of showing at trial that the Assignment did constitute an unlawful distribution.
Case commentary
Intellectual property rights are often the subject of group reorganisations. Against such a background, this decision by the Intellectual Property Enterprise Court is a stark reminder that, in circumstances where the solvency of the assigning party might be in doubt, rights cannot be transferred to related persons without proper consideration being first given by the directors as to the true value of such rights and the impact that their transfer may have on the viability of the assignor.
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[1] Lunar Holdings Limited v Lunar Automotive Limited [2020] EWHC 3415
[2] The Court of Appeal decision in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 and the High Court decision in GHLM Trading Limited v Maroo [2012] EWHC 61 (Ch)
