McCallum, in the Matter of Re Holdco Pty Ltd (Administrators Appointed) (No 2)  FCA 377 (21 April 2021)
Valuing intellectual property – registering security interests concerning intellectual property on the Personal Property Securities Register (“PPSR”)
The case contains a useful analysis of the different ways of valuing assets, including intellectual property, and highlights the need for parties to register security interests in intellectual property assets on the Personal Property Securities Register (PPSR) under the Personal Property Securities Act 2009 (Cth) (PPSA).
It is not unusual to see a clause in an agreement in the form:
All Intellectual Property Rights in the Services and Deliverables (Developed IP) … vests in Sargon immediately upon payment to GrowthOps for same, and GrowthOps hereby assigns, and must procure that its personnel assign, all Intellectual Property Rights in the Developed IP to Sargon.
What many might not know is that the effect of such a clause is to grant a security interest over the intellectual property in favour of the author of the intellectual property (here GrowthOps) within the meaning of section 12 of the PPSA, and a failure by the author to register that interest on the PPSR means that ownership of the intellectual property vests in the proposed assignee of the intellectual property (here Sargon), even though it has not been paid for, should an administrator be appointed to the proposed assignee. Before we return to this curiosity, first some background.
The plaintiffs in this proceeding were appointed as administrators of numerous Sargon Group entities on 4 February 2020. Between the date of their appointment as administrators and the end of April 2020, the plaintiffs negotiated a sale of certain of the businesses and assets of the Sargon VA Entities to the Cloverhill Group (“Cloverhill Sale”). The sale was complicated by disputes over the ownership of, and security interests held in, certain of the assets to be sold.
As a result of those disputes, the plaintiffs sought urgent relief from the Court under ss 442C and 447A of the Corporations Act 2001 (Cth) for leave to dispose of:
- all intellectual property used or in the possession of Sargon Services, including intellectual property in relation to the software systems known as “Arcadia”, “Sentinel”, “Metropolis”, “API Impact” and “Sargon Pay”, and in relation to various trade marks and domain names; and
- such property of the Sargon VA Entities as is (or may be) subject to a security interest (including under the PPSA).
On 1 May 2020, the Court made orders under ss 442C and 447A of the Corporations Act to facilitate the Cloverhill Sale as sought by the plaintiffs.
The administrators then completed a sale of the Sargon Group’s assets to the Cloverhill Group. This included shares in certain subsidiary companies, intellectual property, plant and equipment and other assets, with the net sale proceeds totalling $29.6 million.
The case involved a number of interested parties, including Westpac and Sargon Capital, the ultimate holding company of the Sargon Group to which receivers had been appointed, who had security and other interests in specific assets.
The task undertaken by the Court was to apply the Retained Proceeds for the purpose of meeting claims that any party had as owners of, or security holders in, the property that was sold. Justice O’Bryan noted that in meeting such claims, the Court is carrying into effect the requirement of s 442C(3) of the Corporations Act to protect adequately the interests of such parties, to the extent the Court found that they were owners or security holders in respect of the property that was sold.
The parties agreed that the issues to be determined were, inter alia:
- the valuation date and basis of valuation of assets;
- ownership of assets such as domain names, business names and trade marks; and
- valuation of assets and allocation of value to sale proceeds.
On the first issue, it was determined that the assets were to be valued at the date of the sale. The basis of valuation was market value or fair market value, but the experts differed widely on the methods for determining this.
In relation to the second issue, a key debate concerned what was called Developed IP in the ultimate business sale documentation and whether GrowthOps was owner of this IP and entitled to a proportion of the Retained Proceeds. GrowthOps’ arguments involved detailed analysis of the PPSA. Justice O’Bryan noted that case law from New Zealand, Canada and the USA was relevant to the interpretation of the PPSA.
In short, because GrowthOps failed to register its interest under the PPSA over the Developed IP, by virtue of s 267 of the PPSA, the security interest vested in Sargon Capital once an administrator was appointed to it. As set out in the clause at the commencement of this note, under the relevant agreement, the Developed IP was to be assigned to Sargon immediately upon payment to GrowthOps for the same. The effect of that agreement was to grant a security interest in the Developed IP in favour of GrowthOps within the meaning of s 12 of the PPSA – in particular it was a ‘retention of title clause’. That was because the agreement “assigned the whole of the future copyright in software created under the agreement to Sargon Capital, but on the condition that the copyright would not vest in Sargon Capital until it had paid for the software” – such an arrangement “is a textbook example of a retention of title clause”. If a security interest within the meaning of s 12 of the PPSA is not registered on the PPSR, and an administrator is appointed, the security interest held by the secured party (GrowthOps) vests in the grantor (Sargon), pursuant to s 267 of the PPSA.
Turning to the issue of valuation and allocation, these tasks were complicated by a significant number of factors and differing approaches taken by the experts. For example, in the context of valuing the intellectual property, “Mr Hall used a “relief from royalty” or “notional licensing fee” methodology, whereas Mr Samuel used a depreciated replacement cost methodology (albeit principally based on historical cost as recorded in the balance sheets of Sargon Capital and Sargon Services).” His Honour analysed the utility of each of these methods, identifying that, at least in this case, Mr Samuel’s methodology was more robust given Mr Hall’s methodology suffered from a lack of relevant information.
Indicating the difficulty faced by his Honour, Justice O’Bryan concluded that he considered that aspects of the methodologies applied by each of the expert valuers to be preferable, but none to be adoptable in their entirety, forcing his Honour to undertake some calculations where the relevant calculation had not been done by any of the experts.
In determining the appropriate value, the Court took into account that the Cloverhill Sale was a distressed sale, Justice O’Bryan concluding that the total sale proceeds cannot be regarded as fair market value in those circumstances. The sale proceeds were less than fair market value by reason of the exigencies then facing the companies in administration and the need for the plaintiffs to conclude a speedy sale in order to prevent the loss of all value in those companies. The Court considered whether the value reduction brought about by the distressed circumstances of the sale should be applied proportionately across all of the assets, ultimately deciding it should.
In relation to the IP assets, Justice O’Bryan concluded there was insufficient evidence that intellectual property was deemed to be more important than other asset classes by the purchaser and should be ascribed a higher value accordingly.
There was also debate about the role of an offer to purchase property that is not accepted and whether this is evidence of market value. Justice O’Bryan concluded that the authorities make clear that the probative value of evidence of an offer will depend on the issue to be determined and the circumstances in which the offer is made.
His Honour engaged in a thorough analysis of how intellectual property, among other assets, may be valued. While that analysis is, to a great extent, very case specific, no doubt those who might have to engage in such a process in the future will find this case useful.