Skillful bankruptcy is an investment in the future.

© I. Tleulin

THE ROLE OF INTANGIBLE ASSETS IN BANKRUPTCY.

4 may 2018

The value of intangible assets in business, and, consequently, in bankruptcy cases, is growing steadily, turning them into a dominant force. There is also a growing need for more thorough approaches to valuing intangible assets in bankruptcy, as companies that have experienced bankruptcy are increasingly recognizing the importance of intangible assets in today's business environment. However, bankruptcy specialists should understand that the more methods for valuing intangible assets, the more situations where the accuracy of the valuation can significantly affect the course of a bankruptcy case. In this article, we will consider a number of situations where the correct assessment of intangible assets can be of critical importance in bankruptcy work.

 

Identification of intangible assets

Valuation of intangible assets is a financial analysis and in no way legal. However, the legal strategy can significantly affect the assessment. Similarly, evaluation can have a direct impact on legal strategy.

Due to the characteristics of today's world economy, the value of intangible assets in a company can easily exceed the actual value of tangible assets by 2-3 times. For example, the amount of gross investment in intangible assets in the United States is estimated at least $ 1 trillion. in year. Despite the growing importance of intangible assets in modern commercial activities, they are often overlooked in the financial documents of companies, and as a result, bankruptcy specialists cannot properly consider the case. As part of a recent study, a survey was conducted among company executives to find out if the value of the intangible assets of their companies is listed in the books. Only 10.3% of those surveyed knew firmly that intangible assets were officially recorded in their companies, while the remaining 89.7% replied that they did not have records at all or were not sure that their companies kept records.

The lack of knowledge regarding the accounting for intangible assets is of particular concern given the staggering diversity and prevalence of intangible assets. Many lawyers and entrepreneurs are certainly familiar with more traditional forms of intangible assets, such as copyrights, patents, and trademarks. However, many forms of intangible assets are often overlooked. These include franchising agreements, product names, mailing lists, logos, music and advertising melodies, company concepts and slogans. In addition, intangible assets include the development and growth of technology in business, including Internet URLs and computer operating systems. Even a person’s name can be considered an asset. These assets are often overlooked, although in reality they may be the most valuable assets. For example, the bankrupt Internet company K.B. Toys bought its website from eToys for $ 3.4 million when the latter's assets were sold as a result of bankruptcy in 2001. Which is significantly different from the amount paid for inventory of a bankrupt company.

The authority of lawyers

A professional appraisal of these intangible assets is important for many bankruptcy cases, and the credibility of the debtor's lawyer to the judge plays an important role in such cases. The ability of a lawyer to describe and discuss in detail the intangible assets of the debtor demonstrates his understanding of the activities and financial resources of the debtor and provides certain amenities for the judge. A judge is more inclined to accept the position of a lawyer in a bankruptcy case when he is confident that the lawyer understands the activities of the debtor and the role of intangible assets in its activities.

It is important for a lawyer to understand not only the value of intangible assets and how this value is formed if he wants to receive the favor of a judge in protecting these assets. One of the most significant differences between tangible and intangible assets is that the value of intangible assets can be extremely volatile. Instability is expressed in the fact that the value of the debtor's intangible assets can seriously reduce even the bankruptcy process itself. Most intangible assets, such as trade secrets, lose a large, if not all, part of their value if disclosed. Therefore, lawyers should diligently look for ways and methods to preserve the value of these assets. He must understand how the value of intangible assets is calculated, as this will help him protect these assets from loss of value in the course of a lawsuit. It is the understanding of the role of intangible assets in the activities of the debtor that can help achieve for the lawyer a much greater indulgence of the judge.

Specifying the list of intangible assets in the debt repayment schedule

As soon as the debtor is declared bankrupt, it is first necessary to prepare a debt repayment schedule. This responsibility is often assigned to the accounts department of the debtor company, which has an incomplete understanding of the processes occurring in the company’s activities and their importance. As a result, the debt repayment schedule through the sale of assets merely reflects the debtor's balance sheet. As noted above, most debtors do not indicate intangible assets in their financial statements. Therefore, the lawyer must carefully check all recorded and unaccounted intangible assets. Valuation of intangible assets can be carried out tentatively. In this case, it is necessary to adjust their cost after consulting with an expert. But the primary task is to identify intangible assets and disclose information about them. If intangible assets are not indicated in the debt repayment schedule, the judge may reject the application for the protection of intangible assets. Lenders may view silence about intangible assets as an attempt to hide their importance and potential value.

Profitable use of intangible assets

When the issue of the sale of intangible assets is considered, it is more difficult to evaluate them than the valuation of tangible assets. A distinctive feature of most intangible assets is that their value can vary significantly depending on whether they are sold or used in a reorganized company. The sale of intangible assets can affect their value both positively and negatively. A competitor who is interested in obtaining a web address or customer base for their current activities can pay a significant amount for an asset that was of little use to the original owner or had no value at all. On the other hand, most intangible assets have a significantly higher value, being in the hands of the owners than after the transfer to the new owners. Therefore, the lawyer must take into account the method used by the debtor to measure its intangible assets, if they are reflected in the financial statements. The assessment of the debtor may have little to do with their real value.

When considering several alternative reorganization plans, knowledge and proper use of intangible assets can play a decisive role in approving or rejecting a plan. The possibility of using intangible assets as additional security can help the interested party to convince the judge that her plan is fair or in the best interests of a certain category of creditors. Even when there are no alternative plans, demonstrating that the presence of intangible assets is taken into account can contribute to a faster approval of the debtor's plan.

Auction or negotiated sale

Valuation of intangible assets also plays a significant role in liquidation. In recent years, the sale of intangible assets has become a common and profitable business, so the identification and accurate assessment of these assets is very important. Due to the growth of new markets and sales methods, it is important to know where and how to sell intangible assets. They are mainly sold through traditional private contractual transactions. However, the sale of intangible assets at auctions is becoming increasingly popular. In 2004, Commerce One's intellectual property portfolio was auctioned off by Novell Inc. for $ 15.5 million. But these figures are insignificant compared with $ 121 million in proceeds for the assets of Pillowtex Co. (mainly intellectual property in the form of a company brand) in 2003.

Whatever way intangible assets are sold - in the traditional way, at auction or in any other way, the income that they can bring is quite tangible and material. For example, at the end of 2001, Digimarc Corp purchased its structural unit, which issues ID cards with a photo of the owner, from the bankrupt company Polaroid for $ 56.5 million. Combining Polaroid's large-scale customer contracts with Digimarc's patented digital watermarking technology, the latter helped boost sales with an annual growth rate of 242% over five years.

Intangible assets as pledge

The availability of valuable intangible assets can play a decisive role in overcoming a difficult situation. The value of intangible assets serving as collateral for creditors undoubtedly plays an important role in determining the debtor's equal rights to mortgaged property. Even if he does not have equal rights to a pledge, the presence of an intangible asset may provide the debtor with a basis for arguing that the property is necessary for effective reorganization if this intangible asset is critical for the continuation of the activities of the debtor company.

Since intangible assets can be in the form of contracts that are to be executed in the future, early identification, valuation and planning plays a very important role in managing the debtor's property. If intangible assets are presented in the form of contracts to be executed in the future, the debtor may be faced with extremely short deadlines in order to decide whether to consider these assets or refuse them. Regardless of which decision is made, the ensuing obligations arise, and the ability of the debtor to accept and assign rights and obligations under a contract to a third party may be constrained by restrictions.

The presence and valuation of intangible assets also plays an important role in financing the debtor or financing the costs of removing a company from bankruptcy. Suppliers of such loans have become more willing to accept intangible assets and the regular receipt of income from them as collateral. Congress Financial New Jersey recently provided Maidenform Inc. a $ 60 million loan to recover from a bankruptcy situation, partly relying on the intangible assets of the company, which were accepted as pledge. Understanding the value of intangible assets and demonstrating this value to potential creditors may open up companies with financial difficulties in new ways to secure a loan.

Confidentiality

Restrictions on the use of intangible assets, such as an electronic database of customers, may affect their value. In the case of eToys, the Texas Attorney General has determined that the privacy policy that existed before the bankruptcy of the company prevented the acquisition and use of the eToys customer database by other companies. Some agreements regarding this case required the debtor to remove the names of retail customers and other information about them from the database upon request. On the other hand, in 2000, Disney acquired a customer list from Toysmart to destroy this list. Disney had a 60% stake in Toysmart, which promised customers to keep confidential. To fulfill this promise, Disney bought the list. Of course, the amount paid, which reportedly amounted to $ 50,000, is not that big, but it was of great importance to those concerned with the privacy policy.

Conclusion

The role of intangible assets in bankruptcy is often not taken into account and underestimated. Of course, in large cases involving electronic commerce, intangible assets are in the spotlight. However, bankruptcy professionals should not ignore the potential existence of intangible assets in other business situations. The outcome of a bankruptcy process may depend on the identification and use of intangible assets.

Поделиться
Отправить
 
LEGAL REGIME OF PUBLICATIONS
 
Materials posted in this section of the website: (1)the subjective opinions of the authors; (2)not an official explanations and interpretations of the norms of Kazakhstani and International law; (3)relevant on a date of their publication; (4)exclusively informative and have recommendatory character; (5)Can be used in any form with the written consent of an authorized representative of "Tleulin and Partners" Law Firm or via the link to the website.