What happens to my IP if I default on an IP-backed loan?

Full Explanation

If you default, the lender turns to its security. The consequences depend heavily on the structure used at drawdown. The strongest form is a legal mortgage or assignment by way of security, where legal title transfers to the lender at the outset with a licence-back so you keep operating; on default the lender can sell or assign the IP directly. A fixed charge over identifiable rights (for example, named patents by number) lets the lender realise those specific assets. A floating charge, the weakest form, crystallises on default and captures whatever IP falls within it, but ranks behind fixed charges and preferential creditors in an insolvency. Crucially, enforceability turns on perfection. A charge over IP must be registered at Companies House within 21 days under section 859A of the Companies Act 2006, or it is void against a liquidator or administrator, and the security is also recorded at the UK IPO. If your lender perfected correctly, its claim is robust. The insolvency waterfall then runs: fixed charges first, then insolvency expenses, preferential creditors, floating charges, and unsecured creditors last, so where your IP sits in that ranking determines how much the lender recovers and whether anything remains for others. In practice, enforcement rarely means the lender simply seizes and shelves your intellectual property. Because IP is worth most as a going concern, a lender will usually seek an orderly disposal, a licensing arrangement, or a sale of the business as a whole, aiming to maximise recovery and minimise its loss given default. This is also why operating cash flow, not collateral, is the primary repayment source; well-run facilities are structured so the loan is serviced from the revenue the IP underpins, and enforcement is the fallback of last resort. Before signing, map exactly what is being charged and how. Ask which charge type applies, whether a licence-back preserves your right to trade, how the security ranks against existing creditors, and what cure period you get before enforcement. Have a corporate-finance adviser or solicitor review the debenture and the Companies House filings, and keep covenant headroom under active watch so you can act early if serviceability tightens rather than waiting for a formal default.

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