Steps to taking security over software
In the modern and increasingly tech-focused world, software technology is often a valuable asset of a potential borrower. Alongside this is a need to ensure that lenders considering taking security over borrower groups with software as a key asset can walk the delicate line between ensuring that such security over the software is valid and, in the event a receiver is appointed to the borrower, readily marketable/ disposable and allowing the borrower sufficient flexibility to use the software in the ordinary course of its business. In addition, all of this needs to be done in a manner that is most efficient and cost effective, both to implement and to manage.
This note contains a brief summary of the steps needed to be taken to effect security over software.
2. Steps to take security over software
a. Security Agreement
The first step to take security over software is for a security agreement to be entered into by the borrower in favour of the lender under which the borrower either charges or assigns by way of security its right, title and interest in the software. For more detail as to the benefits of a charge as against an assignment, please see our more detailed briefing paper on taking security over IP.
However, it is important to note that if security is granted by way of an assignment, this will typically need to be accompanied with an exclusive licence back to the borrower to enable the borrower to use the software in its day to day business (terminable in the event of an event of default).
b. Intellectual property rights associated with software
Care should be taken to consider the types of intellectual property rights that may affect software and what additional steps may need to be taken to perfect the security in respect of such intellectual property rights.
In particular, copyright, patents, trade secrets and trademarks may be relevant to software. If patents or trademarks are relevant, then lenders should consider whether their security interest should be recorded on the relevant register, both in the UK and in any other relevant jurisdiction. For more detail as to registration of security interests on intellectual property registers, please see our more detailed briefing paper on taking security over IP.
Copyright and trade secrets cannot be registered on any register and as a consequence neither can interests in such rights.
c. Additional practical steps
A lender will want to ensure that in the event that it appoints a receiver to the borrower that the receiver can sell the business, including the software and all rights associated with the software and the product of the business to a third party.
Accordingly, when the lender takes security over the software, it should consider whether, in addition to requiring the borrower to grant to it an assignment or a charge over the relevant software, it should take additional practical controls over the relevant software.
One such option is for the lender and the borrower to enter into an escrow arrangement whereby an escrow agent agrees to hold the software in escrow and to release it to the lender on enforcement (or the borrower upon satisfaction of the liabilities). This process can be costly and an administrative burden since it needs to be maintained during the life of the security, however, it can be beneficial for borrowers sensitive to disclosing their software to any third parties.
A second option is for the lender to be given a copy of the software (and further copies, each time such software is updated) along with copies of relevant user guides. This would ensure that, in the event of enforcement, the receiver would have a copy of the software. Whether this is appropriate in the circumstances would depend on how sensitive a borrower is to allowing such information to remain in the possession of the lender.
In the event that the software is licenced to the borrower's business (rather than owned by it) and such licence is of sufficient importance to the business that the lenders would want to be able to sell such licence with the business in the event of enforcement, the lender may wish to consider entering into an agreement directly with the licensee, under which the licensee would agree, amongst other things, to permit the licence to continue on foot under certain conditions in the event of enforcement.