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Published online by Cambridge University Press: 16 April 2015
This paper examines the legal impediments facing the acceptability of intellectual property as collateral in Malaysia. As Malaysia practises a dual banking system, conventional and Islamic, both running parallel to each other, the position of intellectual property under the Islamic banking system will also be analysed. This, in turn, requires a deeper elaboration of principles relating to collateral security or rahn in Shari'ah law. The paper also proceeds to explore the suitability, acceptability and practical risks of allowing intellectual property as a form of security in comparison to “physical assets”.
1 Phillips, Jeremy, “Intellectual Property as Security for Debt Finance- A Time for Advance?” [1997] 6 Eur. I.P. Rev. 276 Google Scholar; Sharpe, Anna, “Some Insolvency Aspects of Intellectual Property” (1991) 2 IPJ 60 [Sharpe, “Some Insolvency Aspects of Intellectual Property”]Google Scholar; Morley, Gavin E., “Trade Marks by Way of Security- The South African Situation” (1991) 2 IPJ 98 Google Scholar; Cohen, Schlomo and Klagsbald, Ron, “Security Interests in Intellectual Property in Israel” (1991) 2 IPJ 148 Google Scholar; Sexton, Christopher, “Security over Intellectual Property in Australia” [1991] 2 Eur. I.P, Rev. 65 [Security over Intellectual Property in Australia]Google Scholar; Sumpter, Paul, “Creation and Enforcement of Security Interests in Intellectual Property: A New Zealand Perspective” (1991) 2 IPJ 77 Google Scholar; Jacqueline D. Lipton, Security Over Intangible Property, (Sydney: LBC Information Services, 2000) [Lipton, Security Over Intangible Property].
2 This stands for “Interest Free Banking Scheme”.
3 The move towards full-fledged subsidiaries is based on the Governor's indications in her speeches and briefings made by the Central Bank to the banking industry in Malaysia.
4 Examples of the new Islamic subsidiaries are: Commerce Tijari Bank Bhd; RHB Islamic Bank Bhd; and Hong Leong Islamic Bank Bhd.
5 Act 372, which came into force on 1.10.1989 vide PU (B) 490/89. However, for scheduled institutions, the effective date of enforcement was 1.1.1990 vide PU (B) 490/89. See also other amendments to the Act, i.e., Act A954 of 1996; and Act A1144 of 2002.
6 Act 276, which came into force on 7.4.1983 vide PU (B) 182/83. See also the other amendments to the Act, i.e., Act A634 of 1985; Act A1145 of 2002; and Act A1214 of 2003.
7 See section 124 of BAFIA, which was amended by the Banking and Financial Institutions (Amendment) Act 1996 (ACT 954). Prior to the amendment, section 124 expressly said that the Act would not apply to Islamic banks. The amendment made in this section is to formalise the carrying on of Islamic banking and financial businesses by licensed institutions and to establish a Syariah Advisory Council; see the explanatory note to the Amendment Bill (JIL 40 No 8, Tambahan No 3, DR 8/96). See also Bank Negara Malaysia's Guidelines on “Skim Perbankan Tanpa Faedah” (SPTF) for Commercial Banks, July 1993 which allowed for some Islamic banking window operations by the BAFIA banks, albeit in a limited manner until the formalised amendment in 1996.
8 Section 2 of IBA and section 124 of BAFIA.
9 Section 3(5) of IBA and BNM's Guideline on the Governance of Syariah Committee for the Islamic Financial Institutions (BNM/GPS 1, dated December 2004, but effective on 1st April 2005).
10 Section 13A of IBA and section 124(3) and (4) of BAFIA; read together with section 16B(1) of the Central Bank of Malaysia Act 1958.
11 Shari'ah literally means a path to the watering place, implying the path to the source of a meaningful life. Legally, it means the divinely revealed law, identified by its primary sources, i.e., the Quran and the traditions of the Prophet Muhammad s.a.w. (Sunnah)
12 The nearest concept in Islamic legal terminologies for collateral security is ‘rahn’
13 Fiqh literally means understanding. Technically, it means the knowledge and understanding of the practical legal rulings (ahkam) as derived from their detailed evidences (dalil). See for example, Zarqa’, Mustafa Ahmad al, Al Madkhal al Fiqh al 'Am, vol. 1, (Syria: Dar al Fikr, 3 vols 1967–1968) at 54–55 Google Scholar [translated by author] and al Zuhaili, Wahbah, Usul al Fiqh al Islami, vol.1, (Syria: Dar al Fikr, 1986) at 18–19 Google Scholar [translated by author]. Some scholars differentiate between Shari sah and fiqh, though others use the two terms interchangeably because of their overlapping and inter-relation.
14 See section 60 (5): “Where a security provided in respect of a credit facility given by a licensed institution is, during the currency of the credit facility, by agreement between the licensed institution and the person providing the security, substituted by a different security, the new security shall be of a value which is not less than the amount of the credit facility which is outstanding at the time of said substitution.”
15 Section 60(9) of BAFIA.
16 Pheng, Lee Mei and Samen, Detta, Banking Law, 2nd ed. (Kuala Lumpur: Malayan Law Journal, 2002) at 339–340 Google Scholar.
17 Ibid, as simplified and summarized from the more lengthy explanations in the book.
18 Ibid, at 339.
19 Hassan, Abdullah Alwi Hj, Sales and Contracts in Early Islamic Commercial Law, (Islamabad: Islamic Research Institute, 2000), at 146 Google Scholar [Sales and Contracts in Early Islamic Commercial Law].
20 Article 706 Mejelle: the pledge becomes a concluded contract by the offer and acceptance of the pledgor and pledgee. But, until it is received, it is not complete and irrevocable. Therefore the pledgor before delivery can go back from the pledging. See also McMillen, Michael J. T., “Islamic Shariah Compliant Project Finance: Collateral Security and Financing Structure Case Studies”, (2001) 48 Fordham Int'l L.J. 1184 Google Scholar; also available at www/kslaw.com/library/pdf/,mcmillenislamic2.pdf
21 al Misri, Ahmad ibn Naqib, The Reliance of the Traveller: A Classic Manual of Islamic Sacred Law, trans. by Keller, Noah Mim (1989) at 559 [The Reliance of the Traveller]Google Scholar.
22 Shari'a Standard No. 5, (2002) Shari'a Standards, AAOIFI, Manama, at .60-63 [AAOIFI].
23 Ibid, at 61.
24 The Reliance of the Traveller, supra note 21 at 406.
25 Reported by al Syaibani, Sales and Contracts in Early Islamic Commercial Law, supra note 19 at 149.
26 See Article 709 - 710 of the Majallat al Ahkam al Adliyyah.
27 Zuhaili, Wahbah, Financial Transactions in Islamic Jurisprudence, trans by Gamal, Mahmoud A. El, (Damascus: Dal Fikr, 2003) vol.2 at 101–105 Google Scholar.
28 Ibid.
29 Maqdasi, Al, Al Sharh al Kabir, 12/365 Google Scholar, Hajer al Riyadh; as quoted in Appendix B of the AAOIFI Standard No. 5 2002, at 72.
30 See Schact, Joseph, Introduction to Islamic Law, (Oxford: Oxford University Press, 1964) at 134 Google Scholar.
31 Norman, J. Anderson, D., “Islamic Law” in Lawson, Frederick H. ed., International Encyclopedia of Comparative Law, Vol. IV, (Tubingen: J.C.B Mohr (Paul Siebeck), 1976) at Chapter 2, at 103 Google Scholar.
32 al Khafif, Ali, Ahkam al-Muamalah al Shar'iyyah, Cairo (1948), at 9–11 Google Scholar [Ali al Khafif].
33 al Sanhuri, Abdul Razzaq, Masadir al Haqq fi al Fiqh al Islami (1954) Cairo, 6 vols in 2, in par. Vol. 1 at 13–20 Google Scholar.
34 See the views of Ali al Khafif, supra note 32 at 9-11 and also Mahmasanni, Subhi, The General Theory of Law of Obligations and Contracts under Islamic Jurisprudence: A Comparative Study of the Islamic Rites From the Modern Standpoint, 3rd ed. (Beirut: Dar al -Ilm al Malayin, 1948) 3 vol 1 at 11 Google Scholar.
35 As a result, the Hanafi scholars view that any transgression of usufructuary rights will not give rise to any damages. When a property is wrongfully confiscated, the tangible property should be returned. But the unlawful use and enjoyment of the confiscated property need not be compensated. For further deliberation see, Abu al ‘Aynan Badran, al Shari 'ah al Islamiyyah, Tarikhuha wa Nazariyyah al Milkiyyah wal Uqud (n.d) Muassasah Shihab al Jami'ah, Alexandria, at 304-305.
36 See also Majallah al Ahkam, where mal is defined as ‘what is by nature inclined and liked by humans (i.e. something which is apt to benefit humans) and can be stored and preserved until the time of need.
37 See Qawaid al Zarkashi, p. 323 cited in al Dirini, Fathi, Haqq al Ibtikar fi al Fiqhi al Islami al Muqaran, Muassasah al Risalah, (Beirut: Publisher, 1984) at 23 Google Scholar [Haqq al Ibtikar]. See also ibn al Rahman, Abdullah, Al Amwal al Mubahah wa ahkam Tamlikuha fi al Shari'ah al Islamiyyah, 2 vols (1984)Google Scholar Sharikah al Tibaah al Arabiyyah, Cairo, vol. 1, at 28.
38 Ibn Qudamah, al Mughni cited in Haqq al Ibtikar, ibid at 23.
39 Al Shatibi in al Muwafaqat, cited in Haqq al Ibtikar, supra note 37 at 35.
40 Most major works on Islamic concept of ownership or milkiyyah would cover this aspect, among them; see Abdul Salam Daud al Ibadi, al Milkiyyah fi al Shari'ah al Islamiyyah: Tabi ‘atuha wa Wazifatuha wa Quyuduha: Dirasah Muqaranah bi al Qawanin wa al Nuzum al Wad'iyyah, 2 vols, al Maktabah al Aqsa (1974) Jordan.
41 See Fathi al Dirini in Haqq al Ibtikar , supra note 37 at 27-33..
42 Supra note 37 at 51-70.
43 Al Haqq al Mali li al-Mua'llif fi al-Fiqh al Islam wa al Qanun al Misri, (1988) Maktabah Wahbah, Cairo; al Himayah al Muqarrarah li Huquq al-Muallafin al Adabiyyah (1990) Dar al Nahdah al-Arabiyyah, Cairo.
44 Al Haqq al Muallif fi al Qanun al Misri (1964) Jami’ah al-Duwal al Arabiyyah, Cairo.
45 Nitaq al Khata wa Tatbiquha fi Majal Intihal al Muallafat (1995) Dar al Nahdah Al Arabiyyah, Cairo.
46 Jara'im al Sahafah wa Anshr wa Qanun Himaya Haqq al Muallif wa al Raqabah Ala al Musannaffat al Fanniyyah fi Dau al Qadha wa al Fiqh (1993), Mansha'at al Ma'arif, Alexandria.
47 Wahbah al Zuhaili, supra note 27 at 79.
48 Wahbah Zuhaili, supra note 27 at . 102
49 (1988), Al Haqq Al Maliyy Lil Mualliff Fil Fiqh Al Islami Wal Qanun Misri, Wahbah, Maktabah, (1988) Cairo, at 60 Google Scholar.
50 Surah al Baqarah (2:283)
51 The Reliance of the Traveller, supra note 21 at 404. See also Majallat al Ahkam Al Adliyyah, Article 706.
52 McMillen, Michael J.T., “Al Rahn ‘Adl Collateral Security Structure for Project and Secured Financings” in Proceedings of the Third Harvard University Forum on Islamic Finance: Local Challenges, Global Opportunities, (Boston: Center for Middle Eastern Studies, Harvard Islamic Finance Information Program, Harvard University, 2000)Google Scholar; also available at www/kslaw.com/library/pdf/,mcmillenislamic2.pdf at 25.
53 Wahbah Zuhaili, supra note 27 at 106.
54 Wahbah Zuhaili, supra note 27 at 107.
55 Wahbah Zuhaili, supra note 27 at 108.
56 AAOIFI, supra note 22 at 61. See also Appendix B of the AAOIFI at 72-73, describing the basis for the Shari'a ruling.
57 Fathi al Dirini, supra note 37 at 91.
58 Wahbah Zuhaili, supra note 27 at 111.
59 Wahbah Zuhaili, supra note 27 at 115.
60 Wahbah Zuhaili, supra note 27 at 143.
61 (Reported by al Bukhari), Kitab al Buyu’, (The Book of Business Transactions); p. 300, Bulugh al Maram min adillah al ahkam, (Attainment of the Objective according to evidence of the ordinances), compiled by al Hafiz Ibn Hajar al Asqalani, with brief notes from the book ‘Subul-us-salam’ written by Muhammad bin Islami al Sahani, Dar-us-Salam Publications, Riyadh, Saudi Arabia 1996.
62 Wahbah Zuhaili, supra note 27 at 152.
63 The Reliance of the Traveller, supra note 21 at k11.4 at 405.
64 The Reliance of the Traveller, supra note 21 at k11.4 at 405.
65 Wahbah Zuhaili, supra note 27 at 183
66 Ibid.
67 Ibid.
68 Laws of Malaysia, Act 125.
69 Compare this with the New Zealand provision; section 102 of the New Zealand Companies Act 1955 which requires the registration of: “A charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright or a licence under a copyright.”
70 See section 108(2) of the Company Act.
71 Security Interests in Business Goodwill, supra note 1.
72 Lipton, Jacqueline, “Intellectual Property in the Information Age and Secured Finance Practice” [2002] Eur. I.P. Rev. 358 Google Scholar.
73 See Pollard, Simon Mark, “Aspects of Lenders' Security Over Computer Software Copyright”, (1995) 6 Austl. I.P.J. 80 Google Scholar.
74 Lipton, supra note 1 at 151.
75 Laws of Malaysia Act 332.
76 The term ‘future copyright’ has been defined to mean copyright which will or may come into existence in respect of any future works or class of works or other subject matter, or on the coming into operation of any provision of this Act or in any future event.
77 Lipton, supra note 1 at 151.
78 (1998) 19 Ch. D 342.
79 [1915] 2 Ch 345.
80 Ibid at 358.
81 Ibid at 365-366.
82 Ibid at 373-374.
83 [1957] 3 All ER 331, [1957] 1 WLR 1130.
84 Lipton, Jacqueline D, “Security Interests in Business Goodwill”, (1998) 26 Austl. Bus. L. Rev. 25 Google Scholar [Security Interests in Business Goodwill].
85 9 IPR 469
86 As observed by Ambrose J: “On the other hand, in my view, it is clear that had it not been for the debenture held by the plaintiff over Newford's property including its goodwill to which was attached its trade name and logo that company could certainly have assigned them to the defendants or to one or more of them. The only reason it could not validly do so, in my judgment, resulted from the effect of the debenture held over the property of that company by the plaintiff. I accept the evidence called on behalf of the plaintiff that the goodwill of Newford to which is attached its trade name and logo has not been extinguished and does have some value. It may well be that the business carried on by the defendants using the trade name and logo which Newford purported to assign to them has, if not increased the value of the goodwill, at least prevented it from being lost. That, after all, was the very object of the first defendant paying Newford the sum which he agreed to pay for the transfer of the goodwill, trade name and logo”.
87 [1997] 4 AMR 3610.
88 [1997] 2 AMR 1777; [1997] 1 CLJ Supp 542.
89 [1891] 8 RPC 181.
90 Section 55(1) of the Malaysian Trade Marks Act 1976 (Laws of Malaysia, Act 175).
91 Section 55 (1A) of the Trade Marks Act 1976.
92 Section 55 (4) of the Trade Marks Act 1976.
93 Section 55(1) and (1A) of the Malaysian Trade Marks Act 1976. See also a corresponding section 55(1) of the Australian Trade Marks Act that provides: “Subsection (1) shall have effect on the case of unregistered trade mark used in relation to any goods or services, if at the time of the assignment or transmission of the unregistered trade mark it is or was used in the same business as a registered trade mark, and if it is or was assigned or transmitted at the same time and to the same person as that registered trade mark and in respect of goods or services all of which are goods or services in relation to which the unregistered trade mark is or was used in that business and in respect of which that registered trade mark is or was assigned or transmitted.”
94 Security Interests in Business Goodwill, supra note 84.
95 See Lam Soon (M) Bhd v Forward Supreme Sdn Bhd & Ors [2001] 6 MLJ 651 Google Scholar.
96 Section 46(1)(b) of the Trade Marks Act 1976. See also cases Service Master (M) Sdn. Bhd v MHL Servicemaster Sdn. Bhd & Anor [1998] 1 AMR 379 Google Scholar; Tan Gek Neo Jessie v Minister for Finance & Anor [1991] 2 MLJ 301 Google Scholar; Re Arnold Palmer [1986] 2 MLJ 681 Google Scholar; Ng Chye Mong Pte Ltd v Public Prosecutor [1988] 2 MLJ 150 Google Scholar.
97 See Sexton, “Security Over Intellectual Property in Australia”, supra note 1.
98 [1990] 3 CLJ 31 (Rep)
99 Lipton, Security Over Intangible Property, supra note 1 at 183-184.
100 Section 29 of the Industrial Designs Act 1996 provides:
(1) the rights of an owner with respect to a registered industrial design are personal property and are capable of assignment and transmission by operation of law.
(2) Subject to this Act, the laws applicable to ownership and devolution of personal property shall apply in relation to a registered design as they would apply in relation to other choses-in-action.
101 One view is that domain name is not regarded as a form of property, although sometimes it is referred to as “quasi-property”. See Lipton, Security Over Intangible Property, supra note 1 at 129.
102 54 U.S.P.Q.2d 1738 (Va. Sup. Ct. 2000)
103 337 F.3d 1024 (9th Cir. 2003)
104 Lipton, Security Over Intangible Property, supra note 1 at 134
105 Sharpe, “Some Insolvency Aspects of Intellectual Property” supra note 1.
106 Lipton, Security Over Intangible Property, supra note 1 at 188
107 US Uniform Commercial Code (Article 9 U.C.C § 9-101, Official Cmt. (2001))
108 US Patent Act (35 U.S.C). This section provides: “An assignment, grant or conveyance (of a patent, patent application, or interest therein) shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark office within three months from its date or prior to the date of such subsequent purchase or mortgage.”
109 US Copyright Act (17 U.S.C.) For a deeper elaboration of the US position, see Acuff, James T Jr and Maidman, Bret A., “Intellectual Property as Collateral in the United States: How to Perfect Your Client's Security Interests and Hedge Against the Debtor's Insolvency” (1991) 2 I.P.J. 128 Google Scholar. In re Cybernetic Services, Inc., 252 F.3d 1039 (9th Cir. 2001) creditors of bankrupt debtors found themselves without a perfected patent security interest, to their detriment.
110 Section 38A of the Designs Act (Cth), inserted in 1981, provides: “Where a person becomes entitled as mortgagee...he shall apply to the Registrar to register his title, and the Registrar shall, on receipt of the application, and on proof to the satisfaction of the Registrar of the title of the applicant, cause notice of the interest to be entered in the register, together with particulars of the instrument creating the interest”.
111 Section 23 of the Patents Act 1952 (Cth) contains a similar provision to the Designs Act: “Where a person becomes entitled as a mortgagee.to an interest in a patent, he shall apply to the Commissioner to register his title, and the Commissioner shall, on receipt of the application, and on proof to the satisfaction of the Commissioner of the title of the applicant, cause notice of the interest to be entered in the Register, together with particulars of the instrument creating the interest”.
112 As provided in the Designs Act 1953, where any person becomes entitled: “as mortgagee, licensee, or otherwise to any.interest in a registered design he shall apply to the Commissioner in the prescribed manner for the registration…of notice of his interest, in the register of designs”
113 As provided under the Patents Act 1953, where any person becomes entitled: “as mortgagee, licensee, or otherwise to any.interest in a patent, he shall apply to the Commissioner in the prescribed manner for the registration… of notice of his interest in the register of patents”
114 See Section 108(9) of the Malaysian Companies Act. The exception is a charge or assignment relating to land.