Spectrum dues and insolvency – the NCLAT view

Spectrum held by a telecom company can be transferred during insolvency proceedings but only after the pending government dues are cleared, the National Company Law Appellate Tribunal said.

In its judgment, the NCLAT has dealt with questions on whether the right to use spectrum qualifies as an asset; whether such an asset can be transferred in an insolvency proceeding and the conditions that would precede such a transfer. The answers will be relevant for the ongoing insolvency proceedings against Aircel Ltd., Videocon Group and Reliance Communications Ltd.

This ruling will have implications on the resolution of all insolvent telecom firms like Aircel, Reliance Communications and Videocon as without spectrum all these entities will be headed to liquidation, Kumar Saurabh, a partner at Khaitan & Co., said.

“Alternately, if resolution applicants have to pay government all the pre-insolvency spectrum dues, then they may also back out.”

The treatment of spectrum dues during insolvency had come up before the Supreme Court during the adjusted gross revenue (AGR) case. In its September 2020 ruling, the apex court had referred the question of spectrum liabilities and their treatment under the Insolvency and Bankruptcy Code to the NCLAT.

Spectrum is a tradeable asset
The judgment said spectrum is a natural resource that is owned by the public and held by the government in the capacity of a trustee. Whether the right to use spectrum qualifies as an asset would be determined by the license agreement, it said.

The NCLAT examined the license and tripartite agreement between Aircel, the Department of Telecommunications and the telecom firm’s lenders. The company was granted a spectrum license in December 2006. It had argued the agreement granted it ownership rights over spectrum usage, which would qualify as its asset and be part of the insolvency proceedings.

Pointing to the agreement, the NCLAT said it allowed for the transfer or assignment of license as security for financial assistance. The agreement appeared to have been worked out to facilitate the financing of Aircel’s project and secure the lenders’ interest, it observed.

It also provided for the transfer of the license, in the event of a default, to any person picked by the lenders. But if the department picked an entity other than what the lenders have suggested, the latter’s dues will have to be taken into account.

“Department of Telecommunications is party to the tripartite agreement and it cannot shrug off its shoulders in claiming that the tripartite agreement was in the nature of binding agreement only between the Licensee and the Lender with no obligations created for it to perform.” – NCLAT Order.

The agreements showed that the right to use spectrum was considered as an asset and the telecom department was aware of this fact, the NCLAT said.

Spectrum is subject to IBC proceedings
To determine whether the spectrum can be part of the insolvency proceedings, the NCLAT pointed to Sections 14 and 18 of the Insolvency and Bankruptcy Code.

Section 14 states that licenses and permits granted by governments or statutory authorities cannot be extinguished just because the company is facing insolvency. But for this, all government dues arising from such licenses must’ve been paid. The right to use spectrum, the NCLAT said, is also a license that will be covered under this provision.

The second provision allows the interim resolution professional to take control and manage the assets over which the insolvent company has ownership rights. And since the right to use spectrum is an intangible asset, the interim resolution professional is bound to take it under its control.

License dues rank higher
Dues of financial creditors have been given the highest priority in the payment waterfall under IBC. Dues to government rank lower and qualify as operational dues.

But when it comes to spectrum, this will not be the position, the appellate tribunal has held. The NCLAT has made this exception relying on the special nature of spectrum as an asset which is a natural resource held by the government as a trustee.

The tribunal observed that the license agreement rests the control of the spectrum with the telecom department and spectrum trading guidelines mandate any trade or transfer can take place only with its prior permission. And to get this permission, according to trading guidelines, the telecom firm has to clear all pending dues and liabilities arising out of litigation.

The spectrum trading guidelines, which mandate clearance of all government dues before the transfer of spectrum takes place, cannot be superseded by the IBC, the NCLAT has held.

It also said telecom firms cannot be allowed to wriggle out of paying spectrum dues by initiating voluntary insolvency proceedings.

The NCLAT said that it cannot allow insolvency proceedings initiated with the intention of “withholding the huge arrears payable to government, obtaining moratorium to abort the government’s move to suspend, revoke or terminate the licences and in the event of a resolution plan being approved, subjecting the central government to be contended with the peanuts offered to it as Operational Creditor.”

NCLAT’s reasoning does not appear to be sound as far as the understanding of insolvency code stands, Saurabh said. In the waterfall arrangement, the interests of financial creditors are given precedence over the operational ones, he said.

“The IBC does not make any distinction on treatment to a creditor supplying natural resource vis-à-vis other suppliers nor does it treat government and private sector dues differently. We have seen in numerous cases where operational creditors have seen complete write off of their claims – some of whom are listed companies. There too, public interest argument can be made.”

For now, this NCLAT ruling answers the principle questions on the treatment of spectrum and dues related to it under IBC proceedings. The outcome will likely be applied to telecom companies facing insolvency proceedings in various NCLTs. The hearing in Aircel’s case has been posted for April 26 by the NCLAT. Bloomberg