Hunch to Preserve the Telecom Sector Becomes a Window to Sabotage Concluded Resolution Processes

The contours of enquiry as per the Supreme Court and NCLAT’s response

The order dated 13-4-2021 passed by National Company Law Appellate Tribunal (NCLAT) in Union of India v. Vijaykumar V. Iyer1 and connected matters, seeks to reopen questions which were settled by the Supreme Court after multiple protracted round of litigations witnessed during 2016-2019. The aforesaid order throws open a lot of questions especially in relation to the objections/challenges that can be raised by various stakeholders in a resolution process at an advance stage or even in concluded resolution processes.

The NCLAT was seized, inter alia, of an appeal arising from an order approving the resolution plan for Aircel group. In the meantime, the Supreme Court of India (Supreme Court) in Union of India v. Association of Unified Telecom Service Providers of India,2(Unified Telecom) directed NCLAT to consider certain questions which inter alia include:

whether the licence to use the spectrum is a contractual relationship between Department of Telecommunications (DoT) and telecom service providers i.e. corporate debtor;
whether the spectrum on the basis of right to use is an asset of licensee/corporate debtor;
whether the spectrum can be subjected to proceedings under the Insolvency and Bankruptcy Code, 20163 (I&B Code); and
whether dues towards the spectrum under the licence can be said to be operational dues.

To sum up the findings, NCLAT came to the following conclusions:

relationship between DoT and corporate debtor is contractual;
spectrum is an intangible licence of the corporate debtor;
spectrum, being an intangible asset of the licensee i.e. corporate debtor, can be subjected to insolvency/liquidation proceeding; and
dues of DoT under licence are in the nature of operational debt.

NCLAT venturing beyond the scope of reference and mandate of the I&B Code

After having provided the responses to the questions framed by the Supreme Court, the NCLAT went ahead and rendered observations on the validity of the admission order passed under Section 10 of the I&B Code4. It was observed that since the resolution plan would have the effect of wiping out the dues payable to DoT/Central Government (which was nothing but an operational creditor), the initiation of corporate insolvency resolution process (CIRP) at behest of the corporate debtor under Section 10 of the I&B Code was fraudulent. Such an application was made by the erstwhile management with the malicious intent of withholding the huge arrears payable to the Government. In particular, the NCLAT went ahead to cast a mandate on the adjudicating authorities to examine the bona fides of the applications under Section 10 of the I&B Code at the resolution plan approval stage. In this regard, the observations of the NCLAT in para 87 are of particular importance which reads as:

…The adjudicating authority in the given circumstances should have examined the bona fide of the Aircel entities in initiating CIRP by filing applications under Section 10 of the I&B Code which, on the face of it, aimed at monetising most of the assets for meeting obligations of the resolution applicant towards the banks which too would depend on when and how the spectrum would be sold, more so as the Aircel entities had stopped operations before initiating insolvency proceedings and the spectrum continued to go waste and unutilised.5

In our view, the NCLAT ought to have refrained from providing observations which tantamount to reopening the question of validity of initiation of the resolution process, when the entire resolution process had run its course and the resolution plan was being tested on the limited touchstone of Section 30 of the I&B Code6 read with the Regulations framed thereunder.

It seems that while providing its response to the specific queries posed by the Supreme Court, NCLAT lost sight of the contours enshrined in UnifiedTelecom7as well as the legislative intent enshrined under Sections 10, 318, 619. The NCLAT also did not take into consideration the law laid by the Supreme Court with regard to power of NCLT/NCLAT at time of considering resolution plan under Section 31 in Essar Steel India Ltd. v. Satish Kumar Gupta10, (Essar Steel); Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,11(Ghanashyam Mishra) and Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd. 12(Jaypee).

NCLAT’s observations — Impact on the scheme of the I&B Code

NCLAT categorically observed that dues payable to DoT was operational debt and DoT itself had filed its claim as operational creditor which has been factored in the resolution plan by the successful resolution applicant. However, the basis of the imputing malafides to the initiation of CIRP under Section 10 has been traced to the fact that the approved resolution plan envisages wiping out/extinguishment of operational debts.

The Supreme Court in Essar Steel13 had unequivocally pointed out that a successful resolution applicant has to necessarily commence on a fresh slate after the conclusion of CIRP meaning thereby, all/most of the resolution plans would envisage extinguishment/wiping out of claims, in some or the other form. If such is not the case, the successful resolution applicant would be faced with undecided claims i.e. the proverbial “hydra heads” would start popping up, after the implementation of the resolution plan.

If one were to proceed in terms of the dicta of the NCLAT, we are pained to say that none of the CIRPs would ever see light of the day at the end of tunnel. As a result thereof, the very aim and underlying objection of the I&B Code i.e. to (a) promote entrepreneurship and availability of credit; (b) ensure the balanced interests of all stakeholders; and (c) promote time-bound resolution of insolvency in case of corporate persons, partnership firms and individuals, would fall crumbling into the dust.

Approach of the NCLAT vis-à-vis the legislative intent

In fact, at the time of amending Section 31 of the I&B Code through the Insolvency and Bankruptcy Code (Amendment) Bill, 201914, the Finance Minister in Rajya Sabha on 29-7-2019 (which is much prior to Aircel order dated 13-4-202115 passed by NCLAT) stated as under16:

“79. … There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So that is going to be a major, major sense of assurance for the people who are using the resolution plan….I would want all the hon. members to recognise this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No.…”

(emphasis supplied)

The above statement was relied upon by the Supreme Court in Ghanashyam Mishra17 to declare that pre-CIRP claims are governed by the approved resolution plan. Further, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished.

In view of the above, the treatment of government dues as operational debt is the clear legislative intent and if all other operational debt is being extinguished, government dues cannot be accorded any favourable treatment. Such a resolution plan would ex facie be in teeth of Section 30(2) of the I&B Code. Therefore, no malice to the initiation of a CIRP could be imputed on such a ground and such an extraneous criterion (which finds no mention in either Sections 718, 919 or Section 10 of the I&B Code) for determining fraud or malice would throw the otherwise settled jurisprudence, into a realm of uncertainty.

NCLAT’s observations are in teeth of doctrine of finality of a lis

We believe that the NCLAT ought to have considered the doctrine of finality in relation to a lis based on interest reipublicae ut sit finis litium and nemo debet bis vexari, si constet curiae quod sit pro una et eadem causa, before rendering its findings.

One cannot be oblivious of the provisions of Sections 10 and 61, respectively. It is only at the stage of application under Section 10 that NCLT has the power to examine whether the initiation of insolvency proceedings was fraudulent or malicious. NCLAT at the time of considering an appeal under Section 61 impugning the order admitting Section 10 application, can conduct a similar enquiry. NCLAT ought not to have lost sight of the fact that if no appeal was preferred against an order admitting Section 10 application or appeal was preferred and dismissed, neither NCLT nor NCLAT, in subsequent proceedings, have any power to re-examine any issue surrounding the initiation of the insolvency proceedings much less, the issues of malicious or fraudulent intent (and that too on its own accord).

It is pertinent to mention that NCLAT was considering the appeal against approved resolution in terms of Sections 30(2) and 31 and was not dealing with an appeal against the order admitting insolvency proceedings under Section 10. Hence, NCLAT while wearing a different jurisdictional ought not to have ventured into the issue of fraudulent or malicious commencement of insolvency proceedings.

In view of the aforesaid, NCLAT not only travelled beyond the directions of the Supreme Court in Unified Telecom20 but also the express provisions of the I&B Code as expounded by the Supreme Court in the abovementioned catena of judgments. In our view, NCLAT ought to have, as a matter of judicial propriety, limited its inquiry to the questions framed by the Supreme Court.

*Alumni (2009-2014) National Law University Odisha. Currently working as In-house Counsel at an Indian Conglomerate and may be reached at anuragnluo@gmail.com. The views expressed herein are personal and do not represent views of any organisation.

**(2010-15) National Law University Odisha. Currently working as Managing Associate at L&L Partners Law Offices. The views expressed herein are personal and do not represent views of any organisation.

1 2021 SCC OnLine NCLAT 355.

2 Union of India v. Assn. of Unified Telecom Service Providers of India, (2020) 9 SCC 748.

3 Insolvency and Bankruptcy Code, 2016.

4 Section 10, I&B Code.

5 Union of India v. Vijaykumar V. Iyer, 2021 SCC OnLine NCLAT 355.

6 Section 30, I&B Code.

7 Union of India v. Assn. of Unified Telecom Service Providers of India, (2020) 9 SCC 748.

8 Section 31, I&B Code.

9 Section 61, I&B Code.

10 (2020) 8 SCC 531.

11 2021 SCC OnLine SC 313.

12 2021 SCC OnLine SC 253.