Can Spectrum Licence be Treated as an Asset in the CIRP Initiated by a Creditor Under Insolvency & Bankruptcy Code, 2016 | Union of India v. Vijaykumar V. Iyer: A case comment

Introduction

Ever since the enactment of the Insolvency and Bankruptcy Code¹ (IBC or the Code), interesting questions pertaining to the interaction of IBC with various laws governing particular sectors of the economy have sprung up. One such question that the National Company Law Appellate Tribunal (NCLAT or the Tribunal) was faced with in Union of India v. Vijaykumar V. Iyer² (Vijaykumar V. Iyer) was whether spectrum licence (licence or spectrum licensing agreement or agreement or licensing agreement) and the consequent right to use spectrum (spectrum) can be treated as an asset in respect of corporate insolvency resolution process (CIRP) that takes place under IBC. The NCLAT held that while licences can be transferred as intangible assets under the IBC in ordinary circumstances, the same cannot be permitted if spectrum dues are not cleared by the licensee, as trading is subjected to clearance of dues by the licensee.

The judgment³ has had a mixed reception amongst jurists and sectoral experts, with the main concern being that this interpretation of law will severely hamper the insolvency resolution of telecom companies in India, and negatively affect the recovery process of credit extended them.⁴ All in all, it has the potential of rendering the IBC toothless as far as the telecommunications sector is concerned. Numerous appeals have already been filed before the Supreme Court.⁵ For these reasons, the soundness of the jurisprudence propounded by this judgment is of contemporary importance.

This paper seeks to critically analyse Vijaykumar V. Iyer⁶, both from a legal perspective as well as from a practical implications perspective. We believe that the answers to these issues are of critical importance not only in determining the efficacy of the IBC in respect of telecom companies but can also set important precedence insofar as the treatment of the “right to use natural resources” as an asset for CIRP under the IBC are concerned.

NCLAT’s judgment in “Union of India v. Vijaykumar V. Iyer”

The Supreme Court vide its judgment in Union of India v. Assn. of Unified Telecom Service Providers of India⁷ dated 1-9-2020 referred a number of questions for the NCLAT to consider. These questions pertained to the nature of spectrum licences vis-à-vis the CIRP. Inter alia, the NCLAT was asked to examine the nature of rights owned by telecom service providers (TSPs or telecom companies) as a consequence of the spectrum licence granted to them, whether the licence can be subjected to proceedings under the IBC, whether IBC overrides the laws governing the telecommunications sector in this respect, and whether the same would apply even if spectrum dues were not paid.

The NCLAT first examined the nature of spectrum as a resource, and referring to Centre for Public Interest Litigation v. Union of India⁸ held that it is a well-settled proposition that spectrum is a natural resource that is scarce, finite, and susceptible to degradation in case of inefficient utilisation. It noted that legal ownership over the same, as per accepted international standards, has been granted to the State on behalf of its people. Consequently, the State has been empowered to distribute it as long as the distribution mechanism is in consonance with the principles of equality and public trust. The NCLAT referred to the judgment of the US Supreme Court in Illinois Central Railroad Co. v. State of Illinois⁹ as well as the judgment of the Supreme Court of India in M.C. Mehta v. Kamal Nath¹⁰ to note that the State is bound by the doctrine of public trust in dealing with the spectrum, and thus holds it as cestui que trust. The Tribunal then referred to the scheme of the Telegraph Act, 1885¹¹ (the Telegraph Act). It noted that as per Section 4¹², the Government of India can part with this exclusive privilege by granting a licence as per the terms and conditions it sees fit. The Tribunal concluded that TSPs do not legally own spectrum, and only hold the right to use the spectrum, as a consequence of the spectrum licence granted to them by the Government of India. It further noted the Supreme Court’s judgment in Union of India v. Assn. of Unified Telecom Service Providers of India¹³ and held that the licence is granted in lieu of consideration which partakes of the character of a contract governing relations between the licensor and licensee with terms and conditions of the licence regulating the right to use spectrum. Summarising the exact nature of the right granted in favour of the TSPs, the Tribunal held as follows:

62. … leaves no room for doubt that the licensee enjoys a limited right of use of spectrum even after obtaining right to use for a fixed period and in lieu of payment of licence fee. The effective control lies in the hands of licensor, who for breach of terms of the licence and failure on the part of licensee to perform its obligations or for the reason that the licensee goes into liquidation or is ordered to be wound up and also in the event the TRAI recommending termination of licence for non-compliance of its terms and conditions, can suspend, revoke, or terminate licence. It is abundantly clear that the affairs of licensee and the subject of licence is regulated by the licensor and the licensee has a limited right of use of spectrum which, apart from conditions of licence, is regulated by the provisions of the Telegraph Act and TRAI Regulations.¹⁴

The Tribunal next analysed whether this right to use the spectrum granted through the spectrum licence can be treated as an asset for the purpose of the CIRP conducted under IBC. The Tribunal referred to various provisions of the Code and delved into the meaning of the terms “asset” and “intangible asset”. It held that as far as this question is concerned, there is no question that the right to use spectrum under the spectrum licence agreement is an asset. In fact, the Tribunal noted that Reserve Bank of India had also suggested the treatment of spectrum as an intangible asset in order to resolve the reluctance on part of banks/creditors to lend to telecom companies.

It further noted that the spectrum licence itself treats the spectrum as a tradable asset, and that the same can be utilised by lenders to protect and secure their interests arising out of the grant of financial assistance. It specifically took note of the terms of the Spectrum Licence Agreement as well as the Tripartite Agreement between the TSP (the licensee), the Government of India (the licensor), and the lenders. It noted that in cases of default of repayment obligations by the licensee, the lender can initiate steps for takeover and transfer the project to a third party, should the third party be willing to assume the liabilities and obligations towards the licensor as set out in the terms of licensing agreement. It noted that there were provisions to protect the interests of both the licensor and the lenders in case the former had decided to transfer the licence to a third party due to failure of the licensee in discharging its obligations under the agreement. It also provides for a situation when the licensee has to be effectively liquidated due to termination of the agreement, in which case the first charge on the proceeds would be with the licensor, followed by the lenders. The Tribunal concluded that the interests of the lenders are secured by creation of a security interest in their favour, including the right to takeover and transfer the assets (which includes the licence) of the licensee.

Having held so, the Tribunal analysed the question surrounding the sale of assets of a corporate debtor under IBC, and its application to spectrum licences. The NCLAT took note of various clauses of the Code, and reached the conclusion that since the right to use spectrum is a tradable asset, there is no reason why the same cannot be transferred to a successful resolution applicant in case of insolvency resolution proceedings having been initiated and completed against the licensee.

The NCLAT finally considered the question as to the transferability of a licence under insolvency proceedings when the spectrum dues have not been cleared by the licensee. The Tribunal took extensive note of the broad features and the overall scheme of the Guidelines for Trading of Access Spectrum by Access Service Providers.¹⁵ The Tribunal was of the opinion that the picture that emerged upon reading the trading guidelines point to the face that the control over the right to use spectrum rests with the Government of India, and that the licensee will not be able to transfer the licence without the former’s consent. It concluded that transfer of the licence could not take place, even under insolvency proceedings, unless the prior consent of the Government of India has been obtained, and that the said consent could be lawfully denied for not having cleared past dues.

The Tribunal further went on to note that if transfer of spectrum under IBC is allowed despite the aforementioned outstanding dues, it would have the effect of wiping off dues owed to the Government to the tune of Rs 40,000 crores, whereas the liability of the TSPs to their respective lenders is much less. It was of the opinion that they had caused huge pecuniary loss to the nation on account of non- payment of contractual dues towards use of spectrum and were thus guilty of breach of trust. It was also wary of the fact that the insolvency proceedings before its consideration had not been initiated by the TSP’s financial creditor or operational creditor, but by the TSPs/corporate debtors were trying to evade liability by resorting to initiation of CIRP under Section 10¹⁶ of the Code. It opined that the TSP’s did not intend to resolve the insolvency, but fraudulently withhold payment of arrears to the Government and treat its arrears as operational debt, thus ensuring that the Government has to contend with peanuts that will be paid to it under the resolution plan as an operational creditor under the waterfall mechanism of Section 53¹⁷ of the IBC. It specifically held that if the CIRP mechanism is allowed to function in respect of spectrum dues, then it would seriously jeopardise the interests of the Central Government.

With that, the NCLAT answered the questions referred to it by the Supreme Court. While the observations and conclusions of the Tribunal with respect to the nature of the right held by the TSPs as well as those with respect to whether spectrum is a tradable asset under the IBC are sound and fairly beyond reproach, the same cannot be said about its observations and conclusions with respect to whether the IBC overrides the laws governing the telecommunications sector in respect of transferability of spectrum during insolvency proceedings. We are of the opinion that the Tribunal erred in its conclusions with respect to transferability of spectrum under insolvency proceedings when the licensee has outstanding dues towards its spectrum licence.

Analysis

The NCLAT’s judgment has the effect of rendering IBC toothless as far as telecom companies are concerned and will lead to substantial setbacks in the loan recovery process from such companies. While that may be have been an acceptable outcome were the judgment based on sound legal reasoning, this is not the case, as this paper shall endeavour to highlight below. However, before proceeding with that, it is important to highlight some of the basic principles that infuse the Code, as well as principles that govern the CIRP.

First principles of the Insolvency and Bankruptcy Code, 2016

The enactment of the Insolvency and Bankruptcy Code in 2016 was designed to bring a paradigm shift in the way insolvency resolution took place in India,¹⁸ owing to the failure of the previous legal framework around insolvency and bankruptcy¹⁹ to deal with these issues in a timely and successful manner. The Code thus consolidated all laws around insolvency and bankruptcy under a single umbrella. The Code was formed with certain principles forming its backbone, such as the timely resolution to preserve and maximise economic value, symmetry of information between the debtor and the creditors, clarity in priority of payment of dues, autonomy of creditors and debtors insofar as business decisions are concerned whilst ensuring that the legislature and the courts control the process, etc.²⁰

The Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India²¹ explored these principles. It noted that one of the central objectives of the legislature in designing the IBC was that the resolution process should result in the maximisation of the economic value of the assets of the corporate debtor to ensure maximum recovery by all creditors. This was sought to be achieved by ensuring that the corporate debtor is kept as a going concern during and at the end of the CIRP, instead of the debtor being taken into liquidation. The resolution process cannot act in a way that effaces the substratum of the corporate debtor, as that would prevent it from being revived, thus leading to its corporate death ― a course of action that is clearly the least preferred by the Code. The Court laid down this preference of IBC in clear terms as follows:

27. … The Code is first and foremost, a Code for reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme – workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximise their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark.

28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests.

(emphasis supplied)

In fact, the legislature put the control over deciding the final contours of the resolution plan to be accepted and implemented in hands of the Committee of Creditors, instead of the executive or the courts, as it was of the opinion that the Committee of Creditors would be better placed to make commercial decisions that are aligned with the twin objectives of the Code ― maximisation of assets value and revival of the corporate debtor.²² It was of the opinion that the Committee of Creditors, exclusively made up of financial creditors, would be better positioned and able to make decisions as to the commercial viability of the debtor and the implementability of the resolution plan. The Code departed from the previous legislations in wrestling away control over these decisions from the legislature and the courts and vesting them with the Committee of Creditors because of the twin objectives mentioned above. It is with these objectives in mind that the CIRP was designed the way it stands today.

Overview of the corporate insolvency resolution process (CIRP)²³

The corporate insolvency resolution process of a corporate debtor starts with the filing of an insolvency initiation application under Sections 7²⁴, 9²⁵ or Section 10, depending on who initiates the same. Once the same is admitted by the adjudicating authority, a moratorium under Section 14²⁶ is declared, and an interim resolution professional is appointed to take over the management of the corporate debtor. A public notice is released containing the details of the interim resolution professional as well as the last date for submitting claims against the corporate debtor. The interim resolution professional is supposed to manage the affairs of the corporate debtor as a going concern and is guided in this responsibility by the Committee of Creditors comprising exclusively of the financial creditors of the corporate debtor. The Committee of Creditors is a democratic forum where decisions are taken by a majority vote of 66%. During this process, the interim resolution professional is replaced by the resolution professional. Once the claims are received and verified, an information memorandum is released on the basis of which any interested person may submit a resolution plan to bring the corporate debtor back on its feet. The said resolution plan has to provide for the payment of insolvency resolution process costs, management of the affairs of the corporate debtor after approval of the plan, and implementation and supervision of the plan. Once the plan is approved by the Committee of Creditors as well as the adjudicating authority, it becomes binding on the corporate debtor as well as its employees, members, creditors, guarantors and other stakeholders. The entire process has to be done in a time-bound manner within 330 days from the moment the insolvency resolution process has been initiated. If at the end of the said time period, no resolution plan is forthcoming and/or accepted by the Committee of Creditors, the corporate debtor is sent into liquidation. The CIRP is thus designed in such a way that the erstwhile management is divested of its powers and responsibilities, and the same is put in the hands of a professional agency i.e. the resolution professional, who is supposed to conduct the business of the corporate debtor as a going concern. Once the resolution plan is finalised and approved, the management is handed over to the successful resolution applicant so that the debtor is able to get back on its feet.

While approving/disapproving a resolution plan, the Committee of Creditors is vested with absolute discretion, as long as it satisfies the requirements of Section 30²⁷ of the Code. In deciding which resolution plan to accept, if any, the Committee of Creditors must try to maximise the value of the debtor’s assets, ensure that the interests of all stakeholders (including the operational creditors) are adequately balanced, and the corporate debtor is revived and kept as a going concern. How is this balance achieved? The Code leaves it to the commercial wisdom of the Committee of Creditors, believing that out of all stakeholders in the process, they are best suited to make such decisions.

Different classes of creditors, commercial wisdom of the committee of creditors, and the waterfall mechanism

What is necessary to acknowledge and accept is that the Code envisages different classes of creditors ― secured and unsecured creditors, financial and operational creditors, etc²⁸. Different classes of creditors are to be treated differently, but creditors similarly situated ought to be treated equally²⁹. Priority is given to secured and financial creditors, as is the established global practice³⁰― it recognises that all creditors do not need to be treated identically, but in a manner that reflects the different bargains they have struck with the debtor³¹. The reason for keeping such differential treatment was highlighted by the Supreme Court in Essar Steel (India) Ltd. v. Satish Kumar Gupta³² wherein it said that if all creditors are treated equally, secured creditors in a lot of cases might be incentivised to vote for liquidation instead of resolution as they might have better rights in case of liquidation than they might if the resolution plan is approved. This would clearly defeat the purpose of the Code, where resolution is the preferred outcome and liquidation only the last resort. Furthermore, financial, and secured creditors are better placed to take commercial decisions during the CIRP that ensures the preservation of the corporate debtor as a going concern, while ensuring maximum recovery for all creditors³³.

The differential treatment of creditors is captured by Section 53 of the Code, also known as the ‘waterfall mechanism’³⁴. This provision establishes the order of priority amongst various classes of creditors, in case the corporate debtor’s CIRP is unfruitful, and its consequent fate is liquidation. It is an overriding and binding provision that is equally important in deciding the legality of a resolution plan. This order of priority adopted by the legislature is aimed at increasing the long run availability of finance, reducing the cost of capital, promoting entrepreneurship, and spurring faster economic growth.

This differential treatment means that financial and operational creditors will be able to recover different amounts from a successful CIRP, as decided by the Committee of Creditors in their commercial wisdom. This commercial wisdom is not amenable to judicial review.³⁵ The resolution plan legally does not need to pay them the same proportionate amount and can discriminate in favour of one at the expense of the other, subject to certain safeguards set out in Section 30. If a resolution plan is accepted by the Committee of Creditors, then the proceeds from the sale of the debtor’s assets will be distributed according to the formula set out in the resolution plan. There is absolute freedom and discretion with the Committee of Creditors on how the proceeds should be distributed to various creditors.³⁶ In fact, as long as there is no liquidation, the order of priority envisaged under Section 53 of the Code can be jumbled up by the Committee of Creditors, as long as the operational creditors, unsecured creditors, and dissenting financial creditors are paid a certain minimum known as the “liquidation value”³⁷, which is calculated by referring to Section 53 of the Code.

What is thus important to note is that once the corporate debtor has gone into the insolvency resolution process, the fate of its creditors rests at the hands of the Committee of Creditors who have nearly unfettered discretion in deciding who gets paid how much, so long as they treat equally placed creditors equally and pay certain classes of creditors their minimums envisaged under Section 30.

So where did the NCLAT err?

Having delineated the major principles that govern the IBC and the CIRP, it is now appropriate to analyse why the NCLAT erred in holding that the spectrum licence and the resultant right to use the spectrum cannot be transferred in a CIRP if the licensee/corporate debtor has not paid its spectrum dues to the Government/licensor.

(I) The NCLAT had a particular issue with allowing the transfer of the right to use spectrum to the successful resolution applicant of the CIRP if the spectrum dues had not been paid to the licensor i.e. the Government of India acting through the Department of Telecommunications. This paper, that the NCLAT’s reasoning and conclusions are flawed on legal principles and have detrimental practical and financial consequences on various sectors like banking and telecom. This ruling thus needs to be seriously reviewed and relegated as laying down the incorrect law.

One of the first principles of the IBC is the revival of the corporate debtor as a going concern, which is sought to be achieved via the CIRP. If and only if this process fails is liquidation and the consequent economic death of the corporate debtor envisaged. In fact, the Code creates obligations on part of the resolution professional to run the corporate debtor as a going concern.³⁸ A similar obligation is placed on the resolution plan too, for the IBC does not want that the successful resolution applicant acquire the assets of the corporate debtor only to strip them of their value or liquidate them. Resolution plans are mandated to provide for “the management of the affairs of the corporate debtor after approval of the resolution plan” as well as the mechanism for the “implementation and supervision of the resolution plan”.³⁹ The idea behind ensuring that the corporate debtor continues as a going concern has sound economic rationale behind it. When the entire business and assets of the corporate debtor are sold as a going concern, there is generally a higher rate of recovery of dues owed to the corporate debtor’s creditors, as opposed to when the corporate debtor undergoes liquidation.⁴⁰ A higher rate of recovery means that the financial health of financial creditors is better, thus allowing them to take a more active part in the credit markets and credit creation process. From the perspective of operational creditors, they have a greater chance of receiving a percentage of their dues via a successful resolution plan, as opposed to liquidation ― where they will generally get nothing. Therefore, a higher rate of recovery means that the financial health of operational creditors is not too detrimentally affected, thus preventing a cascading effect of insolvency further down the supply chain. This promotes higher credit creation, investment, and growth in the economy.

The judgment in Vijaykumar V. Iyer⁴¹ deprives the IBC from achieving this objective for all practical purposes vis-à-vis telecom companies. Why? The right to use spectrum is the core asset of any telecommunications company. Without this right, it has no way of operating and providing these services. The remaining assets of the company are worthless (or worth a meagre fraction) without this right. It is impossible to keep the debtor as a going concern. Not only that, it makes the telecom company a highly unattractive proposition for any prospective resolution applicant. Without the right to spectrum accompanying it, it makes little commercial sense for a prospective resolution applicant to take part in the CIRP and submit a resolution plan to absorb the assets of the telecom company. This position was succinctly captured by the Mumbai Bench of the National Company Law Tribunal in Aircel Ltd. v. Union of India⁴²:

7.1. The facility of spectrum and licence was obtained by the petitioner after huge payment. Since presently the company is in insolvency, the expectation is to get a reasonably good resolution plan. Any resolution applicant shall show interest in the business of the company if the company holds licence. Without licence, since no other valuable asset is available to the company, no resolution applicant may show any interest in the business of this debtor company for its revival. Without licence this company be as good as a shell company. Resolution professional has informed that in response to advertisement inviting EOI, few parties have shown interest, but all are interested in running the telecom business. Therefore, the presence of the licence is a sine qua non for getting a good resolution plan.

Without the “right to use the spectrum” being an asset that the resolution applicant can get its hands on through the CIRP, it is unlikely that a telecom company will have a successful resolution process, for want of an acceptable resolution plan. Vijaykumar V. Iyer⁴³ would require that in order to make the corporate debtor an attractive enough investment prospect, it first clear its spectrum dues to the Central Government. Admittedly, in the case of telecom companies, spectrum dues do constitute a substantial share of their total debt obligations. If these companies were in a position to pay their spectrum dues, then in all likeliness, they would not be insolvent and unable to service their debts owed to financial and operational creditors, thus making the resolution process unnecessary.

The above analysis thus shows that the law laid down by Vijaykumar V. Iyer⁴⁴ makes IBC an ineffective tool for successfully resolving telecom companies, based on reasoning that is fallacious and contrary to the explicit language and intent of the Code.

(II) Vijaykumar V. Iyer⁴⁵ has the practical effect of rewriting various provisions of the Code, particularly those related to the order of priority in payments, commercial wisdom of the Committee of Creditors, and the waterfall mechanism envisaged in Section 53.

It is important to analyse the nature of spectrum dues. The licence is a mere contract between two parties, with one of them being the Government of India. The Supreme Court in Union of India v. Assn. of Unified Telecom Service Providers of India⁴⁶ held that a licence issued under the proviso to Section 4(1) of the Telegraph Act is a contract between the telecom company and the Government of India. The licence is not a rule under the Telegraph Act and is hence not a part of it. It is a mere contract, and not even a statutory one. The fact that it enables the licence-holder to utilise the exclusive privilege granted to the Central Government does not change this position.⁴⁷ Given this legal position, what becomes clear is that the fees paid under the licence is a mere contractual due owed to the Government. It has no statutory character. There is another aspect that warrants attention. The spectrum licence has a revenue sharing mechanism between the telecom company and the Government. Indirectly, the Government has partaken in the risk involved in commercially exploiting the spectrum. Unlike financial creditors, whose returns are fixed by contract and are not contingent on the performance of the telecom company, the returns of the Government are. Consequently, spectrum dues fall under the definition of operational debt, as defined by Section 5(21) of the Code. In fact, even if the licence was to be considered as a statutory contract or the spectrum dues a statutory due, the same would still be operational debt, given that the Code treats statutory debts, including tax, crown debts, etc., as operational debts. Therefore, the Government is an operational creditor of the corporate debtor.⁴⁸

The Code, treating government dues as operational debt, expressly redefines the priority accorded to them. Therefore, the Committee of Creditors is free to accept any resolution plan in its commercial wisdom wherein the Central Government is paid the liquidation value for all the dues owed by the corporate debtor. Spectrum licence fee comes within that ambit too for it is an operational debt. It is, after all, a “debt in respect of the repayment of dues arising under any law for the time-being in force and payable to the Central Government”. Spectrum dues should thus be considered like any other operational debt in their treatment in a resolution plan.

Therefore, the only legal safeguard that the Central Government has vis-à-vis the resolution plan, in respect of spectrum dues owed to it, is that it will have to be given at least the liquidation value that it would have received if the waterfall mechanism under Section 53 was followed. This follows from the plain language used in the statute, and the NCLAT’s judgment reordering this order of priority of government dues in the waterfall mechanism is erroneous. In effect, the NCLAT has put the Government on a wholly different pedestal as far as spectrum dues are concerned, above that of a secured creditor too. The IBC cannot be used to resolve the spectrum dues of a telecom company, and the only recourse is to pay these dues in full. Even secured creditors have to abide by the resolution plan and take a haircut once the CIRP has been initiated and the resolution plan is accepted by the committee of creditors. Following this judgment, the Government does not, despite an express legislative intent to that effect.

Parliament has taken a policy decision to sacrifice the Government’s interest in favour of secured creditors, financial creditors, workmen, etc. as evidenced by Section 53. The Code was enacted in 2016 when the Indian economy was going through an acute twin balance sheet problem affecting banks and infrastructure companies, that was morphing into a graver four balance sheet problem affecting banks, infrastructure companies, non-banking financial companies (NBFC), and real estate companies.⁴⁹ There was an urgent need to provide the financial sector with the appropriate legal framework that allowed it to recover debts effectively and in a time-bound manner. It was in this background that the waterfall mechanism was designed to prioritise financial creditors over the Government, keeping in mind the broader requirements of the Indian economy. The NCLAT cannot question that policy decision and can definitely not alter the same as it deems fit, especially since courts are ill-equipped to assess the rationality of economic laws.⁵⁰

By making the clearance of operational dues a pre-condition to the transfer of the asset (the right to use spectrum), the NCLAT has done two things ― created a special class for the Department of Telecommunications as a creditor, on whom the philosophy of the Code is not applicable, and created a distinction within statutory dues with spectrum licence fee on one side and all other dues owed to the Government on the other. In doing so, the NCLAT has done exactly what is beyond its powers ― gone beyond the express objectives of the Code, questioned and replaced the policy decision made by Parliament with its own understanding of what is best, and rewritten the statute itself. The Tribunal cannot become the recovery agent for the Department of Telecommunications and give it special treatment in violation of the provisions of the Code to effectuate that objective. Furthermore, it is well settled that the National Company Law Tribunals and the National Company Law Appellate Tribunal are not courts of equity⁵¹, and are bound by the statutory provisions of the laws they interpret and enforce. When courts of equity are bound by the statute, then the NCLAT definitely cannot go beyond express statutory provisions to decide questions of law based on equitable considerations.

Was the NCLAT’s judicial reprioritisation of spectrum dues based on sound reasoning?

No.

The Tribunal was concerned that the Government’s interest would be jeopardised because dues owed to it are placed below those owed to secured creditors, financial creditors, workmen, etc., and the CIRP would have the effect of effectively wiping out the dues owed to the Government under the spectrum licence. This reasoning flies in the face of the core principles governing the IBC. The Code aims to successfully resolve insolvent businesses and give them a fresh start. Debt claims, whether addressed by the resolution plan or not, are considered to be wiped out. Statutory dues, which spectrum dues are not, no matter how important or what their quantum, are not exempted from the process of wiping out that follows after acceptance of a resolution plan. That philosophy runs throughout the scheme of the CIRP, in furtherance of its objective of reviving the corporate debtor as running concern on a fresh slate.⁵²

The current approach adopted by the NCLAT in giving spectrum dues a special status of being above the provisions of the Code is a without any legal foundation whatsoever and deals a serious blow to the interests of all other stakeholders in the insolvency resolution process, as well as to the ability of the IBC to resolve telecom companies.

(III) Vijaykumar V. Iyer⁵³ also erred in overlooking the overriding nature of IBC, as explicitly stated in Section 238.⁵⁴ Section 238 thus mandates that whenever there is a clash between the Code and any other law or legal instrument, the Code shall prevail. There are no reservations or exceptions to this principle. The legislature has decided to explicitly give the Code primacy, in order to ensure that there is no legal basis to scuttle its operation and effect. The provision came into force on 1-12-2016, much after the Telegraph Act, or the spectrum licences governing the corporate debtor’s right to use spectrum. A plain reading of this provision points to the fact that IBC shall prevail over any other “instrument” having effect by virtue of any other law. An instrument would mean any legal document which is in effect.⁵⁵ The provisions of IBC should thus override the provisions of the spectrum licence, which is an instrument in existence by virtue of the provisions of the Telegraph Act. This means that the rights of the licensor-creditor under the spectrum licensing agreement and the recovery mechanism for the dues owed to it shall give way to the Code wherever there is a clash. Consequently, to the extent that the provisions of the agreement give primacy to the licensor-creditor-Government of India in respect of the dues owed to it, they are null and void on account of being in conflict with IBC, which shuffles this priority order and knocks the financial rights of the Government of India significantly down the pecking order. The rights of the Government of India captured in the spectrum licensing agreement in case of default by the licensee-corporate debtor no longer exist once the CIRP has been initiated, as the provisions of the Code shall have primacy and the rights regime of various creditors set by it shall operate, instead of the one established by the agreement.

This position is apparent even if the clash between IBC and the spectrum licence is considered without recourse to Section 238 of the Code. Firstly, the Code comes chronologically after the spectrum licences. This means that the legislature was aware of the general terms and conditions of spectrum licences, particularly Articles 3.4 and 3.5, which deal with the rights of the Government of India in case of default by the licensee-corporate debtor. The legislature thus consciously chose to give primacy to the recovery mechanism in the IBC as opposed to the recovery mechanism in the licence. Secondly, the Telegraph Act and the spectrum licence contain general provisions governing the rights and obligations of the licensee-corporate debtor as far as the use of spectrum is concerned. IBC, on the other hand, is a special legislation dealing specifically with insolvency and resolution⁵⁶. Given that the licensing agreement and IBC establish a different regime of dealing with the insolvency of the licensee-corporate debtor, the IBC will have to take precedence over the agreement, being the special law. This applies even when statutory debts are involved.⁵⁷ Even crown debts, such as tax dues, become subordinate to other dues in the manner indicated in Section 53⁵⁸, in spite of a specific statutory and executive machinery provided for their recovery.

At this stage, it is also important to consider whether the argument that spectrum dues are secured debt, based on certain provisions in the spectrum licence, is a meritorious one. At a cursory glance, this argument seems to hold ground and looks to be buttressed by the recent Supreme Court decision in STO v. Rainbow Papers Ltd.⁵⁹ There, the Supreme Court held that Section 48⁶⁰ of the Gujarat Value Added Tax Act, 2003, by creating a charge in respect of an assessee’s property for payment of the tax, created a security interest in favour of the Government, and the Government was thus a secured creditor for the purposes of the Code. The provisions of the spectrum licence do not create a specific charge in favour of the Government in respect of spectrum dues. Unlike Section 48 of the Gujarat Value Added Tax Act, 2003, the licence does not create a general security interest/first charge in favour of the Government of India for the payment of spectrum dues. All it does is accord priority to the Government in case the licensee is unable to pay its debts and has to undergo liquidation. The licence postulates that the proceeds of liquidation shall first be used to pay off the dues owed to the Government. This priority status has been explicitly and unequivocally amended by the Code, and due to a direct clash between the licence and the Code, the latter shall prevail by virtue of Section 238 of the Code. Therefore, it cannot be said that spectrum dues are secured debt to be treated differently from other dues owed to the Government, both by virtue of the language of the licence, as well as Section 238 IBC.

What the above analysis shows is that the NCLAT should not have been influenced by the provisions in the spectrum licensing agreement to give spectrum dues blanket immunity from the provisions of IBC, as the provisions of the spectrum licensing agreement vis-à-vis recovery of spectrum dues become nugatory the minute they come in conflict with IBC.

Issues with practical implementation of the current position ― A self-defeating interpretation

The current interpretation placed by the NCLAT on the applicability of the provisions of the Code on spectrum licence during the CIRP of an insolvent telecom company where spectrum dues have not been paid, renders the entire resolution process unworkable. Why is that so? There are four possible ways of implementing and enforcing the law laid down in Vijaykumar V. Iyer⁶¹, each having different effects on how the CIRP would pan out practically vis-à-vis telecom companies, spectrum licence, and spectrum dues. However, the end result would be the same in all four ― the debtor’s insolvency will not be successfully resolved in order to keep it running as a going concern, and the financial interests of the Government of India would not be safeguarded.

The first would be that the spectrum dues are completely untouched by the Code, while the spectrum licence is still an asset that can be transferred following the CIRP. In that case, the successful resolution applicant would gain control over all assets of the licensee-corporate debtor, including the spectrum licence. However, the spectrum dues would be intact and not wiped out after the CIRP is concluded, and that obligation would have to be discharged by the resolution applicant. Notwithstanding that the concept of leaving out spectrum dues from the ambit of the Code would be legally impermissible given the express provisions of the Code to the contrary effect, this outcome would be highly unworkable from the perspective of the resolution applicant. The logic behind the Code is that a resolution applicant will be incentivised to pay off the debt of a corporate debtor because it can get the debtor’s productive assets at a bargain, since creditors typically take a haircut during the resolution process on the dues owed to them. If spectrum dues are left intact, then the resolution applicant will be saddled with a massive liability, thus hampering its ability to revive the corporate debtor as a going concern. Instead of the debt being resolved, it would simply be kicked down the road. It would make greater economic and business sense for it to let the debtor go into liquidation, buy its assets for even cheaper, and negotiate with the Government of India for a fresh and hence longer-term spectrum licensing agreement, without incurring historical liability. The Government of India at this stage will practically have no choice but to agree to some form of a spectrum licence, because if it is unwilling to, then the spectrum will simply go to waste. Given that it is a scarce natural resource, such an outcome would be detrimental to society at large, and will also result in the Government not being able to financially exploit its time sensitive, exclusive privilege under the Telegraph Act. Therefore, in this scenario, it is not like the interests of the Government of India, which the Tribunal was so conscious to protect, would really be secured. If the licensee-debtor does go into liquidation, then odds are that the Government will recover nothing, as operational creditors usually do not get anything in liquidation. The stipulations in the licensing agreement giving the Government first charge over the assets of the debtor in case of liquidation would be overridden by the waterfall mechanism of the Code by virtue of Section 238. Therefore, neither will the debtor be resolved successfully and kept running as a going concern, nor will the interests of the Government be safeguarded. This is definitely not the outcome the Code envisaged.

The second would be that both the spectrum dues, as well as the spectrum licence are left out of the ambit of the Code. While the NCLAT does acknowledge that spectrum is an asset that can be transferred under a resolution plan pursuant to a successful CIRP, this is one of the possible ways of enforcing the jurisprudence propounded in Vijaykumar V. Iyer⁶². In such a case, the successful resolution applicant will gain control over all assets of the licensee-corporate debtor, except the right to use spectrum (which would revert to the licensor). It would also not have to pay any amount towards clearance of spectrum dues. It will thus gain access to the entire business apparatus of the telecom company that is under resolution, except the most basic asset required to keep it as a going concern spectrum. A telecom company makes for an unattractive proposition for a prospective resolution applicant without the right to use spectrum present as an asset that would be transferred to the resolution applicant.⁶³ In this scenario, it will be difficult to find any entity that would be interested in submitting an attractive resolution plan that would meet the interests of various creditors and keep the debtor as a going concern. What is likely to happen is that the debtor will go into liquidation for lack of a better alternative, with its assets being sold at throwaway prices. This will be detrimental to the interests of all creditors, as they will have to take an even larger haircut than if the CIRP were successful, and some of them will likely receive nothing. Even from the Government’s perspective, no beneficial result will emerge. If the company goes into liquidation, the proceeds will be distributed as per the waterfall mechanism of Section 53. The Government would not receive anything since spectrum dues would be outside the ambit of the Code, and due to Section 238 of the Code, the stipulations in the licensing agreement giving the Government first charge over the assets of the debtor in case of liquidation would be overridden by Section 53 of the Code. Like in the previous scenario, neither will the debtor be resolved successfully and kept running as a going concern, nor will the interests of the Government be safeguarded.

The third would be that there be an embargo on the commencement of the resolution process until spectrum dues are paid off. In this scenario, the licensee-debtor as well as its creditors would be held hostage till the former is able to repay its spectrum dues. This would lead to an untenable position, as an insolvent licensee would obviously not be able to pay the dues, but there would be a bar on the commencement of its resolution. This would only deteriorate the situation further. There is a reason why time is of the essence in both initiating as well as completing the CIRP. Continuation of the licensee in its inefficient, unprofitable state would further erode the value of its asset base, thus making its resolution down the line even more difficult. The greater the delay, the greater the erosion. In fact, it is likely that the licensee’s finances would be so poor by the time it is able to pay off spectrum dues in their entirety, that it will be an unattractive proposition for a resolution applicant, thus necessitating its liquidation. That is an outcome that the Code seeks to avoid. The only situation where such a scenario really protects the interests of the Government is if the currently insolvent licensee-debtor is somehow able to turn itself around to raise funds to pay off its spectrum dues. If this does happen, then odds are that the licensee will be in a financially healthy position to repay other creditors, thus not needing insolvency resolution in the first place. Therefore, the success of this scenario in protecting the licensee’s creditors and the Government really depends on the unrealistic possibility of an insolvent licensee somehow turning itself around, in effect hoping for a miraculous resolution without recourse to the CIRP. If that is the situation, then the very question of transfer of spectrum under CIRP becomes moot in the first place. Clearly, even this scenario of barring the commencement of CIRP until spectrum dues are paid off in full is an untenable one.

The fourth would be that while both the spectrum as well as the dues are covered by the Code, it will be necessary for the resolution plan to provide for the repayment of spectrum dues in full. Legally, this would amount to designating spectrum dues to be a special class of debt to which the philosophy and the general provisions of the Code do not apply, thus rewriting the Code⁶⁴, which is precisely what the NCLAT has sought to achieve. Assuming for the sake of argument that this is permissible, it would lead to the same situation as the first possible scenario discussed above. It would make more economic sense for the resolution applicant to let the debtor go into liquidation, buy its assets for even cheaper, and negotiate with the Government for a spectrum licensing agreement without incurring historical liability. As noted above, the Government of India at this stage will practically have no choice but to agree to some form of a spectrum licence. Once again, neither will the debtor be resolved successfully and kept running as a going concern, nor will the interests of the Government be safeguarded.

Neither scenario leads to a desirable outcome. Treatment of spectrum dues as regular operation debt, unlike the situation envisaged in Vijaykumar V. Iyer⁶⁵, will lead to the best outcome given the situation. The interests of financial creditors will be protected, the licensee will continue to function as a going concern, a scarce, precious and limited national resource like spectrum will be efficiently utilised under new management instead of lying idle in the hands of the Government, operational creditors (including the Government) will likely get something from the resolution plan, and the licensor will at least be paid the spectrum dues for the remainder of the period of the agreement, instead of getting nothing if the licensee goes into liquidation (as is likely in all four scenarios).

Conclusion

The NCLAT’s decision in Vijaykumar V. Iyer⁶⁶, by holding that spectrum dues need to be cleared in full, prior to any transfer of the right to use the spectrum to the successful resolution applicant has rendered the Code fairly impotent in resolving insolvency in the telecom sector. The NCLAT has done this on poor legal foundation and reasoning, and not only gone against the objectives, scheme, and the express language of the IBC, but also gone into the legislature’s domain of determining policy and has rewritten the law based on its understanding of what is desirable.

This decision will make it virtually impossible to keep telecom companies as a going concern, thus defeating the purpose sought to be achieved by the Code. It creates primacy of government dues over all other debt, something that is against the intent and the plain, unambiguous language of the Code. Even from a practical implications perspective, every possible scenario leads to the same end result – the licensee will not be kept running as a going concern, and the interests of the Government will not be safeguarded.

The decision will not only affect the efficacy of the IBC vis-à-vis the telecom sector but will have a debilitating effect on the ability of the Code to successfully resolve insolvent companies in a wide variety of industries that involve statutory contracts dealing with natural resources held by the State in public trust. Any company that operates using scarce natural resources such as petroleum, natural gas, minerals, ecological resources, forests, waterbodies, etc. will face difficulties in the successful resolution of its insolvency, thus affecting myriad stakeholders, including the financial system. The contracts in all these industries are similar to spectrum licences ― the State holds the scarce resource in public trust and confers a limited right to use these resources for commercial purposes in lieu of a fee. If the law laid down in Vijaykumar V. Iyer⁶⁷ is held to be correct, then it will make insolvency resolution an uphill task for these industries and will eventually lead to liquidations across the spectrum ― an undesirable outcome from every perspective.

Therefore, for the reasons analysed in this paper, the judgment is erroneous from a legal perspective as well as from a practical implication perspective. Consequently, its reasonings and conclusions need to be disregarded as having laid down the incorrect law, in order to prevent the Code from becoming a dead letter in respect of industries dealing with scarce natural resources held by the State in public trust. Spectrum has to be held as a transferable asset for the purposes of the CIRP, irrespective of whether spectrum dues are owed by the licensee-debtor or not, and spectrum dues have to be treated as regular operational debt for the CIRP.