The Conundrum or Spectrum: Analysing the Gamut of Union of India v. Vijay Kumar V. Iyer

Ruchir Joshi and Ayush Yadav*

The article demonstrates the shortcomings of the recent National Company Law Appellate Tribunal (“NCLAT”) judgement of Union of India v. Vijay Kumar Iyer. The NCLAT, through this judgement had an opportunity to settle the fate of those telecom companies who had resorted to IBC for their resolution in the event of unpaid Annual Gross Revenue (“AGR”) dues. Instead, it seems that it has possibly invited future litigation. The authors strongly believe that the NCLAT while focusing on the merits, has ignored the objective of Insolvency Proceedings. The telecom companies would now be pushed for liquidation if the AGR dues remain unpaid. 

With the advent of the National Telecom Policy in 1994, the Indian telecom sector witnessed a liberal transition in its conventional policies. The transition witnessed the central government issuing spectrum portions to companies through auction. This was followed by a new policy rollout in 1999 focused on easing the payment procedure. Under the new model, the revenue is shared and telecom operators are required to pay license fees and spectrum-usage charges as part of their revenue to the government.

Background

The NCLAT’s judgement in Union of India vs. Vijay Kumar V. Iyer settled the primary question regarding whether the spectrum of a distressed telecom company can be subjected to the Insolvency proceedings under the Indian laws.

The judgement came in the backdrop of the long-standing dispute between the telecom giants and Department of Telecommunication (“DoT”). In 2019, various telecom companies approached the Apex Court to seek waiver of their AGR dues. The Hon’ble Supreme Court in Union of India vs. Association of Unified Telecom Service Providers of India rightly dismissed the application and gave telecom companies a reduced time-limit of 10 years to pay their dues. This judgement gave a major blow to Reliance Communication and Aircel, who were eventually denied from trading their spectrum through Corporate Insolvency Resolution Process (“CIRP”) ad interim. However, the Supreme Court’s decision settled solely the position on AGR dues. Questions regarding the nature of spectrum license, its transferability in case of unpaid dues and whether it could be subjected to Insolvency proceedings were referred to the NCLAT.

The nature of Spectrum: Upholding the doctrine of Public Trust

The Tribunal, while duly acknowledging the decision of Hon’ble Supreme Court in Centre for Public Interest Litigation and Others v Union of India, categorized spectrum as a natural resource. Now, it is a settled position that the Government holds the spectrum in the capacity of Cestui que trust and consequently no entity can claim ownership or possession over this scarce resource.

It is interesting to note that although the Tribunal delineated the nature of the spectrum, it specifically noted that this does not form the primary bone of contention as the telecom companies have not asserted their title to the spectrum per se. Instead, their argument hovers around ownership on the ‘right to use’ spectrum. The agreement between the DoT and telecom companies resulted in the Tribunal declaring that companies are only entitled to a limited ‘right of use’ of spectrum. In line with the agreement, this would be granted by the DoT for a fixed period and in lieu of a certain license fee.

‘Right to use’ as an intangible asset: Widening the horizon of spectrum

As per the Insolvency and Bankruptcy Code, 2016 (‘I&B Code’), in the absence of ownership and possession of assets (herein, ‘right to use’ of spectrum), the corporate debtors are impeded from transferring them through the CIRP or liquidation. The Tribunal was diligent enough to sense the possible ramification caused by barring the telecom companies from resettlement of spectrums.

In giving effect to the value attached to the spectrum, it must be emphasized that no prospective resolution applicant would be willing to settle the debts of a company, unless some lucrative assets are proposed in exchange. Spectrum, which forms the principal asset of any telecom company, needs to get transferred to receive a good resolution plan. In case of non- transferability of spectrum, the company would be forced into liquidation, which is against the objective of Insolvency and Bankruptcy Code.

It was argued before the Tribunal that an ‘asset’ is defined as a “present economic resource controlled by the entity as a result of past events.” Relying on this definition and the intangible nature of a spectrum, the Tribunal effectively declared the ‘right to use’ as an intangible asset, under Section 18 of the ‘I&B’ Code.

Interestingly, while deciding this issue, the Tribunal drew the DoT’s attention towards the Tripartite Agreement and the Guidelines for Trading of Access Spectrum, 2015 that allowed the ‘right to use’ to be transferred on certain conditions. On the conjoint reading of these provisions, the Tribunal was of the view that the DoT’s stand of not allowing the transfer of ‘right to use’ is certainly not in consonance with the same. Thus, it held that the ‘right to use’ can be transferred through the proceedings and subsequently moratorium would apply in accordance with the provisions of the ‘I&B’ Code.

The possible threat of wiping off the AGR dues

Another issue, which fell for consideration before the Tribunal, pertains to the ‘nature of debt’ and the status of the DoT. The Tribunal categorically held that all dues payable to the Government/licensor are operational in nature and hence the DoT can be best qualified as Operational Creditor. Being an operational creditor, the DoT does not have any right to vote on the resolution plan and hence their interest can potentially get jeopardized.

The above position of law posed a serious concern on the settlement of AGR dues, which are now dependent on the vagaries of resolution plan. Since, the public money in the form of AGR dues was at stake, its wiping off would inevitably cause futuristic disruptions.

Therefore, the Tribunal while addressing the Hon’ble Supreme Court’s concern of whether such dues as  payable to Government can be wiped off by resorting to the proceedings under the I&B Code, did not limit itself to the scheme provided under the ‘I&B’ Code. It went on to examine whether the insolvency proceedings itself are bonafide or not. The Tribunal in the present case, was of the view that the intention of the Telecom Companies in initiating the CIRP itself is malafide as it seems to be another attempt by these ‘self-confessed defaulters’ to evade the huge outstanding payment of the AGR dues and to wriggle out of their liabilities. The Tribunal also observed that “the plan does not appear to be a resolution plan but appears to be a winding up, liquidation plan” as it seeks to monetise the majority of the assets while continuing only with a small portion of the business operations. The Tribunal reckoned the companies’ ulterior motive of not paying the AGR dues, under the garb of insolvency.

Therefore, though on one hand the Tribunal held that the ‘right to use’ of spectrum can be transferred through the proceedings, on the other it added a condition precedent to the same which required that “the spectrum cannot be utilized without payment of requisite dues which cannot be wiped off by triggering CIRP under ‘I&B’ Code“. The Tribunal did not let the company forgo the obligation to pay the AGR dues. It further upheld the Guidelines 10 and 11 of the Guidelines for Trading of Access Spectrum, 2015, which bars the transferor in default to qualify for transfer of license under the insolvency proceedings. The Tribunal held that these guidelines cannot be substituted, under the CIRP, even though there is a non-obstante clause attached to the ‘I&B’ Code. 

Concluding remarks

A cursory glance at the judgement gives the impression that it has settled the intricacies of spectrum and AGR dues. The Tribunal by rendering ‘right to use’as an intangible asset of the telecom companies has surely intensified the commercial and economic viability of spectrum. Further, the obligation to pay AGR dues before transferring the ‘right to use’ restores the doctrine of public trust.

However, the authors believe that the judgement is tainted by various defects. Firstly, it is almost impossible for the companies to pay the whopping sum of AGR dues. Secondly, had the companies been able to settle the dues, they would not have resorted to Insolvency. The failure to pay AGR dues will prevent them from utilising the spectrum in Insolvency process and hence resolution is unattainable. Therefore, it can be concluded that although the companies are allowed to transfer the spectrum’s ‘right to use’, its application is almost impossible. As a result of this, the companies will be left with no other option but to liquidate as the outstanding debts are enormous. In fact, this judgement might lead Reliance Communications to liquidate unless this ruling is reversed by the Apex Court.

While pronouncing the judgement, the Tribunal substantially relied on the malafide intention of corporate debtors. The position is still ambiguous for those companies, who are actually facing the precariousness of dissolution and want to sustain themselves through resolution.

The authors agree that in cases where the intention behind the triggering of CIRP and the resolution plan appears to be malafide resolution should not be allowed, however, in genuine cases the companies must be allowed to resort to it. However, even ingenuine cases, the company won’t be able to utilise spectrum without settling the AGR dues. The court failed to provide any alternative recourse to the debtors who initiated CIRP in good faith. There exists no clear demarcation between the nature of proceedings initiated in good faith and those with malafide intention.

Further, it needs to be understood that though the trading guidelines are not substituted under the CIRP, they must be interpreted in accordance with the resolution of pre-CIRP dues made, in accordance with provisions of the ‘I&B’ Code.

Therefore, in the author’s opinion, though this judgement is in the interests of justice as it considers the huge amount of loss that may have been caused to the public exchequer but its recovery is still dubious. However, it is not in consonance with the objective of the ‘I&B’ Code as it lays down a condition precedent, which in a way, is an attempt to rewrite the ‘I&B’ Code, in a manner, in which the government dues are much lower in hierarchy when a company goes for Insolvency.

*The authors are fourth-year student at National Law University, Nagpur