Treatment of Spectrum Under IBC: Avoiding a Lose-Lose Situation after the 5G Auction

Richik Dadhich*

The telecommunication services (hereinafter “telecom”) sector continues to see an exponential growth in India. The recent 5G auction saw an enthusiastic response from various stakeholders, and has been hailed as India’s biggest ever spectrum auction. While the Indian government often claims that it is focused on improving the ease of doing business in the country, the judicial and legislative support seems to be missing for the telecom sector under the Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC”).

Over the past years, the Courts have attempted to provide clarity on multiple issues related to spectrum trading and the manner in which spectrum could be subjected to insolvency proceedings. Union of India vs. Vijaykumar V. Iyer (hereinafter “Vijaykumar case”) was one of the cases where the discussion on spectrum trading under IBC was taken up.

Here, in a stark contrast with the established position on the treatment of operational creditors, the National Company Law Appellate Tribunal (hereinafter “NCLAT”) created a new class of creditors in spectrum issues.

Considering the declining profits in the industry and the high reserve costs involved, several companies such as Reliance Communications and Vodafone Idea have filed for insolvency and bankruptcy proceedings in the past. There is a strong possibility that these events might repeat themselves in the near future, post the launch of 5G services.

In this context, the article is aimed at showcasing how the Vijaykumar case has set a dangerous precedent and why the Supreme Court needs to categorically overrule it, in order to protect the interests of all the stakeholders.

Can Spectrum Trading be Subjected to IBC Proceedings?

As held by the Apex Court in Centre for Public Interest Litigation and Others v Union of India[i], it is well settled that spectrum per se is a natural resource and hence no individual could claim rights or ownership over the same. It has also been held that in order to further the best interests of the society, the central authority must regulate and grant licenses to other entities to use these resources.[ii] Thus, the telecom companies could only possess a license to use the spectrum, without any ownership over the actual spectrum.

Now, the Ministry of Corporate Affairs defines an intangible asset as “an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.” Based on this definition, it is clear that spectrum licenses would be classified as intangible assets. This notion has been affirmed by the Courts in multiple cases where spectrum licenses were considered as intangible assets for accounting treatment and taxation purposes.

These assets would form a part of the liquidation estate under Section 35 of IBC, implying that the liquidator would have the power to sell the debtor’s assets once an order is passed.

The Apparent Primacy of Trading Guidelines over IBC

The bone of contention for the persistent dispute between the Department of Telecommunication, Government of India (hereinafter “DoT”) and multiple telecom companies arises from the fact that the Guidelines for Trading of Access Spectrum, 2015 (hereinafter “trading guidelines”) allow the spectrum licenses to be transferred on certain conditions. One of the main pre-requisites of transferring the license is that all prior dues of the seller must be cleared.

In the Association of Unified Telecom Service Providers of India Case[iii], these telecom companies approached the Supreme Court to seek a waiver of their past Adjusted Gross Revenue (hereinafter “AGR”) dues. Instead of allowing the relaxation, the Court dismissed the application and ordered the companies to pay the dues within the time limit of the next 10 years.  

However, the abovementioned judgement only settled the position on AGR dues. Issues pertaining to the validity of spectrum trading under IBC, and the possible implications of unpaid past dues were referred to the NCLAT.

Thus, in the Vijayakumar Case, the NCLAT relied on the provisions of the Guidelines for Trading of Access Spectrum, 2015 to rule that:

 “the Spectrum Trading Guidelines cannot be substituted under the CIRP and the dues of the Licensor, which are required to be cleared by the Seller prior to concluding any agreement for spectrum trading in terms of Guideline 11, cannot be subjected to clearance by way of a provision in a Resolution Plan, more so, when the Seller is in breach under contract viz. the License Agreement”.

The NCLAT has held that even in the cases of resolution of a licensor under IBC, spectrum assets cannot be transferred to the new bidder without payment of overdue amounts. In other words, the only possible way of transferring spectrum license would be the unconditional clearance of all the past dues by the licensor/corporate debtor. 

The Perilous Defects of the NCLAT Order

While the NCLAT’s ruling was correct with respect to its findings regarding spectrum being a natural resource and the fact that such licenses could be subject to insolvency proceedings, it fell prey to several defects.

• Disregard of the Overriding Effect of IBC

Section 238 of the IBC explicitly provides that the provisions of the IBC override all other laws and instruments. Thus, IBC would prevail over the contractual stipulations of the licenses, as well as the Trading Guidelines and the NCLAT would have no power to enforce such conditions.

Further, Section 31(1) of the IBC makes the resolution plan binding on the “corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.”

One of the purposes of Insolvency & Bankruptcy Code (Amendment) Act, 2019 was the inclusion of Central and State Governments, and all the other authorities to which debt is owed. From this, it could be inferred that the legislative intent was to make the resolution plan equally binding on all the stakeholders. Preferential treatment could not be meted out to an authority merely because of statuary obligations or its affiliations to the government.

In the present case, the DoT, being a department under the Government of India, would squarely fall under the categories mentioned in Section 31(1) and hence, no pre-condition such as clearance of dues should have been accepted by the Court.

• Unjustified Treatment of Spectrum Dues Under a Special Category of Creditor Dues

 There are myriads of cases in which issues regarding the differential treatment between various categories of creditors under IBC have been raised before the Courts. In the landmark Swiss Ribbons Pvt Ltd. v. Union of India[iv] judgement, the Supreme Court held that there exists an intelligible differentia between financial creditors and operational creditors which has a direct relation to the objects sought to be achieved by the Code. This difference exists with respect to the nature of transactions and the secured/unsecured nature of these creditors. Further, with respect to operational creditors, the Court imposed a condition that for a resolution plan to be approved there must be fair and equitable treatment of operational creditors.

Additionally, the Apex Court declared in Commissioner of Income Tax v. Monnet Ispat Ltd.[v] (hereinafter “Monet Ispat”) that government creditors such as the Income Tax authorities are prohibited from initiating separate recovery actions and must settle their claims through the IBC.

In Vijayakumar, the Central Government raised the issue that if the resolution plan is approved, they will have to be satisfied with the “peanuts offered to it as Operational Creditor, if at all anything survives…within the ambit of distribution mechanism”. Now, even though the Government’s concern is valid, all other operational creditors are also in the same boat. Hence, its position is not unique.

It is well settled that creditors of the same class must be treated similarly. The condition for payment of existing dues would result in arbitrary treatment within the same class of creditors and creation of a new sub-class of operational creditors, whose claims are accorded a higher pedestal than others. Thus, the ruling of the NCLAT in Vijayakumar is wrong in distinguishing spectrum dues from all other operational creditor dues.

Navigating the Way Forward from a Lose-Lose Situation

Over the past, the Courts and Tribunals have attempted to settle the intricacies of spectrum and AGR dues under IBC. However, the current position is highly problematic. This is because the inability to transfer spectrum licenses without the payment of past dues leads to unfavorable outcomes not only for the telecom companies, but also for the DoT.

Spectrum licenses are the most important assets for any telecom company, and a significant amount of capital is spent on acquiring them. In fact, the 5G auction saw an investment of more than Rs. 1.5 lakh crore by various bidders. It is clear that the ability to trade these licenses as per the resolution plan would be the deciding factor on whether the company would stay afloat or not. If these companies had the ability to settle AGR dues, they would not have resorted to insolvency in the first place.

The Vijayakumar verdict also implies that, in the absence of clearance of past dues, the licenses would remain unsold. In other words, the spectrum would be defunct and not usable by other telecom companies to provide services to the customers. Thus, the DoT is also deprived of the revenue it could have generated from the license dues and revenue-based royalties.

The matter has already been appealed and is currently sub-judice before the Apex Court. The Court must overrule the NCLAT’s verdict considering the primacy of IBC over other statutes. Further, it must weigh the interest of DoT, an operational creditor, over the interests of banks, financial institutions, and other financial creditors, who have been given preferential treatment under IBC.

The UNCITRAL Legislative Guide on Insolvency Law gives importance to the elements of certainty and consistency with respect to the priority of creditor claims. As highlighted in the previous section, both of these elements are missing in the Indian scenario. Thus, in order to clarify the primacy of IBC over existing laws, the legislature must consider amending the spectrum guidelines to provide for transfer of spectrum licenses under IBC, subject to appropriate conditions. Further, the judiciary must maintain a consistent approach with respect to government’s claims as an operational creditor. It must avoid deviating from the well-settled position laid down by the Supreme Court in cases such as Swiss Ribbons and Monet Ispat.

*The author is a fifth year student at National Law University, Jodhpur.

[i] Centre for Public Interest Litigation and Others v Union of India, Writ Petition (C) No. 382 of 2014.

[ii] Ministry of Information vs. Cricket Association of Bengal, 1995 AIR 1236, 1995 SCC (2)161.

[iii] Union of India v. Association of Unified Telecom Service Providers of India, 2020 SCC Online SC 1247.

[iv] Swiss Ribbons Pvt Ltd. v. Union of India, Writ Petition (Civil) No. 37 Of 2019.

[v] Commissioner of Income Tax v. Monnet Ispat and Energy Ltd, SLP(C) No. 6487/2018 (XIV).