NCLAT: Spectrum license Is Subject to Insolvency Proceedings If Dues Are Cleared By License Holder to the Union/DOT

NCLAT: Spectrum license Is Subject to Insolvency Proceedings If Dues Are Cleared By License Holder to the Union/DOT

The National Company Law Appellate Tribunal (NCLAT) on 13 April 2021, in the case titled Union of India (Appellant) v. Vijaykumar V. Iyer (Respondent) has ruled that spectrum is an intangible asset that can be subjected to insolvency/liquidation proceedings and the dues of Central Government/ Department of Telecom (DOT) under the spectrum license fall within the ambit of operational dues under the Insolvency & Bankruptcy Code (IBC).

The NCLAT comprising of Justices Bansi Lal Bhat, Acting Chairperson; Anant Bijay Singh, Member (Judicial) and Shreesha Merla, Member (Technical). The Appellate Tribunal clarified that spectrum is an intangible asset of a telecom company and it can be subject to insolvency proceedings or liquidation.

The NCLAT added that while a license can be transferred as an intangible asset of the Licensee /Corporate Debtor under Insolvency Proceedings in ordinary circumstances, however as the trading is subjected to clearance of dues by Seller or Buyer, as the case may be, the Transferor/Seller or Transferee/Buyer being in default would not qualify for transfer of license under the insolvency proceedings.

It clarified that the spectrum held by telecom operators cannot be transferred to new buyers under insolvency proceedings if government dues are not cleared. The Appellate Tribunal was dealing with a blow to lenders to bankrupt telcos Reliance Communications Ltd (RCom), Aircel Group, and Videocon Telecommunications Ltd.

In October 2020, following a clarification plea by Aircel, the Supreme Court had permitted the Appellate Tribunal to decide the issue of-

Whether mobile operator Aircel's spectrum license could be sold the Insolvency Code?

The Union Govt. argued that there was an implicit embargo on the right of the State to transfer public resources to private property if such transfer affected the general public.

It stated that the License Agreement between the DoT and the Corporate Debtor, a mobile operator, is also a facet of public trust, and could not be said to exist outside the trust. On disposal of assets, DoT would have the first charge for recovery of its dues and that it would be a Financial Creditor in the insolvency process.

On the other hand, the contentions of the resolution professional was that the dues owed to DoT constituted operational debt and being a statutory authority, DoT should be treated in a similar manner as other statutory authorities under IBC as creditors of the same class and no preferential treatment can be given to it.

The NCLAT pointed out that the use of spectrum under the license was an intangible asset in the hands of Licensee, and it is to be managed by the Resolution Professional under Section 18 IBC.

The Appellate Tribunal stated that the Telecom service providers have due right to use spectrum under license granted to them. Ownership of spectrum belongs to people with Government only being its Trustee. Possession correlates with the ownership right. It emphasized that however the spectrum cannot be utilized without payment of requisite dues.

It added that the spectrum could not be treated as a security interest by the lenders as the priority/first charge belonged to DoT. Apart from stating that dues under the license were operational dues, the NCLAT stated that even the deferred/ default payment installments of spectrum acquisition cost also fell within the ambit of Operational Dues.

The NCLAT added, "Under Section 18 of the I&B Code, the Interim Resolution Professional is bound to monitor the assets of the Corporate Debtor and manage its operations, take control and custody of assets over which the Corporate Debtor has ownership rights including intangible assets which include right to use spectrum."

It further clarified that "The defaulting Licensees/ TelCos cannot be permitted to wriggle out of their liabilities by resorting to triggering of CIRP by seeking initiation of CIRP under Section 10 of I&B Code, not for purposes of resolution but fraudulently and with malicious intent of withholding the huge arrears payable to Government, obtaining moratorium to abort Government's move to suspend, revoke or terminate the licenses and in the event of a Resolution Plan being approved, subjecting the Central Government contended with the peanuts offered to it as 'Operational Creditor' within the ambit of distribution mechanism contemplated under Section 53 of I&B Code."

It stated that the spectrum can be subject to IBC proceedings, but only if all the dues payable by the spectrum license holder to the DoT are cleared. It added that dues owed to Union/DOTunder 'spectrum license' are operational dues as per insolvency & bankruptcy code.

According to the NCLAT, "While a licence can be transferred as an intangible asset of the Licensee /Corporate Debtor under Insolvency Proceedings in ordinary circumstances, however as the trading is subjected to clearance of dues by Seller or Buyer, as the case may be, the Transferor/Seller or Transferee/Buyer being in default, would not qualify for transfer of licence under the insolvency proceedings."

It added that the spectrum cannot be utilized without payment of requisite dues which cannot be wiped off by triggering CIRP under the IBC.

The Appellate Tribunal concluded that the telecommunication companies only have the right to use the spectrum and that they do not own it, this also effectively blocks lenders to the companies from creating any charge or claim on the said spectrum.

It added that the DoT being an operational creditor in the scheme of things will get priority in payments from any prospective bidders since the statutory dues owed to it will have to be cleared either by the corporate debtor or the bidders.