NCLAT | 10 Appeals, one tripartite agreement, with almost similar quandary on ‘Spectrum’| Non payment of dues-Can Spectrum be used as security interest in insolvency and moratorium as an excuse| Convoluted attempts to “offer peanuts”?

National Company Law Appellate Tribunal (NCLAT): A Coram of Bansi Lal Bhat, J. (Acting Chairperson), Anant Bijay Singh, J. (Judicial Member) and Shreesha Merla (Technical Member) was of the opinion that Spectrum is a natural resource and the Government is holding the same as cestui que trust. Resultantly, it cannot be treated as a security interest by the lenders and they cannot be said to be the owners in possession but only in occupation of the right to use spectrum. And that it would not be available to use without payment of requisite dues.

The 10 appeals were against approval of resolution plans in respect of Aircel Ltd., Dishnet Wireless Ltd. and Aircel Cellular Ltd. in terms of common order passed by the Adjudicating Authority.

In the present matter the debt-ridden telecom companies that are undergoing insolvency proceedings sought rights to their spectrum where they claimed  it as a security interest. It was therefore alleged, that the defaulting Licensees/TelCos sought to wriggle out of their liabilities by resorting to triggering of Corporate Insolvency Resolution Process (CIRP) by seeking initiation of CIRP under Section 10 of Insolvency and Bankruptcy Code, 2016 (the 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 Licences and in the event of a Resolution Plan being approved, subjecting the Central Government to be contented with the peanuts offered to it as ‘Operational Creditor’, if at all anything survives for the Operational Creditors within the ambit of distribution mechanism contemplated under Section 53 of the Code. Further that it was indisputable that the Licensees are the self-confessed defaulters having contravened terms and conditions of Licence Agreement on account of nonpayment of contractual dues towards use of spectrum causing huge pecuniary loss to the Nation besides being guilty of breach of trust but instead of rectifying the breach raised disputes of sorts to evade the huge outstanding payment. Counsel representing the Union of India remarked that “…The twin requirements of payment of dues and maintenance of services are the imprimatur of the licence agreement as the same would protect the public interest. while the Tripartite Agreement was entered to facilitate the financing of the project by Lenders and enabled Lenders to procure assignment or transfer of licence, the interest of DOT was never intended to be inferior to the interests of Lenders”. It was further submitted that the Aircel Companies stopped operations before going into insolvency and for about three years spectrum was being wasted.

Counsel for the respondent among other things submitted that the same being payable for the grants arising prior to commencement of CIRP would not be required to be paid during the moratorium period.

In the pertinent case, the issues involved were:

-Whether Telecom Service Providers can be said to be the owner based on the right to use the spectrum under licence granted to them?

-Whether a licence is a contractual arrangement? Whether ownership belongs to the Government of India?

-Whether spectrum being under contract can be subjected to proceedings under Section 18 of the Code?

– Whether the spectrum can be said to be in possession, which arises from ownership. What is the distinction between possession and occupation? Whether possession correlates with the ownership right?

-The difference between trading and insolvency proceedings and whether a licence can be transferred under the insolvency proceedings, particularly when the trading is subjected to clearance of dues by seller or buyer, as the case may be, as provided in guideline nos. 10 and 11; whereas in insolvency proceedings dues are wiped off. Guideline No. 12 is also assumed to be of significance in case spectrum is subjected to insolvency proceedings, which must be considered. the licence contained an agreement between the licensor, licensee, and the lenders, whether on the basis of that, spectrum can be treated as a security interest and what is the mode of its enforcement.

The Tribunal dealt with the matter in depth, and appreciated the articulate oral submissions so made that helped the case to see the light of the day. Thus, drafted the following summary:

Summary of Findings

-Is a natural resource and the Government is the trustee, therefore not be available to use without payment of requisite dues.

-Being an intangible asset can be subjected to insolvency/liquidation proceedings.

-Dues of Central Government/ DOT under the Licence fall within the ambit of Operational Dues under the Code and payment installments of spectrum acquisition cost also fall within the ambit.

-As per Revenue Sharing Regime and the provisions of Indian Telegraph Act, 1885, the nature of dues payable to Licenser continues to be ‘Operational Dues’ which are payable primarily in terms of the Licence Agreement.

-Triggering of CIRP under the Code with malicious or fraudulent intention, would be impermissible.

-Telecom Service Providers have the right to use spectrum under licence granted to them. They cannot be said to be the owners in possession of the spectrum but only in occupation of the right to use spectrum. Ownership of spectrum belongs to Nation (people) with Government only being its Trustee. Possession correlates with the ownership right.

-Under Section 18 of the Code, the Interim Resolution Professional is bound to monitor the assets of the Corporate Debtor and manage its operations, take control and custody.

– Insolvency Proceedings arise out of default in discharge of financial or operational debt and are triggered for insolvency resolution of corporate persons, etc. in a time bound manner for maximization of value of assets of such persons.

 -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.

-The spectrum cannot be utilised without payment of requisite dues which cannot be wiped off by triggering CIRP under the Code.

-The defaulting Licensees/ TelCos cannot withhold the huge arrears payable to Government, obtaining moratorium to abort Government’s move to suspend, revoke or terminate the Licences and in the event of a Resolution Plan being approved, subjecting the Central Government to be contended with the peanuts offered to it as ‘Operational Creditor’ within the ambit of distribution mechanism contemplated under Section 53 of the Code.

-Having regard to Clause 3.4 and 3.5 of the Tripartite Agreement according priority/ first charge to DOT, the spectrum cannot be treated as a security interest by the Lenders. Therefore, the mode of Enforcement of security interest was not considered.

 [Union of India v. Vijaykumar V. Iyer, Company Appeal (AT) (Insolvency) No. 733 of 2020], decided on 13-04-2021]


Advocates before the Tribunal:

Counsel for the Appellant

Amit Mahajan, CGSC with Pooja Mahajan, Gitesh Chopra, Vidur Mohan, Kanu Agrawal and Shefali Munde

Counsel for the Respondent

Ravi Kadam and Abhinav Vashisht, Sr. Advocates with Anoop Rawat,  Charu Bansal, Ankita Mandal, Vaijayant Paliwal, Saurav Panda, Kriti Kalyani and Salonee Kulkarni, Advocates for R1. Dhruv Dewan, Harshita Choubey, Dhruv Sethi, Chandni Ghatak and Rohan Batra, Advocates for R-2. Ramji Srinivasan, Sr. Advocate with Raunak Dhillon, Aditya Marwah, Madhav Kanoria, Shubhankar Jain, Shivkrit Rai and Rajshree Chaudhary, Advocates for R-3

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.