Treatment of Intangible Rights over Natural Resources in a CIRP: A Tussle between Exclusive Privilege and Resolution under the IBC

It seems that intangible rights over natural resources such as spectrum are subject to insolvency resolution under the CIRP as such rights constitute an asset within the meaning of Section 18(f) IBC.

The Insolvency and Bankruptcy Code, 2016 (IBC) provides for a creditor-driven corporate insolvency resolution process (CIRP) wherein the resolution professional takes control and custody of assets of the corporate debtor to manage the affairs of the corporate debtor as a going concern.

The preservation of the assets of the corporate debtor is one of the key objectives of the IBC and is crucial for the effective resolution of a corporate debtor.¹ However, the resolution of a corporate debtor engaged in businesses such as mining, telecommunications, or hydroelectricity presents a unique challenge. Corporate debtors engaged in such businesses may require a licence, grant, right to use, or other similar intangible rights over natural resources from the Government for the conduct of their business operations. In such a case, the resolution of the corporate debtor often turns on the value maximisation of the licence, right to use, or other intangible rights held by the corporate debtor.

Nature of intangible rights over natural resources

The public trust doctrine that has long been a part of Indian law provides that natural resources are held by the Government in trust for the people.² For assets such as minerals³, natural gas⁴ and spectrum⁵, the Government also has a judicially recognised exclusive privilege to use the said assets or to make the assets available for use by private parties.

The Supreme Court in Mineral Area Development Authority v. SAIL⁶ has held that once the Government decides to enter into a contract for the use of the natural resources, it parts with the exclusive privilege with respect to that natural resource. In fact, the Supreme Court in its judgment in Union of India v. Assn. of Unified Telecom Service Providers of India⁷ has held that once the Government has entered into a licence agreement for the use of spectrum in lieu of consideration, the right to use the spectrum is governed by the licence agreement.

Thus, it follows that when intangible rights to use a natural resource are granted to a licensee in lieu of consideration, the Government cannot claim exclusive privilege to use the said natural resource. Accordingly, intangible rights such as the right to use or rights under a licence accrue to licensee.

In fact, Indian Accounting Standards 38, i.e. Ind AS 38, recognise that licences, right to use, and other intangible rights over natural resources are to be recorded as assets in the books of the licensee.

Legislative scheme of the IBC vis-à-vis intangible rights over natural resources

Section 18(f) IBC provides that the interim resolution professional shall take control and custody of the assets over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor. For the purposes of Section 18(f) IBC, assets owned by a third party but held in trust by the corporate debtor or under contractual arrangements are not considered to be assets of the corporate debtor.

Section 36(4)(a) IBC excludes, from the liquidation estate, contractual arrangements that confer only the right to use, without transfer of title which may ostensibly mean that rights to use a natural resource in the form of a licence, grant or right to use may be excluded from the liquidation estate. However, the Supreme Court in Bharti Airtel Ltd. v. Aircel Ltd. & Dishnet Wireless Ltd. (Resolution Professional)⁸ has clarified that Section 36(4) does not apply in CIRP.

Thus, the reference to use-based contractual arrangements being excluded from the pool of assets of the corporate debtor which subject to insolvency resolution may be grounded in the distinction between CIRP and liquidation. While a CIRP requires continuation of such contracts to rehabilitate and revive the corporate debtor, liquidation focuses on sale and distribution of assets. Thus, the inclusion of usage rights in the liquidation estate may not be appropriate given that such rights are ordinarily granted pursuant to public bidding processes and cannot normally be unilaterally transferred from one private party to another.

Furthermore, Sections 18 and 36(4) IBC empower the Central Government to exclude assets that may be notified by the Central Government from being taken control of by resolution professional (RP) or being included in the liquidation estate. However, the Central Government has till date not notified such a class of assets, indicating that there is no special exclusion of intangible assets over natural resources from being subject to insolvency resolution.

In absence of a legislative exclusion of assets in the nature of intangible rights over natural resources from being subject to insolvency resolution under the IBC, it can be said that IBC being a consolidating legislation does not exclude intangible rights over natural resources from being considered as assets of the corporate debtor.

Judicial treatment of intangible rights over natural resources under the IBC

Though the term “asset” is not defined under the IBC, the Supreme Court in its judgment in Victory Iron Works Ltd. v. Jitendra Lohia⁹ while placing reliance on the definition of “asset” under Section 102(2), Income-tax Act, 1961 to include “property or right of any kind”, held that the intangible bundle of rights forming part of leasehold rights over an immovable property would constitute “asset” within the meaning of Section 18(f) IBC.

In relation to natural resources, the National Company Law Appellate Tribunal (NCLAT) in its judgment in Union of India v. Vijaykumar V. Iyer¹⁰ (Vijaykumar) has categorically held that the intangible right to use spectrum is an asset of the corporate debtor for the purposes of Section 18(f) IBC and can be subjected to insolvency proceedings under the IBC. However, an appeal filed by the Department of Telecommunications against the said judgment is currently pending before the Supreme Court.

Further, a three-member Bench of the NCLAT in its judgment dated 23 October 2024 in Avil Menezes v. Ministry of Coal¹¹ (Avil Menezes) has held that annual mine closure costs (AMCC) that had been payable to the Ministry of Coal in relation to mining rights granted to the corporate debtor constitutes a part of the estate of the corporate debtor. The decision of the NCLAT had been based on the reasoning that the AMCC could not have been said to have been held in trust by the corporate debtor on the behalf of the Ministry of Coal given that there had been no separate trust account or agreement evidencing to substantiate that the AMCC had been held in trust.

Notably, the NCLAT further opined that the Government cannot recover dues owed to it dehors the scheme of the IBC in the garb of the public trust doctrine. Thus, the NCLAT in Avil Menezes case¹² has indicated that the assets relating to natural resources cannot be said to be held in trust unless a commercial agreement for the same is entered into or a separate trust account has been created.

In light of the foregoing, it seems that intangible rights over natural resources such as spectrum are subject to insolvency resolution under the CIRP as such rights constitute an asset within the meaning of Section 18(f) IBC.

Conclusion

The IBC is a comprehensive consolidating legislation and its legislative scheme as well as the judicial trends support the view that the intangible rights over natural resources are subject to the insolvency resolution under the IBC. Though the NCLAT in Vijaykumar case¹³ has held that a right to use spectrum is an intangible asset of the corporate debtor and is subject to insolvency resolution under the IBC, an appeal against the said judgment is pending before the Supreme Court.

Since such intangible rights can often be the most valuable assets of a corporate debtor, particularly in sectors such as mining, telecommunications and hydroelectricity, their exclusion from the asset pool of the corporate debtor has the potential of adversely impacting the efficacy of the IBC in ensuring that the corporate debtor is run as a going concern. Therefore, it is in the interest of value maximisation of assets that such intangible rights remain subject to insolvency resolution of the IBC.