IBC cannot be the guiding principle for restructuring the ownership and control of spectrum

·      Spectrum has consistently been recognized as a public resource, and it is precious also since it is finite and limited.  The SC reaffirmed the doctrine of “public trust” in the context of allocation and distribution of spectrum, as recognised in CPIL Judgement[3].

·      The Constitutional framework mandates that the ownership and control of this material resource of the community be distributed so as to best subserve the common good and to ensure that access and use of such resource is regulated in a transparent, non-discriminatory manner, for the benefit of the nation rather than being treated as objects of private ownership or unfettered commercial exploitation.

·      Section 4 of Telegraph Act vests exclusive privilege in the Central Government to grant License subject to terms and conditions, which includes payments towards the Universal Service Obligations.

·      The grant of a Licence including the right to use spectrum is in the nature of State largesse and does not translate into a transfer of ownership or proprietary interest in favour of Licensee but confers a limited, conditional and revocable privilege to use spectrum for specified purposes and for a defined duration.

·      SC traced the evolution of laws/ policies relating to spectrum allocation and trading and held that spectrum trading is not a private commercial arrangement, but part of privilege vested in the Government. The Government, as Licensor has retained comprehensive supervisory and corrective control over spectrum trading and access, even after spectrum being unbundled with license and private enterprise permitted to develop spectrum.

·      Whilst the License has contractual attributes, the Licensor’s powers and obligations do not arise solely from contract but flow concurrently from the Constitution and the statute, and in the event of conflict, obligations flowing from constitutional and statutory mandate necessarily prevail over contractual stipulations.

·      After referring to various provisions of the License Agreement, SC noted the effective and pervasive control of the Licensor (DoT) and held that ownership, particularly as a trustee of natural resource by the Licensor, coupled with power to suspend or terminate license, negates any claim of proprietary ownership in the Licensee. Where Licensee has defaulted in payments or performance, the very substratum of right to use spectrum stands impaired.

·      Guideline 11 of the Spectrum Trading Guidelines reinforce control of DoT by mandating that all outstanding dues of the seller be cleared prior to conclusion of any spectrum trading agreement and vesting discretion in the Government to recover any subsequently discovered dues from either or both parties, jointly or severally. Trading is conditional subject to adherence to financial and regulatory obligations owed to the State.

·      The Licensee has no independent right to assign or transfer the license under the License Agreement and Spectrum Trading Guidelines, without prior consent of the Licensor (DoT) and such assignment/ transfer is permissible only upon fulfilment of prescribed conditions including complete clearance of dues.

·      The obligation to clear dues prior to trading is absolute and default by either seller or buyer disqualifies them from effecting a valid transfer including under insolvency proceedings.

·      The Tripartite Agreement between the DoT, the TSP and the Bank is a contractual mechanism devised to enable TSPs to secure financial assistance and enables license to be treated as security. However, the Tripartite Agreement underscores that while the license may be conditionally transferable to a Selectee to safeguard lender interests, such transfer remains subject to the Licensor’s paramount authority and regulatory control.

·      While spectrum licensing right are recognized as an “intangible asset” in the balance sheet of the TSPs under the Indian Accounting Standards – this only indicates control over future economic benefits flowing from the grant of the right to use spectrum – but is not determinative of recognition/ transfer of ownership of spectrum to TSPs.

·      Even if the right to use spectrum exhibits property-like features such as longer licensing terms, exclusivity and transferability, they merely represent different sticks in the bundle of rights and fall short of conferring complete ownership of the spectrum on TSPs.

·      Section 18(f), Section 36 (3) and 36 (4) of IBC specifically excludes from its scope, assets over which CD does not have ownership or that are owned by a third party in possession of the CD under trust or under other contractual arrangements. The IBC only includes those tangible and intangible assets within the insolvency framework over which CD has ownership rights including all rights and interests therein as recorded in the Balance Sheet.

·      Even assuming that licensing and spectrum rights is one among the bundle of rights, in the absence of transfer of title over the spectrum, no ownership rights are created in TSPs either in the spectrum or in its right to use as governed by licensing conditions. Under the IBC framework, spectrum licensing rights are therefore not part of the pool of assets for insolvency or liquidation.

·      Relying on Embassy Judgement[4], the SC held that where the dispute relates to the exercise of statutory or sovereign power by the State, particularly in matters involving public interest and natural resources, such issues fall outside the domain of the insolvency adjudicatory framework, and the Code cannot be invoked to usurp or neutralise powers vested in the State under special statutes.

·      Scope of IBC is to speed up process providing for insolvency and achieving maximization of assets – the focus is on the company. On the other hand, the Telegraph Act, Wireless Telegraphy Act and TRAI Act form a complete and exhaustive code for all matters relating to the telecom sector, including declaration of the nature of the rights and liabilities arising out of holding and using spectrum, and taken together, the Union as the owner and trustee of spectrum and TRAI as the regulator occupy the entire province of telecommunications.

·      The statutory regime under IBC cannot be permitted to make inroads into the telecom sector and re-write and restructure the rights and liabilities arising out of administration, usage, and transfers of spectrum which operate under an exclusive legal regime concerning telecommunications.

·      Merely because spectrum can be treated as an “asset” on the basis of certain attributes, the entirety of the telecom sector cannot be brought under the sweep of IBC. Constitutional courts must recognise the respective provinces of two laws and ensure that they operate in harmony and without conflict.

The amendments to the IBC propose insertion of Section 31 (5) to provide that once NCLT approves a resolution plan, any license, permit, registration, quota, concession, clearance or similar right granted by the Central Government, State Government, local authority, sectoral regulator or any other authority, which forms part of the resolution plan, shall not be suspended or terminated for the remainder of its validity period, provided the company continues to comply with its obligations during such period. Further, the amendments also propose insertion of Section 31 (6) in the IBC to clarify that the claims not dealt with under the resolution plan shall be deemed to be extinguished.

From a reading of the Select Committee Report[6] on the IBC amendments, it is evident that the amendments will clarify that the obligations of the CD in respect of the pre-CIRP/ past debts of Government/ authorities under such license, permit etc. can be dealt with under the resolution plan. Notably, there are other proposed amendments to the IBC for clarifying that government dues fall under the fifth order of priority under Section 53 of IBC in support of the legislative intent to assign a lower priority to government dues.

At the same time, as far as compliance with other technical terms of license, permit etc. is concerned, the Select Committee Report acknowledges that the scope of IBC does not extend to interfering with the powers of the Government/ regulator to ensure compliance with other technical requirements and that the right of the government/ regulator to examine the new parent company’s capability to fulfil its obligations under the license/agreement are requirements specific to law governing that sector and do not fall under the domain of IBC.

Thus, while the amendments acknowledge Government/ regulator’s role in ensuring compliance with laws specific to the sector, they also note that past dues of the Government/ regulator can be dealt with under the resolution plan and so long as there is compliance with “remainder” of the validity period, the licenses, permits etc. cannot be terminated or suspended for non-payment of past dues.

Given the Aircel judgment, interesting questions are likely to arise in cases where CD has a critical license, permit etc. and where change in control of the CD or transfer of the license, permit etc. is linked to payment of the past dues of the Government/ regulator. The questions will range from “what is meant by asset” to “is the asset a material national resource” to what is meant by “compliance with the remainder of the validity period of an asset” and whether past dues linked with license, permit etc. can be extinguished at all, if the relevant contract, law or policy mandates payment of such dues as a condition.

It may also be added that the Aircel judgment proceeds on the fundamental assumption of spectrum being a scarce and finite resource covered under the public trust policy. Hence, eventually, given the proposed amendments to the IBC, the application of Aircel judgment may depend on specific facts of the case including the nature of asset, the nature of license/ permit and the provisions of the relevant contract, law or policy applicable to the sector.

Pooja Mahajan

Partner, Head of Insolvency and Restructuring

Savar Mahajan

Managing Associate, Insolvency and Restructuring

Srivatsav Reddy Beerapalli

Associate, Insolvency and Restructuring