Interaction of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with various sectors of the economy – aviation and real estate – has produced uneven results. Telecom sector brings forth its own set of issues. The Supreme Court in its recent judgment of State Bank of India v Union Bank of India (‘SBI case’) has accorded primacy to the Indian Telegraph Act, 1885 and its attendant regulatory framework, potentially throwing a spanner in the efficacy of IBC for telecom companies. The narrow issue was whether spectrum – held under a license by telecom companies – is an asset that can be subjected to corporate insolvency resolution proceedings (‘CIRP’) under the IBC. The Supreme Court answered in the negative and held that telecom companies do not own the spectrum, and it cannot be categorized as their asset under the IBC.
The broader framework – previously endorsed in Property Owners Association & Ors v State of Maharashtra & Ors – within which the Supreme Court decided the case was that spectrum is a finite natural resource and belongs to the people. The Government acts as a trustee in distributing these natural resources and is constitutionally bound to distribute spectrum to sub-serve common good. The Supreme Court held that telecom companies possess a limited right to use the spectrum and do not own it. And treatment of spectrum as an asset by telecom companies in their balance sheet is not determinative of the nature of spectrum. Instead, the relevant telecommunication laws – and license conditions – provide the answer to question if spectrum is an asset or not. Further, the Supreme Court held that the IBC cannot displace telecommunication laws as the latter determine conditions for grant, use, and transfer of spectrum.
This article attempts to highlight three aspects of the SBI case: firstly, an acknowledgment that natural resources cannot be treated as objects of private ownership does not naturally lead to the conclusion that they cannot be treated as assets for CIRP; there is a ‘reasoning gap’ between the statement and its conclusion; secondly, potential implications for companies in other sectors where use of licenses for exploiting natural resources is the main business activity and, the license, a vital asset of such companies; thirdly, by treating spectrum as incapable of being subjected to CIRP, the recovery of pending dues by the State may not materialize or alternatively, push negotiations outside the framework of IBC. Both eventualities do not serve the IBC’s purpose. Finally, this article examines the broader issue of reconciling telecommunication laws with the IBC and makes a case that the latter should override the former and all sectoral laws should accommodate the contingency of licensee’s insolvency to harmonize the objectives of both laws.
Background
The Aircel Group entities (‘Aircel’) were granted telecom licenses by the Department of Telecom (‘DoT’) under license agreements which were valid for twenty years. Aircel availed loan facilities from domestic lenders such as the State Bank of India for its business. Aircel, on failure to pay license fees to the DoT, initiated voluntary CIRP under Section 10 of the IBC. The DoT challenged resolution plan approved by the NCLT via an appeal before the NCLAT. The NCLAT’s three observations that are relevant to this article are: (a) spectrum is an intangible asset of Aircel; (b) DoT is an operational creditor of Aircel in relation to pending payment of license fee and usage charges’; (c) spectrum cannot be utilized without clearing pending dues as CIRP cannot be used to wipe out statutory dues. The last two observations are, inter-se, inconsistent. If the DoT was accepted as an operational creditor, it should have been paid as per the approved resolution plan. The NCLAT by observing that payment of pending license fees to the DoT is pre-condition for utilization of spectrum indirectly categorized the DoT as a ‘pre-eminent creditor’. A situation not endorsed by the IBC. The Supreme Court disagreed with the NCLAT’s first observation itself and held that spectrum is not owned by a licensee such as Aircel, is not its asset, and cannot be subjected to CIRP.
Spectrum Trading Subject to Clearance of Dues
The Supreme Court examined the nature and conditions of the spectrum license and made three pertinent observations: (a) the DoT’s powers as a licensor are not merely contractual in nature but emerge concurrently from the Constitution and statute; (b) the license does not confer ownership or proprietary interests to the licensee merely a right to use the spectrum for a limited duration; (c) the licensor maintains absolute control over the licensee including rights of the latter to create third-party rights or transfer the spectrum. The latter was evident in The Guidelines for Trading of Access Spectrum, 2015 which stipulate certain conditions that need to be fulfilled for spectrum trading. The Supreme Court cited Guideline 11 which mandates a licensee to pay all pending dues before concluding any agreement for spectrum trading. And Guideline 12 under which the Government reserves the right to claim any subsequent dues discovered from either of the two parties, jointly or severally.
Core condition of spectrum trading under the license can thus be spelled out: if a licensee has pending dues, it cannot trade spectrum unless pending dues are paid. But does this condition apply even during a CIRP under the IBC? If a licensee is undergoing CIRP, can a successful resolution applicant can acquire its license without paying the (entirety of) pending dues? The Supreme Court answered in following words:
The Spectrum Trading Guidelines cannot be overridden or substituted by the insolvency resolution framework. Dues payable to the Licensor, which must be cleared prior to spectrum trading, cannot be relegated to treatment under a Resolution Plan. (para 29)
The Supreme Court endorsed this position by reasoning that payment of pending dues is an absolute condition. And that the IBC cannot bypass telecommunication laws by treating spectrum as an asset. Nor can the non-obstante clause of the IBC – Section 238 – wherein it overrides all other laws can be used to displace the condition of payment of pending dues before transferring the spectrum. Supreme Court’s reasoning suffers from a few limitations, as I elaborate in the subsequent sections.
Understanding Implications
Firstly, Supreme Court’s conclusion is encased in the constitutional framework of natural resources being owned by the people. The emphasis on the absolute and pervasive control of the DoT on all aspects of spectrum – tradability, transferability – was one reason to conclude that licensee did not own the spectrum. Supreme Court’s understanding that natural resources such as spectrum are licensed by State largesse and do not result in change in ownership is plausible on a standalone basis. However, this understanding does not naturally lead to the conclusion that spectrum cannot be subjected to CIRP. The Supreme Court justified the conclusion by referring to Section 18 of the IBC wherein assets of a corporate debtor include intangible assets owned by the corporate debtor. However, Section 18(f) states that it includes ‘any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor …’. Thus, merely ownership of an asset is not a condition, its reflection as an asset in balance sheet is also crucial. However, the Supreme Court emphasized on the former and reasoned that treatment of spectrum in a balance sheet was not determinative of ownership of an asset. But, did not engage with the language of Section 18(f) which mentions ownership of an asset and its treatment in the balance sheet.
Also, the Supreme Court arrived at its conclusion by identifying telecommunication laws as the ‘legal province’ of spectrum and observing that the IBC cannot alter conditions for license prescribed by the former. The Supreme Court observed that if the DoT forgoes pending dues under a resolution plan, it will be acting contrary not only to telecommunication laws but also to its constitutional obligations. The IBC’s competing aim of rescuing the licensee pales in comparison to constitutional mandate of distribution of natural resources for the common good. The Supreme Court’s approach does not acknowledge that transfer of spectrum as an asset – under the approved resolution plan – would also take place under a constitutionally valid law, i.e., the IBC. And the DoT’s legal and constitutional mandate of securing pending payments cannot be secured merely under telecommunication laws. Though once the Supreme Court identified latter as the relevant laws, applicability of the IBC was only possible if the special circumstance – of financial distress – that precipitate the CIRP were acknowledged. But the Supreme Court insisted on the absolute nature of telecommunication laws, unqualified adherence to conditions of licenses, and impliedly endorsed the position that any reduction or non-payment of pending dues will be a betrayal of the constitutional mandate to secure natural resources for common good.
Secondly, the Supreme Court’s observations create potential issues for similarly placed companies whose licenses are one of their most valuable assets. For example, companies that have secured mining licenses – for coal and other natural resources – may face similar legal situations wherein the State may claim priority for any pending dues under the respective licenses. For such companies, a mining license is their core asset and if it does not form part of CIRP, the IBC’s aim to rescue such companies may fail. Other companies will have little incentive to participate in CIRP and rescue the company if they cannot control the latter’s most lucrative asset, i.e., the license. The only caveat is that the Supreme Court’s conclusion in the SBI case is based on its examination of the relevant telecommunication laws. And the specific legal and regulatory framework for such other licenses and terms of licenses may determine the outcome in those cases. Though the State is likely to use the SBI case as an instrument to claim payment of all pending dues under a license.
Thirdly, it is worth highlighting that the corporate debtor’s unwillingness or inability to pay the pending dues is the reason that CIRP is initiated. In such a situation, the DoT’s insistence that the corporate debtor pay all pending dues may not materialize. The other plausible option is that a resolution applicant’s whose plan is chosen by the CoC makes payment to the DoT before getting the plan approved by the NCLT. But if one operational creditor – the DoT, even if it is a statutory body – gets paid on priority and in full under the resolution plan it prejudices claims of other operational creditors. And payment of dues to the DoT on priority has no statutory basis under the IBC. The third option is of corporate debtor entering negotiations outside the IBC framework. A telecom company – unable to unwilling to pay dues – may enter into an agreement with a willing buyer wherein the latter pays the pending dues and buys the spectrum. The Supreme Court’s judgment may push financial distressed telecom companies towards these negotiations that will occur outside the IBC’s framework.
I suggest that all three possible options elaborated above defeat the IBC’s objective of providing timely resolution of a distressed corporate, accounting the interests of all stakeholders, and maximizing the value of corporate debtor’s assets. Payment to the DoT, on priority, prejudices other creditors and is at odds with prescribed mechanisms under the IBC. While initiation and completion of any negotiations outside the framework of the IBC prevents the corporate debtor from taking advantage of a law enacted for the purpose of corporate rescue and can potentially sideline other stakeholders. On balance, I would argue that the obligations of outstanding debts and pending dues are better recast and negotiated under the IBC’s framework and not beyond.
Reconciling Telecommunication Laws with the IBC
Supreme Court’s judgment in the SBI case implies that all dues that a licensee owes to the State are to be recovered as per the telecommunication laws, and the IBC cannot influence the nature and quantum of pending payments. The fact that the licensee is financially distressed and is seeking rescue under the IBC via CIRP is immaterial. The Supreme Court observed that payment of pending dues is an ‘absolute’ condition under the telecommunication laws and the IBC cannot displace it. There are two aspects worth examining in respect of the Supreme Court’s above observations.
Firstly, let us look at Explanation to Section 14(1) wherein it is stated that the Central Government, State Government, local authority or sectoral regulator shall not terminate a license, permit or quota on grounds of insolvency; provided there is no default in payment of dues during the moratorium period. This provision reduces the elbow room for a licensor such as the DoT to terminate a telecom license on grounds of non-payment of dues caused by insolvency or initiation of CIRP. While Section 14 of the IBC seemingly constraints the powers of licensors to terminate licenses, it also reveals that a reconciliation between the IBC and licensing powers of the State is possible. Latter is forced to acknowledge financial distress of the corporate debtor, restrain from termination of license, and acknowledge the IBC’s purview.
In fact, I would argue that Section 14 envisages that all dues relating to licenses should be resolved as part of CIRP and not independent of it. Explanation to Section 14(1) prevents cancellation of licenses to preserve status quo until a resolution plan is approved. The explanation is premised on the fact that all pending dues in relation to a license shall be resolved as per the resolution plan. Else, if the recovery of dues of a license – telecom or otherwise – was envisaged to be independent of the CIRP there is little reason to prevent cancellation of licenses. The presumption is that natural resources in possession of a licensee even if not owned by it have value that can be accounted for in the resolution plan. And pending dues paid accordingly. This ensures that all pending dues under a license are paid to the licensor as part of CIRP, the corporate debtor is rescued, and all its financial obligations are addressed comprehensively under the IBC itself. While it is trite that natural resources cannot be privately owned, it is also vital to acknowledge that a license confers economic and exploitation rights to the licensee. While the Supreme Court – in the SBI case – examined the issue of economic rights, it looked at solely from the lens of ownership of asset and did not engage in a deeper analysis of their interaction with insolvency. Economic rights in relation to the natural resources are a crucial asset that are subject to license conditions, but insolvency is a special condition and provides a persuasive reason to deviate from standard license conditions.
Secondly, only a related note, it needs to be underlined that non-obstante clause of the IBC serves multiple purposes. To begin with, it indicates that – to the extent of inconsistency – the IBC prevails over all other laws since it is an exhaustive law. The Supreme Court has clarified the exhaustive nature of IBC sufficiently. In matters relating to insolvency, the IBC prevails over all other laws. Even sectoral laws. The IBC does not ‘displace’ sectoral laws but only ensures that in matters relating to insolvency no other law be applicable to ensure predictability and certainty in CIRP. Further, I would argue that the non-obstante clause also underlines that the IBC hovers over all sectors of the economy and applies to all companies. It is sector agnostic. Thus, it is the sectoral laws that need to adjust to the presence of IBC and not the other way around. The Supreme Court – in the SBI case – reasoned that applying the IBC to telecom sector will cause disharmony. And the harmony, as per the Supreme Court could only be served by observing the license conditions in isolation from CIRP. The Supreme Court concluded:
The two statutes have different subjects to deal with, different purposes to subserve, different laws to abide, protect different rights and create different liabilities. It is necessary for the constitutional courts to recognize their respective provinces and to ensure that they operate with harmony and without conflict. (para 68)
If both laws operate in their own provinces, then the harmony that prevails is only superficial. The harmonious approach endorsed by the Supreme Court has the potential of each sector regulator – in its capacity as a licensor – claiming a privileged position as a debtor. And, rendering the non-obstante clause of the IBC subject to vagaries of various sectoral laws and license conditions. At the very least, it will jeopardize attempts at rescuing various kinds of companies under the IBC, especially the ones that have secured licenses from the State.
Conclusion
Supreme Court’s observations in the SBI case, in effect, privileges dues owed to the State under a license. And there are scarcely justifiable reasons why pending dues under a license cannot be recovered – in part or full – as part of the resolution plan. The conditions of payment under a license should be respected unless a CIRP is commenced. The latter – once commenced – should have the effect of varying the contractual obligations as it is a special circumstance. But insistence on absolute nature of payments on constitutional grounds and sub-serving common goods does little to increase the likelihood of payment of pending dues. And if a successful resolution applicant does pay the dues to the State on priority, it amounts to redesigning the IBC in favor of the State. While, ideally, the State should actively concede its claims to help revive a corporate debtor instead of saddling it with full recovery amounts.
