Spectrum under IBC can’t be used if govt dues are not paid: NCLAT

Spectrum held by telecom operators cannot be transferred to new buyers under insolvency proceedings if government dues are not cleared, the National Company Law Appellate Tribunal (NCLAT) ruled on Tuesday, dealing a blow to lenders to bankrupt telcos Reliance Communications Ltd (RCom), Aircel Group and Videocon Telecommunications Ltd.

The appellate tribunal clarified that spectrum, which is an intangible asset of a telecom company, can be subjected to insolvency proceedings or liquidation. However, telcos cannot use or transfer the airwaves under the Insolvency and Bankruptcy Code (IBC) without settling government dues.

It added that dues of the government, including deferred spectrum payments, cannot be wiped off under bankruptcy proceedings.

“Triggering of corporate insolvency resolution proceedings (CIRP) under IBC by the corporate debtor with the object of wiping-off of such dues, not being for insolvency resolution, but with malicious or fraudulent intention, would be impermissible,” the appeals court said.

The NCLAT’s judgement relates to the Supreme Court order of 1 September 2020, where the apex court directed the National Company Law Tribunal (NCLT) to consider all issues related to the sale of spectrum usage rights and adjusted gross revenue (AGR) dues of bankrupt telcos—RCom, Aircel and Videocon.

Though the top court had authorized NCLT to look into the matter, an application filed by Aircel on 9 September requested the Supreme Court to allow NCLAT to take decisions related to its spectrum sale as nothing was pending before NCLT. The apex court then authorized NCLAT.

However, a two-judge bench, headed by Justice S. Abdul Nazeer, said the decision was only for Aircel as NCLT had approved UV Asset Reconstruction Co. Ltd’s (UV ARC) resolution bid for the bankrupt telco.

“The judgement removes regulatory uncertainties on the issue of status and trading of spectrum during insolvency proceedings. Rightly, it rejected the argument of DoT that spectrum is not an intangible asset and not subject to insolvency proceedings,” said Asim Abbas, partner, L&L Partners.

NCLAT also said spectrum cannot be treated as a security interest by lenders. The tribunal said the government is an operational creditor. This means the Centre has little or no chance recovering AGR dues as financial lenders get preference over the operational ones under IBC.

On 1 September, the Supreme Court allowed Vodafone Idea Ltd, Bharti Airtel Ltd and Tata Teleservices Ltd to pay AGR dues over 10 years. However, it did not decide on whether spectrum could be sold under the insolvency process.

Prior to the judgement, while lenders argued spectrum was an asset and an important part of the resolution process to recover dues, DoT claimed it could not be sold as it was national property.

In June, the Mumbai bench of NCLT approved a ₹6,630 crore bid for Aircel by UV ARC that included transfer of spectrum, subject to the government’s approval. Aircel owes ₹12,389 crore to DoT in AGR dues. RCom has to pay ₹25,199 crore in AGR dues, and Videocon owes the government ₹1,376 crore.