Spectrum Dues And IBC: NCLAT Ruling Makes Resolution Of Telecom Firms Virtually Impossible, Appeal Says

Fetters imposed on bidders to gain access to spectrum rights will make resolution of telecom companies a virtual impossibility, an appeal filed against the NCLAT judgment on status of spectrum during insolvency proceedings has told the Supreme Court.

The challenge before the apex court has arisen from the National Company Law Appellate Tribunal’s April order.

In its judgment, the NCLAT had held that the right to use spectrum is an intangible asset of a telecom firm and that it can be transferred to a successful bidder during insolvency proceedings. But, pending spectrum dues of the insolvent telecom company must be cleared before such a transfer can take place.

State Bank of India-led lenders and UV Asset Reconstruction Co. Ltd., the successful applicant for Aircel, have approached the Supreme Court against the NCLAT ruling. BloombergQuint has reviewed a copy of both the petitions.

NCLAT Ruling Is Inherently Contradictory: Lenders

In its judgment, the NCLAT had examined the spectrum trading guidelines and tripartite agreements between telecom firms, lenders and the Department of Telecommunications. It had noted that for transfer of spectrum, DoT’s prior permission is necessary.

And to get this permission, as per trading guidelines, the telecom firm has to clear all pending dues and liabilities arising out of litigation, the NCLAT had concluded.

The appeals said this is impermissible under the IBC as well as against the findings made by the appellate tribunal itself in the judgment.

The appeal by UV ARC also argued that once the appellate tribunal acknowledged that right to use spectrum is an intangible asset of the telecom firm, then it could not have imposed conditions on the asset in the insolvency process.

The appellate tribunal cannot keep the debt owed as government dues outside the ambit of the resolution process and direct that those should be cleared first, the resolution applicant has stated in their submission.

This conclusion ruptures the very fabric of the code and renders the resolution of telecom companies a virtual impossibility, UV ARC has said.

Further, the petitioners said, the NCLAT judgment failed to consider that the IBC provisions will override the agreements and spectrum guidelines. The lenders rely on the Section 238 of IBC to make their case.

The Section 238 of the insolvency code states it will override the contrary provisions in any other existing law.

Prioritisation Of One Operational Creditor Violates IBC: Lenders

As per the creditor hierarchy under the IBC, financial creditors and employee dues get preference over dues of operational creditors.

In this case, the NCLAT had found right to use spectrum as an intangible asset of the corporate debtor and held the spectrum dues as operational dues. But the appellate tribunal mandated their clearance first on basis of the special nature of spectrum as a national resource.

The NCLAT has made an error in saying dues owed to DoT, which is an operational creditor, cannot be wiped off under the IBC in terms of the sanctioned resolution plan, the petitioners have said in their appeal.

The appeals by the lenders and UV ARC came up for hearing before the Supreme Court bench of Justices Abdul Nazeer and V Ramasubramanian. The court has issued a notice on the appeal. The Solicitor General of India Tushar Mehta informed the bench that DoT will also file an appeal against parts of the NCLAT judgment.

The treatment of spectrum dues under the IBC had first come up before the Supreme Court during the adjusted gross revenue case. In its September 2020 ruling, the apex court had referred the question of spectrum liabilities and their treatment under the IBC to the NCLAT.

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