Can Telecom Spectrum License Be Subjected To Insolvency Proceedings? Supreme Court Reserves Judgment

The Supreme Court on Friday reserved judgment in a batch of appeals challenging the National Company Law Appellate Tribunal's decision in the insolvency proceedings of Aircel and Reliance Communications holding that spectrum can be subjected to insolvency/liquidation proceedings being an intangible asset of the Corporate Debtor.

The NCLAT further held that the right to use the spectrum can only be transferred in the CIRP only after clearing the spectrum-related dues to the Government.

A bench of Justice PS Narasimha and Justice Atul Chandurkar reserved judgment after hearing arguments from Attorney General R Venkatramani for Union of India along with Senior Advocates Shyam Divan for erstwhile RP of Aircel, Rakesh Dwivedi for Committee of Creditors through SBI and Gopal Jain for erstwhile RP of Reliance.

Attorney General R. Venkataramani for the Union of India submitted that the IBC is a procedural statute meant to consolidate insolvency processes and its overriding clause, Section 238, should be read narrowly. It cannot automatically override statutory controls placed on natural resources, he said. He submitted that spectrum is not consumed like coal or petroleum, and the "right to use" licence only permits operation for communication.

The Attorney General relied on Section 4 of the Telegraph Act, which vests the exclusive privilege of operating telegraphs in the Central Government, to argue that only restricted operational permissions can be granted to the licensee, subject to government restrictions.

He submitted that spectrum is a separate category of natural resource and cannot be treated as an asset under the IBC. He relied on Sections 18 and 36 of the IBC, which exclude third-party property from the insolvency, and argued that since the Union owns the spectrum, it cannot fall under the Code. He also cited Article 297 of the Constitution, which vests certain natural resources in the Union unless Parliament provides otherwise.

The Attorney General further argued that if spectrum rights are not assets, they cannot be treated as operational debt. He concluded that spectrum is a community resource and that when a licensee defaults after having enjoyed it, the public must be proportionately compensated.

Opposing the Union of India, Senior Advocate Rakesh Dwivedi for the Committee of Creditors through lead bank State Bank of India submitted that spectrum is not something that can be 'kept' or 'delivered' as it exists in the airwaves. The State, as trustee, can only regulate how it is used, he said.

He argued that the Government's “exclusive privilege” under the Telegraph Act simply means it can frame regulations for how telecom services operate. It does not mean that the licence-based rights of the telecom company fall outside the IBC.

Dwivedi submitted that the government as a trustee parts with an element of the people's property. The owner has a “bundle” or rights and when a license is granted under an agreement, a strand or element of the property is given to the service provider to develop the telegraph network, with government approval, he said.

He pointed to the licence terms permitting assignment with government's approval and submitted that lenders financed the project only after the Tripartite Agreement was signed, treating these rights as the basis for security. "The Government of India virtually represented to the banks that you can proceed to grant heavy loans and this will be a transfer assignement of licence. It has become my security interest."

On the Attorney General's argument that the Union is a third party under Section 18(1)(f), he submitted that the government had entered into the agreement and had a substantial role in financing and enabling the project, and therefore cannot be treated as an external third party. He referred to the 2023 judgment which held that the “right to develop” was an asset of the debtor. He submitted that if the licence does not distinguish spectrum from other such rights, spectrum must fall under the IBC.

Senior Advocate Shyam Divan assisted by advocates Saurav Panda, Vaijayant Paliwal and Kirti Gupta for the erstwhile resolution professional of Aircel opposed the Attorney General's submissions. He said the IBC creates and extinguishes substantive rights, not just procedural ones. Thus, Section 238's overriding effect must be applied fully, he said. He submitted that while spectrum may be held in trust by the government, the 'right to use spectrum' is an asset under IBC.

He argued that it is an intangible asset recognised in TRAI Guidelines, TRAI Consultation Papers, Indian Accounting Standards and Aircel's financial statements and highlighted that creditors lend on the strength of such assets. He submitted that the remaining licence period qualifies as an asset under IBC.

Divan opposed the Attorney General's argument that spectrum forms a special class of natural resource, submitting that all natural resources must be treated on the same footing for purposes of the Code.

He relied on Section 5(21) of the IBC, which defines “operational debt” and highlighted that the government submitted claims for spectrum dues as an operational creditor, thus putting spectrum licence in the purview of IBC. He relied on the Ministry of Corporate Affairs' clarification identifying DoT as an operational creditor. He submitted that DoT's claims are part of the operational creditor class and should not be treated differently.

Senior Advocate Gopal Jain assisted by advocates Saurav Panda, Vaijayant Paliwal and Kirti Gupta also opossed the Union of India, arguing that the IBC is designed to ensure continuity of business by preventing termination of crucial licenses during insolvency, which is supported by the legislative intent and committee reports. He said that Section 14 of IBC (the moratorium clause) is intended "to keep the corporate debtor's assets together during the insolvency process, and facilitating orderly completion of the process envisaged during the insolvency resolution process, and ensuring that the company may continue as a going concern while the creditors take a view on resolution of default."

Jain further submitted that continuation of the license was a key objective, termination of licenses during the CIRP would be contrary to the purpose of IBC. He submitted that the spectrum licence remains with the company even during insolvency unless transferred as per guidelines. He also emphasised that IBC overrides TRAI Act.

"This court in virtually every case except, I think, maritime law - Income Tax Act, Electricity Act, every Act has applied 238, and given primacy to to IBC. The intent is that resolution must work. If you take away the license and the spectrum, it's a husk, no resolution will take place. So it has a far reaching object, goes against the objective of the IBC and its intent of a successful resolution", he concluded.

NCLAT judgment

The NCLAT said that spectrum belongs to the nation and the Government holds it as trustee. But when a telecom company gets a licence, it receives a right to use the spectrum. The Tribunal said this right to use spectrum is an intangible asset of the telecom company, and therefore falls within the assets that a resolution professional can manage during CIRP.

At the same time, the NCLAT said this right cannot be freely transferred in CIRP. The licence conditions and the Tripartite Agreement require that all past dues owed to the Government must be paid in full before any assignment of the licence. If the company or the buyer has unpaid dues, they are not eligible for transfer. The Tribunal added that spectrum cannot be used without paying these dues, and a company cannot trigger CIRP to avoid paying them or reduce the Government to a small recovery under the Section 53 waterfall.

The present batch of appeals challenge this judgment.

Case no. – Civil Appeal No. 1810/2021 with connected cases

Case Title – State Bank of India v. Union of India & Ors. with connected cases