NCLAT says lenders cannot treat telcos’ spectrum as ‘security interest’ under insolvency proceedings

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April 13, 2021 10:09 PM

NCLAT’s latest ruling might have a bearing on insolvency proceedings against two other telecom operators—Reliance Communications and Videocon. Both matters are at different stages of CIRP before the NCLT.

NCLATThus, if the primary revenue is reduced, and robust, next-generation network is rolled out, the secondary revenue accruing from beneficiary industries would be far more. This approach would compensate many times for any shortfall on account of primary revenue, he argued.

The National Company Law Appellate Tribunal (NCLAT) on Tuesday ruled that debt-ridden telecom companies undergoing insolvency proceedings cannot claim rights to their spectrum, which is a natural resource, unless requisite spectrum usage payments have been made to the government.

In what could be a landmark judgement amid multiple telecom players undergoing proceedings under the insolvency law, a three-member bench of the tribunal also made it clear that spectrum “cannot be treated as a security interest by the lenders”.

Though a telecom service provider has the right to use spectrum under the licence granted to them, the tribunal noted that however, they cannot be said to be the owners in possession but only in occupation of the right to use spectrum.

“The spectrum cannot be utilised without payment of requisite dues which cannot be wiped off by triggering CIRP under I&B Code,” the bench headed by Acting Chairperson Justice B L Bhat said.

Corporate Insolvency Resolution Process (CIRP) is initiated under the Insolvency and Bankruptcy Code (IBC). A CIRP commences only after approval from the National Company Law Tribunal (NCLT) and in case of disputes, the matter is heard by NCLAT.

According to the appellate tribunal, spectrum is a “natural resource” and the government is holding it as a “cestui que trust” (beneficiary) and it would not be available to use without payment of requisite dues.

Triggering of CIRP by any telco with the object of wiping off of dues towards spectrum usage charge, “not being for insolvency resolution, but with malicious or fraudulent intention, would be impermissible”, it noted.

NCLAT’s ruling came on a batch of ten petitions related to debt-ridden Dishnet Wireless Ltd and Aircel Cellular Ltd, which are undergoing insolvency proceedings.

On September 25, 2020, Supreme Court had asked NCLAT to decide whether lenders can sell spectrum of Aircel Group under the insolvency resolution process to recover dues.

NCLAT’s latest ruling might have a bearing on insolvency proceedings against two other telecom operators—Reliance Communications and Videocon. Both matters are at different stages of CIRP before the NCLT.

In its 107-page order passed on Tuesday, NCLAT also said that a licence can be transferred as an intangible asset of the telecom service provider under insolvency proceedings in ordinary circumstances. However, if the seller is in default, then it would not qualify for transfer of licence under the insolvency proceedings, the appellate tribunal added.

According to the order, the defaulting licensees/ telcos cannot be permitted to wriggle out of their liabilities by resorting to triggering of CIRP.

“… not for purposes of resolution but fraudulently and with the malicious intent of withholding the huge arrears payable to government, obtaining moratorium to abort government’s move to suspend, revoke or terminate the licences and in the event of a resolution plan being approved, subjecting the central government to be contended with the peanuts offered to it as ‘operational creditor’ within the ambit of distribution mechanism contemplated under Section 53 of I&B Code,” the order said.

Further, the appellate tribunal said the relationship amongst the licensor (DoT), licensee (operators) and the lender are governed by the tripartite agreement which envisages priority to the dues of DoT (Department of Telecommunication) over dues of other creditors, be they secured or unsecured creditors.

“… the lender has been permitted to cause assignment of licence and change of licensee with permission of DoT on conditions including payment of dues owed to DoT. Such tripartite agreement cannot be overridden and nullified,” NCLAT said.

Creditors of Aircel had argued that spectrum is an asset and can be part of the insolvency process. However, DoT had contended that it cannot be traded and that spectrum cannot be subject to moratorium during the insolvency proceedings.

Aircel and its subsidiaries Aircel Cellular and Dishnet Wireless together owe around Rs 40,000 crore to creditors.

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