The debate over spectrum allotment, transfer, and trading in India’s telecom sector has persisted for two decades. During this period, the telecom industry has witnessed the exit of several international players, consolidation among existing operators, and the insolvency of a few telecom companies.
A recent Supreme Court judgment in “State Bank of India v. Union of India & Ors [Civil Appeal No. 1810 of 2021]” has finally clarified the treatment of spectrum under the Insolvency and Bankruptcy Code, 2016 (IBC). Some commentators compare this ruling to the earlier Kalyani Transco vs Bhushan Power and Steel Ltd case, which was later reversed by the Supreme Court. Others warn that the judgment could have far-reaching consequences for companies in sectors such as mining, petroleum, and real estate, where natural resources are allocated by the government to private entities.
Secured Operational Creditors under IBC
The IBC divides creditors into two categories: financial and operational. Financial creditors are those owed financial debt, while operational creditors are owed debts arising from goods, services, employment, or statutory dues payable to government authorities.
Crucially, the definition of “security interest” under the IBC is broad. Section 53(1) of the IBC, which sets out the waterfall mechanism for creditor payments, does not distinguish between secured financial creditors and secured operational creditors. Both can hold secured status under the IBC and hence can be classified as secured creditors.
The Deciding Factor: DoT’s First Charge
In practice, lenders often seek permission from authorities to ensure their dues take precedence in case of default. However, in the SBI vs Union of India case, it was an admitted fact that the department of telecommunications (DoT) held a first charge over spectrum under its agreement with the company - a fact known to the lenders as well. The litigation arose from the mistaken belief that DoT, as an operational creditor, could not be a secured creditor under the IBC, and that the committee of creditors (CoC) could prioritise payments to financial creditors over DoT in violation of existing agreements.
Asset vs Ownership
The judgment also highlights the distinction between “asset” and “ownership”. An asset listed on a company’s balance sheet does not necessarily imply ownership. While tangible assets are governed by laws such as the Sale of Goods Act, 1930, and the Transfer of Property Act, 1882, intangible assets like trademarks, patents, or spectrum licenses may be recognised as assets without conferring ownership rights. The court further clarified that disposal of assets must follow the underlying agreements, which cannot be overridden by statutory provisions such as section 238 of the IBC.
Security Interest-based Distribution
To protect the sanctity of security interests of financial creditors under the IBC, the Indian government amended Section 30(4) of the IBC in 2019 after the judgement of the national company law appellate tribunal in Essar Steel India Ltd that equated distribution among all creditors by ignoring the security interest. This amendment allows the CoC to consider the order of priority among creditors as laid down in Section 53(1) of the IBC, including the priority and value of the security interest of a secured creditor while determining distribution to the creditors during the corporate insolvency resolution process (CIRP).
The issue of whether a secured creditor can receive less than the value of its secured interest during CIRP is still pending before the Supreme Court in “DBS Bank Ltd Singapore v. Ruchi Soya Industries Ltd and Another [Civil Appeal No. 9133 of 2019]”. Further, Section 53(2) of the IBC also protects existing security agreements, such as first and second charges, during the liquidation process under the IBC.
Avoidable Issue Created
What if the lenders had not failed in evaluating the project cost and had ensured the proper end use of funds, yet the company still faced insolvency due to excessive spectrum charges and adverse market conditions? Logically, in such a case, DoT would need to make an equitable sacrifice, as intended under the IBC, wherein the government has subordinated its debt to that of the lenders. This issue should be resolved by evolving clear protocols for handling regulatory assets such as adjusted gross revenue (AGR) dues. If the government could extend relief to Vodafone Idea Ltd by deferring and converting part of its AGR dues into equity, then adopting a pari passu treatment of DoT and lenders’ claims in such cases could have better served the objectives of the IBC. Instead, the CoC chose a confrontational stance, resisting accommodation of DoT rather than fulfilling its fiduciary duties.
It is well-established that a concession-driven regulatory asset remains with the concessionaire only for the duration of the concession period. The judgment, however, has triggered an unseemly debate on the ownership of such assets, effectively suggesting that concessionaires do not own regulatory assets at all. This interpretation will have adverse implications for debt financing in infrastructure concessions.
NCLT as Insolvency Forum: A Structural Weakness
Unlike the High Courts under the Companies Act, 1956, the national company law tribunal (NCLT) lacks constitutional authority to grant public relief. The primary rationale behind the creation of tribunals was to address the crisis of delays and backlogs in the administration of justice, thereby providing an effective mechanism to ease the burden on the judiciary. Courts, with their elaborate procedures, formalistic approaches, and rigid attitudes, were considered incapable of delivering speedy and affordable justice to the parties involved. In particular, technical cases were thought to require adjudicatory forums composed of individuals with specialised knowledge of the relevant statutes. However, it is becoming increasingly evident that NCLT members also suffer from similar limitations.
Though Section 434 of the Companies Act, 2013 gives the NCLT powers otherwise vested in civil courts under the Civil Procedure Code, and Sections 63 and 231 of the IBC bar civil court jurisdiction, loopholes remain. For instance, Section 18(f)(vi) and Section 36(3)(e) of the IBC have created confusion, with NCLT sometimes directing insolvency professionals to approach civil courts or other forums. This undermines the IBC’s promise of time-bound resolution.
In the IBC, the powers of the NCLT are deliberately curtailed, causing greater value destruction and litigation. For example, under Section 279 of the Companies Act, 2013, liquidation proceedings prevent past litigation from continuing without NCLT’s permission, whereas under Section 33(5) of the IBC, past litigation can continue during liquidation without NCLT’s permission.
Such loopholes lead to ambiguity and prolonged litigation, defeating the objectives of timely resolution and value maximisation under the IBC. The failure to address these issues despite repeated reminders from stakeholders suggests deliberate neglect.
The Supreme Court’s ruling raises uncomfortable questions about negligent or adventurous lending by banks and the misuse of the IBC. In this case, DoT’s existing contractual rights as a first-charge holder during default to banks were challenged under the guise of CoC’s “commercial wisdom”.
What makes the episode striking is the prolonged litigation between public sector banks and a government department, both arms of the Union of India. This “cat fight” consumed years and millions of public money through litigation. A more prudent approach would have been to seek advice from the government law officers rather than pursue costly litigation. The independence of the insolvency professional is also questionable, as a position favourable to the CoC (paying fees to the insolvency professional) was taken in such legal proceedings. Had it been a case involving a normal operational creditor and not DoT, the outcome would have been different because most operational creditors are not financially strong enough to contest such costly litigation under the IBC.
The case also underscores the need to revisit NCLT’s role. As a statutory tribunal without writ jurisdiction, it cannot resolve all issues under the IBC. While the IBC is a complete code, the NCLT is not an exclusive forum for its implementation. Unless structural loopholes are addressed, the objectives of value maximisation and timely resolution will remain elusive. It may be time to return to the High Courts, especially as there are rumours that the government is considering replacing the NCLT with dedicated insolvency courts for IBC implementation.
(Jitender Kumar Jain is a Mumbai-based advocate with over two decades of practice in corporate and commercial laws, including insolvency law. Dr Rajendra M Ganatra, ex-MD&CEO of an ARC & an insolvency professional, has over four decades of experience in industry & financial services.)
