ABSTRACT

In Union of India vs. Vijaykumar V. Iyer, the National Company Law Appellate Tribunal held the ‘spectrum licenses’, which are key assets of the company being resolved as a going concern, cannot be transferred through insolvency proceedings under IBC without payment of dues in relation to these licences. The Appellate Tribunal also ruled that these dues cannot be ‘white-washed’ under IBC in accordance with the resolution plan.

The position taken by the Appellate Tribunal deviates from established jurisprudence on treatment of operational creditor dues. The authors, in this article, capture the far-reaching implications of this ruling and suggest a way forward with the help of insights from other jurisdictions and the UNCITRAL Legislative Guide on Insolvency Law.

I. INTRODUCTION

In Union of India v. Vijaykumar V. Iyer, [1] in dealing with the question of,
inter alia, transfer of the spectrum assets licensed to Aircel Limited, Dishnet
Wireless Limited and Aircel Cellular Limited (“Aircel Entities”), pursuant to
the Corporate Insolvency Resolution Process (“CIRP”), the National Company
Law Appellate tribunal (“NCLAT”) has held that (i) spectrum licenses cannot
be transferred through insolvency proceedings under the Insolvency and
Bankruptcy Code, 2016 (“IBC”) without payment of overdue amounts, and (ii)
outstanding dues payable in relation to the spectrum licences cannot be wiped
off under IBC in accordance with the resolution plan.

Previously, these questions have been partially considered by the Hon’ble
Supreme Court in Union of India v. Association of Unified Telecom
Service Providers of India [2] (read with subsequent modification dated
September 25, 2020) (“SC Order”) in the context of calculation of Adjusted
Gross Revenue (“AGR”) dues payable by telecom services providers, however,
the Supreme Court directed these matters to be considered by NCLAT first.
In this case note we analyse the implications of the order of NCLAT in Union of
India v. Vijaykumar V. Iyer.

II. BACKGROUND

The Aircel Entities filed petitions for initiation of CIRP under section 10 of
IBC, which were admitted in March 2018. The resolution plans submitted by
UV Asset Reconstruction Company Limited (UVARC) (“UVARC Plans”) for
the Aircel Entities were approved by the Committee of Creditors (“COC”).

The National Company Law Tribunal (“NCLT”) in its order dated June 9, 2020 (“NCLT Order”), approved the UVARC Plans, with certain modifications, while noting that the “monitoring committee of the Aircel Entities shall take permission of the Department of Telecommunications (“DOT”) with respect to the spectrum transactions and AL fibre and business transactions”. The DOT appealed before the NCLAT.

III. SPECTRUM CANNOT BE TRANSFERRED UNDER IBC PLANS?

Several insolvency resolutions in recent years have involved the transfer of
licenses issued by Government authorities. Most notably the resolutions of
both Essar Steel Limited [3] and Bhushan Steel Limited [4] involved the transfer of
mining rights granted through letters of intent. The transfer of these rights,
issued by the Government of Orissa was challenged in the High Court of the
Orissa [5]. The Orissa HC rejected arguments suggesting that the mining licenses
granted to these entities ought to be cancelled on grounds of ‘insolvency’ and
subsequent resolution and takeover of these entities under the scheme of IBC.[6]

Post the conclusion of this case, the Ministry of Mines has also notified, inter alia, the Minerals (Other than Atomic and Hydro Carbons Energy Mineral) Concession (Amendment) Rules, 2021, enabling transfer of letter(s) of intent
(for grant of mining lease or licence) consequent to conclusion of insolvency,
liquidation, or bankruptcy proceedings, subject to compliance with specified
conditions. As such, the transfer of mining license(s) is permitted pursuant to
implementation of IBC resolution plan, subject to conditions specified.

Conversely, in Union of India v. Vijaykumar V. Iyer, the NCLAT relied on
the provisions of the Guidelines for Trading of Access Spectrum by Access
Service Providers issued on October 12, 2015, by the Department of
Telecommunications (“Spectrum Guidelines”), to rule that “the Spectrum
Trading Guidelines cannot be substituted under the CIRP and the dues of the Licensor, which are required to be cleared by the Seller prior to concluding any agreement for spectrum trading in terms of Guideline 11, cannot be subjected to clearance by way of a provision in a Resolution Plan, more so, when the Seller is in breach under contract viz. the Licence Agreement”.

The NCLAT has held that even in the cases of resolution of a licensor under
IBC, spectrum assets cannot be transferred to the new bidder without payment
of overdue amounts and observed that “while a licence can be transferred as an
intangible asset of the Licensee/Corporate Debtor under Insolvency Proceedings in ordinary circumstances, however as the trading is subjected to clearance of dues by Seller or Buyer, as the case may be, in terms of Guidelines 10 and 11 of the Guidelines for Access Spectrum Trading for Access Service Providers [7], the Transferor/Seller or Transferee/Buyer being in default, would not qualify for transfer of licence under the insolvency proceedings.”

IV. UNDERSTANDING THE IMPLICATION OF THE NCLAT ORDER

Despite the contentions of DOT against the classification of spectrum dues as
operational debt, the NCLAT categorically held that “the dues payable to the
Government would fall within the ambit of ‘Operational Dues’ thereby clothing the Central Government / Licensor with the status of an ‘Operational Creditor’”, while in the same breath ruling that such dues cannot be wiped off under a resolution plan
submitted in the CIRP, if such resolution plan requires the license asset to be traded.

There is substantial jurisprudence on the past dues and claims being
extinguished upon approval of the resolution plan under IBC. This order of
NCLAT deviates from this by requiring past license dues to be paid, if such
resolution plan requires the license asset to be traded.

Given the nature of the business of the Aircel Entities, a resolution plan
proposed by a prospective resolution applicant for insolvency resolution of the
Aircel Entities as a going concern will require the license asset to be traded. In
Vijaykumar Iyer v Union of India,[8] the NCLT directed DOT to not cancel
the spectrum licences, acknowledging that presence of spectrum license is
crucial for the debtors.[9]

The question now arises – whether by holding the satisfaction of the terms of
the Spectrum Guidelines as a prerequisite for the transferability of spectrum
license under a resolution plan, has the NCLAT order ignored the express
provisions of IBC and existing jurisprudence on IBC?

The IBC is lucid regarding its overriding effect. Further, Section 31(1) of the
IBC makes the resolution plan binding on the corporate debtor and its
employees, members, creditors, including the Central Government, any State
Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.

The order of the NCLAT has set a dangerous precedent leaving the treatment of such governmental dues in a state of limbo.

V. DO SPECTRUM DUES FALL UNDER A SPECIAL CATEGORY OF CREDITOR DUES?

Notably, the ruling of the NCLAT may be seen to distinguish spectrum dues
from all other operational creditor dues, especially cases whereby courts have
held that creditors of the same class must be treated similarly. In Swiss
Ribbons Pvt Ltd. v. Union of India, the Supreme Court imposed a condition that for a resolution plan to be approved there must be fair and equitable treatment of operational creditors. Additionally, the Supreme Court declared in
CIT v. Monnet Ispat and Energy Ltd. that government creditors such as the
Income Tax authorities are prohibited from initiating separate recovery actions
and must settle their claims through the IBC.

Arguably, this ruling also sets a precedent for contractual restrictions against
transfer of assets, subject to the payment of existing dues trumping well
established provisions under the IBC. This could result in arbitrary treatment of
such creditors and creation of a new sub-class of operational creditors, whose
claims would be fully satisfied above all others.

VI. SPECIAL CATEGORIES OF CREDITOR DUES IN FOREIGN JURISDICTIONS

A. United Kingdom (UK)

Since 2003, the HM Revenue & Customs (the UK’s tax authority) has been an
unsecured creditor in respect of all tax dues owed to it, unless it has separately
taken security. However, the UK’s Finance Act, 2020 as well as subsequent
regulations reverted the position such that certain tax dues owed to the HMRC
were given a preferential status under all insolvency proceedings commencing
on or after December 1, 2020. This means that any dues owed to HMRC for
such taxes are to be ranked in priority to debts owed to both the floating charge
holders and the unsecured creditors.

B. United States (US)

Similarly, the US also has provisions in its Bankruptcy Code for priority
unsecured claims. Like the UK, all types of claims which fall within this category are demarcated in chapter 11 of the US’s Bankruptcy Code [10] Similar to the UK, the US also requires an amendment to its federal bankruptcy law to add additional categories of priority claims.

In both the UK and the US, the law can be differentiated from the order of
NCLAT in Union of India v. Vijaykumar V. Iyer, as, in both the countries
the exceptions are created by way of legislation which expressly provided that
such dues would rank in priority. Conversely, the order of NCLAT in Union of
India v. Vijaykumar V. Iyer relied on the interpretation of a provision of the
Spectrum Guidelines which predated the IBC. This contradicts section 238 of
the IBC which states that the IBC shall have an over-riding effect over anything
inconsistent therewith contained in any other law, unless expressly provided.

C. United Nations Commission on International Trade Law (UNCITRAL)

One of the nine key objectives of the UNCITRAL Legislative Guide on
Insolvency Law (“UNCITRAL Guide”) is the recognition of existing creditor
rights and establishment of clear rules for ranking of priority claims. The
UNCITRAL Guide, acknowledges that priority of claims are based on social
and even political, considerations. Its suggested in the UNCITRAL Guide that
the priorities of existing and post-insolvency commencement creditor claims be
clearly provisioned for in the insolvency law or rules made thereunder and,
more importantly, these priorities are consistently applied.

Such provisioning will aid in developing lender confidence in the insolvency
regime as it makes the insolvency process more transparent and predictable in
term of its impact on creditors, enabling them to assess more accurately the
risks associated with lending and adopt appropriate measures to mitigate it.[11]

The NCLAT order in Union of India v. Vijaykumar V. Iyer contradicts this
recommendation in the UNCITRAL Guide as the priority of the spectrum dues over the other unsecured operational creditors was not clearly stated or referred to in the IBC prior to this judgement. Further, to the contrary, Section 238 of
the IBC states that the IBC shall have an over-riding effect over anything
inconsistent therewith in any other law, unless expressly provided. Such a
priority of spectrum dues was not clearly provided.

VII. CONCLUSION: CONSEQUENCES AND NEXT STEPS

The NCLAT Order has been appealed before the Supreme Court and is sub-judice. Upholding this jurisprudence may have an adverse impact on the insolvency cases of other telecom services providers, and indeed any business
dealing with sovereign assets and licenses.

In order to clarify the primacy of IBC over existing laws further, the legislature
may consider amending the spectrum guidelines to provide for transfer of
spectrum licences under IBC, subject to appropriate conditions or may create a
special priority for such government dues as is the case in the UK and the US.
In order to ensure eligibility requirements of the transferee, the DOT may
stipulate conditions that may be fulfilled by the successful bidder for it to be
considered as a valid licensor.

Footnotes:

[1]. Union of India v. Vijaykumar V. Iyer, 2020 SCC Online NCLAT 679.
[2]. Union of India v. Association of Unified Telecom Service Providers of India, 2020 SCC Online SC 1247
[3]. Standard Chartered Bank & Anr. v. Essar Steel India Limited, 2017 SCC Online NCLT 10751.
[4]. Central Bureau of Investigation v. Bhushan Power and Steel Limited, 2021 SCC Online Del 4085.
[5]. Chitta Ranjan Sahu v. Government of Odisha &Ors., [2018] WP (Civ) No. 9247 of 2018.
[6]. Relevant observations of the Orissa High Court have been extracted as follows:
“‘What is significant is that the major premise on which the Petitioner filed the present petition viz., that ‘three companies, to whom the LOIs were issued were declared insolvent’ is contrary to the factual position. The initiation of the process under the IBC is not to be equated with insolvency…. The IBC process involves appointing a resolution professional and it is only if the CIPR is unsuccessful that the question whether the entity should be declared insolvent arises…’
“‘The altered reality makes the very basis of filing of the present petition non-existent. Each of the three entities, i.e. Opposite Party Nos. 5, 6 and 7 are back to functioning as fully solvent companies with all the creditors dues being satisfied. The apprehension, therefore, that their alleged bankruptcy rendered them ineligible and incapable of operating the mining lease, if granted in their favour, is not factually or legally tenable.
Mr. Sankaranarayanan, however, submitted that the question that still arises is whether the past illegalities should be ‘condoned’? The Court is unable to accept the submission for the simple reason that each of the three entities have met all the eligibility conditions. Initiation of any proceeding against them under the IBC was not specified as a condition of ineligibility. The three entities fully met the requirement of ‘net worth’, which is a well understood expression in the world of finance. Merely because an entity might have unpaid loans owing to financial institutions would not mean that it has lost its ‘net worth’. In fact the very process of initiating the CIPR under the IBC is to see how a company, which otherwise has a high net worth, can be restored to its full operational potential through restructuring, notwithstanding that it might have defaulted on the loans borrowed from financial institutions.
The Petitioner appears to have been under a misconception that merely because a proceeding under the IBC was initiated against three entities around the time when they were issued with LOI, that by itself rendered them ineligible for issuance of the LOI.
[7]. Relevant guidelines are extracted as follows:
“10) Both the licensees shall also give an undertaking that they are in compliance with all the terms and conditions of the guidelines for spectrum trading and the license conditions and will agree that in the event, it is established at any state in future that either of the licensee was not in conformance with the terms and conditions of the guidelines for spectrum trading or/and of the license at the time of giving intimation for trading of right to use the spectrum, the Government will have the right to take appropriate action which inter-alia may include annulment of trading arrangement.
11) The seller shall clear all its dues prior to concluding any agreement for spectrum trading. Thereafter, any dues recoverable up to the effective date of trade shall be the liability of the buyer. The Government shall, at its discretion, be entitled to recover the amount, if any, found recoverable subsequent to the effective date of trade, which was not known to the parties at the time of the effective date of trade, for the buyer or seller, jointly or severally. The demands, if any, relating to licenses of seller, stayed by the Court of Law, shall be subject to outcome of decision of such litigation.
[8]. Vijaykumar Iyer v. Union of India, MA-337/2018 in C.P. (IB)-298/(MB)/2018.
[9]. The NCLT in its order stated “without license, since no other valuable asset is available to the Company, no Resolution Applicant may show any interest in the business of this Debtor Company for its revival”.
[10]. US Bankruptcy Code, 11 U.S.C. § 507(a).
[11]. Legislative Guide on Insolvency Law (United Nations), 2005.