WHETHER AIRCEL CAN SELL SPECTRUM RIGHTS THROUGH IBC? NCLAT ANSWER

UOI V. VIJAY KUMAR IYER,

HON’BLE NCLAT, BANSI LAL BHAT, J , 3JJ

(i)              Natural resources are Nation assets which are owned by State as trustee and therefore there is implied obligation upon state to ensure constitutionalism and fairness in action while dealing with these assets at any stage

 

(ii)             Public trust doctrine is established judicial principle now which imposes duty on state to ensure that public interest does not get hampered under guise of private Interest while dealing with any natural resources

 

(iii)   Spectrum are Natural resources and therefore State / DOT have ownership as well as duty over it

 

(iv)       After LPG, telecom sector were given license to use these air waves as per licensee agreement on payment of fixed dues but since these private companies were not financially strong so mode of payment made as flexible in 1999 telecom policy

 

(v)      Through telecom policy of 2012, the payment is made as per method of Adjustable Gross Revenue (AGR) and dues in 40,000 crore being asked by License DOT from various telecom companies including Aircel

 

(vi)        In 2013,Supreme court held that these companies are liable to pay ADR and they have no absolute right over these natural assets

 

(vii)         Aircel sough DOT permission to trade its license but CG denied it and asked for payment of ADR

 

(viii)    Thereafter Aircel filed Section 10 IBC Petition against itself and NCLT admitted the petition and Resolution plan also approved by NCLT under section 31

 

(ix)         Hence, appeal before NCLAT

 

(x)                NCLAT held that

 

-   Spectrum is not but right to use spectrum is an assets of corporate debtor and thus can be made part of CIRP

 

-        Since it is an assets of Corporate debtor hence IRP can prepare information memorandum and take custody and control over it

 

-     But the right of licensee/ Aircel/ Corporate debtor is very limited on basis of reading of obligations under the agreement whereby licensor has right to terminate it by 60 days’ notice and also have right to terminate it in public Interest

 

-       The Statutory guidelines and Agreement cannot be read independently and resolution plan cannot ignore the fact that no AGR Dues were cleared by Aircel and without complying them, Aircel limited right to use which is also an assets of it cannot be subjected to CIRP

 

-          Rather it is a clear case of malafide filling of petition and NCLT should have dismissed it invoking Section 65 because here corporate debtor who itself a defaulter is filling for its CIRP

 

-        Since Operational creditor gets a haircut in payment so allowing such a resolution plan would mean creating a huge prejudice to interest of CG especially when the assets in question is limited right.

 

-        The resolution plan seem like a winding up plan 

 

-   There can be no statutory interest created over spectrum because as per agreement and guidelines, it is the DOT who has first charge over the spectrum and without its prior consent and without complying the guidelines, there can be no transfer

Hence, Order of NCLT approving resolution plan set aside

 

HISTORY OF TELECOM & LICENSE OF SPECTRUM

Telecom Sector owned, controlled and operated by the Government came  to be liberalized in 90’s. In 1994, Government allowed private participation in basic services by grating licences to TelCos who were required to pay a fixed licence fee for initial three years and subsequently based on numbers of subscribers subject to some minimum commitments.

Since the TelCos were unable to arrange finances for their projects, new Telecom Policy came to be adopted in 1999 which allowed the migration of licensees from a fixed licence fee regime to a revenue share arrangement scheme where under the licence fee was collected as part of TelCos revenue (Adjusted Gross Revenue – ‘AGR’).

National Telecom Policy, 2012 introduced unified licensing regime under which the service operators could provide converged services and allocation of spectrum was delinked from the licence.

Under the Licence Agreement eligibility criteria is laid down for grant of licence to ensure that only persons capable of operating telecom services are given the licence, which can only be transferred with the consent of DOT provided all dues of DOT prior to transfer are fully paid and the transferee undertakes to pay all future dues.

While the license has been granted for twenty years, the same can be revoked under Clause 10 for non-compliance with the terms and conditions including failure to timely pay the fee and other charges.

Licence is not a simple transfer of right to operate telecom services for twenty years but is subject to compliance with various provisions of the agreement including continuous and uninterrupted telecom services by the Licensees and payment of fee, including AGR to maintain/ preserve the licence

TRADING OF SPECTURM ONLY WITH NON DEFAULTY LICENSE HOLDER

The twin requirements of payment of dues and maintenance of services are the imprimatur of the licence agreement as the same would protect the public interest

Telecom Licence Agreement and NIA neither grant an exclusive right to use spectrum nor an exclusive possession of the licence to the TelCos. It is admitted that trading of spectrum is allowed under the Spectrum Trading Guidelines, 2015 but such trading is only permitted amongst valid licence holders who have not violated the terms of licence. This is also subject to the proviso that the seller has cleared all dues to DOT prior to the trade. Trading is permitted only after interests of the Licensor viz. DOT have been secured.

NATURAL RESOURCES ARE NATIONAL ASSETS & THUS CONSTITUTIONALISM MUST BE REFLECTED

Natural resources belong to the people but the State legally owns them on behalf of its people and from that point of view natural resources are considered as National Assets, more so because the State benefits immensely from their value. The State is empowered to distribute natural resources. However, as they constitute public property/ national asset while distributing natural resources the State is bound to act in consonance with the principles of equality and public trust and ensure that no action is taken which may be detrimental to public interest. Like any other state action constitutionalism must be reflected at every stage of the distribution of natural resources.”

PUBLIC TRUST DOCTRINE

The public trust doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit their use for private ownership or commercial purposes. This doctrine puts an implicit embargo on the right of the State to transfer public properties to private party if such transfer affects public interest, mandates affirmative State action for effective management of natural resources and empowers the citizens to question ineffective management thereof.

The heart of the public trust doctrine is that it imposes limits and obligations upon government agencies and their administrators on behalf of all the people and especially future generations. For example,

(i)                 renewable and non-renewable resources,

(ii)               associated uses,

(iii)             ecological values or

(iv)              objects in which the public has a special interest (i.e. public lands, waters, etc.)

Held subject to the duty of the State not to impair such resources, uses or values, even if private interests are involved. The same obligations apply to managers of forests, monuments, parks, the public domain and other public assets

The public trust doctrine is a tool for exerting long established public rights over short-term public rights and private gain. Today every person exercising his or her right to use the air, water, or land and associated natural ecosystems has the obligation to secure for the rest of us the right to live or otherwise use that same resource or property for the long-term and enjoyment by future generations. To say it another way, a landowner or lessee and a water right holder has an obligation to use such resources in a manner as not to impair or diminish the people's rights and the people's long-term interest in that property or resource, including down slope lands, waters and resources

Hence, State is the legal owner of the natural resources as a trustee of the people and although it is empowered to distribute the same, the process of distribution must be guided by the constitutional principles including the doctrine of equality and larger public good.

SPECTRUM BEING ASSETS OF LICENSEE CAN BE TRANSFERRED

None of the contesting parties disputed the proposition that the actions of the State in relation to the spectrum are to be guided by public interest and public good. The right to use of spectrum is granted by DOT to Telecom Service Providers through licence in lieu of consideration which partakes of the character of a contract governing relations between the Licensor and Licensee with terms and conditions of licence regulating the right to use spectrum by the Licensee for the period of licence.

It, however, remains to be seen whether upon parting of the right to use spectrum by DOT by way of grant of licence to TSPs, such right vests in the Licensee as an asset and if so, what is the nature of the asset and whether the same is capable of being transferred/ traded irrespective of breach of terms of licence

They only claim to be owners of the right to use spectrum which is stated to have been parted with by the Government in their favor on payment of consideration for a specific period of time. The case set up by the TSPs is that they can be said to be owners qua the right to use spectrum which right accrues to them under the licence granted to them by the DOT.

It is not in controversy that auctions were held by Government in which TSPs including Aircel Entities participated and emerging as successful bidders obtained the right to use spectrum in lieu of consideration. This emerges from the terms of Licence Agreement/ UASL dated 5th December, 2006 executed inter se DOT and M/s Aircel Ltd

LICENSOR CONTINUE TO EXERCISE CONTROL

Looking at terms of agreement, it is clear that the Licensor continues to exercise control over the subject of Licence Agreement notwithstanding the licence having been granted to Licensee for providing UAS in the licensed services area for a period of twenty years in lieu of consideration viz. payment of licence fee. The terms and conditions governing the grant of licence and the power vested with the DOT – Licensor to withhold consent for assignment or transfer of licence by the Licensee in any manner whatsoever to a third party or sub-lease, enter into partnership or create third party interest coupled with the fact that the Licensee is bound to furnish all required documents, accounts and information to the Licensor/ TRAI and refrain from providing services to any TSP whose licence has been terminated or suspended or is not in operation, superadded to it the fact that the Licensor may in public interest or in the interest of security of the State or for the proper conduct of the telegraph suspend the operation of the licence or terminate the licence by written notice

The effective control lies in the hands of Licensor, who for breach of terms of the licence and failure on the part of Licensee to perform its obligations or for the reason that the Licensee goes into liquidation or is ordered to be wound up and also in the event the TRAI recommending termination of licence for non-compliance of its terms and conditions, can suspend, revoke or terminate licence.

Hence, it is clear that the Licensor and the Licensee has a limited right of use of spectrum which, apart from conditions of licence, is regulated by the provisions of Indian Telegraph Act and TRAI Regulations.

CAN SPECTRUM BEING AN ASSETS BE TAKEN AS PART OF CIRP

Whether the spectrum granted under the Licence Agreement is a tangible asset of Licensee qua which CIRP could be initiated at the instance of Corporate Debtor notwithstanding the fact that it had defaulted in payment of licence fee and failed to perform its obligations under the Licence Agreement

 

Section 3(27) of IBC defines “property” includes money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property;”

Section 3(36) of General Clauses Act defines “movable property” shall mean property of every description, except immovable property

IRP TO PREPARE INFORMATION MEMORANDUM & DETAILS OF ASSETS OF CD

Section 18 of I&B Code enjoins upon the Interim Resolution Professional (IRP) to collect all information, inter-alia, related to the assets of the Corporate Debtor for determining the financial position of the Corporate Debtor.

Section 18(1)(f) mandates that the IRP shall take control and custody of any asset over which the Corporate Debtor has ownership rights as recorded in balance sheet of the Corporate Debtor or with information utility etc. that records the ownership of assets including intangible assets which include intellectual property.

Section 25 of I&B Code dealing with duties of Resolution Professional inter-alia provides that the Resolution Professional shall take immediate custody and control of all the assets of the Corporate Debtor including the business records of Corporate Debtor.

Assets owned by a third party in possession of the Corporate Debtor held under trust or under contractual arrangements including bailment have been excluded from the purview of assets which the Interim Resolution Professional is required to take in his control and custody

LIMITED RIGHT TO USE VESTED WITH LICENSEE CAN BE CALLED AS ASSETS OF CORPORATE DEBTOR

 

Black’s Law Dictionary (11th Edition, 2019), the expression ‘asset’ is defined as

(1)    an item that is owned and has value

 

(2)    the entries on a balance sheet showing the items of property owned, including cash, inventory, equipment, real estate, accounts receivable and good will

 

(3)    all the property of a person (especially a bankrupt and deceased person) available for paying debts or for distribution

Balance sheet of Aircel Ltd. as on 31st March, 2017 wherein intangible assets of the value of Rs.62,447,618,927/- have been reflected. The spectrum under the Licence Agreement between DOT and the Licensee TSPs is an asset being a valuable thing and same has been treated so and reflected as intangible asset in the balance sheet of the Licensee.

The apparatus, instruments, appliances or other material used for transmission of signals etc., being material objects, fall within the purview of tangible assets, it is to be determined whether spectrum or its use would embrace the concept of intangible assets which constitutes a primary asset of Telecom Operator.

TRIPARTITE AGREEMENT & ROLE OF DOT

In terms of Tripartite Agreement the interests of the Lender are secured by creation of security interest in its favour which includes takeover and transfer of the project together with all the assets pertaining to the project including the licence to the Selectee.

DOT is a party to the Tripartite Agreement and it cannot shrug off its shoulders in claiming that the Tripartite Agreement was in the nature of binding agreement only between the Licensee and the Lender with no obligations created for it to perform. DOT is a constituent and a party to the Tripartite Agreement which provides for transfer/ assignment of licence by the Licensee in favour of the Selectee of the Lenders with the consent and approval of DOT.

It is flabbergasting to hear DOT advancing the proposition that use of spectrum in terms of the licence does not constitute the assets of the Licensee and that the licence granted to Licensee and use of spectrum thereunder is not a tradable 

In the face of provisions of Tripartite Agreement read in juxtaposition with the Guidelines for Trading of Access Spectrum, it is inconceivable that DOT as Licensor is not aware of the import of the provisions and the effect of the stipulations in the Tripartite Agreement and the Guidelines for Trading of Access Spectrum based on National Telecom Policy and formulated by Central Government on the recommendations of TRAI.

Presence of DOT in the Tripartite Agreement is neither cosmetic nor an idol formality. The combined effect of all this is that the DOT has taken a stand which is in direct conflict with the factual proposition emanating from record and the role it has played all along. The argument raised on the score that the use of spectrum under the licence granted to it is not an intangible asset in the hands of Licensee being devoid of merit has to be repelled

So yes right to spectrum is an intangible asset of corporate debtor not per se but on basis of question of fact which is tripartite agreement between lender, licensee and DOT

 

WHETHER SPECTURM CAN BE MADE AS SUBJECT OF I& B CODE

It depends on nature of the resource has to be kept in view while determining whether same can be subjected to insolvency/ liquidation proceedings. It having been found that the Telecom Licence and right to use spectrum are assets of the Licensee/ Corporate Debtor falling within the purview of Section 18 and 25 of the I&B Code for purposes of control and custody in the hands of Interim Resolution Professional/ Resolution Professional during CIRP Proceedings, be it seen that the Telecom Licences and right to use spectrum being assets of the Corporate  Debtor are covered under moratorium slapped under Section 14 of the I&B Code as a sequel to the admission of an application seeking triggering of the CIRP.

Explanation to Section 14(1) and sub-section (2A) in clear and unambiguous terms provide that the licences and concessions issued by the Government Authorities cannot be terminated or suspended during CIRP so long as the current dues were being paid, which has the object of ensuring maintenance of the substratum of the business during the CIRP period and keeping the Corporate Debtor as a going concern.

The protection has been granted to telecom licences and right to use spectrum being assets of the Corporate Debtor and the slapping of moratorium prohibits the Owner/Lessor during CIRP period from recovering property occupied or possessed by the Corporate Debtor. This protection is only limited to moratorium period and obtains only on the condition of there being no default in payment of current dues

MORATORIUM & LICENSEE DUES RECOVERY BY GOVT.

Under Section 14(1)(d), the Adjudicating Authority is empowered to declare moratorium for prohibiting the recovery of any property by an owner or Lessor where such property is occupied by or in the possession of the Corporate Debtor

Preservation of the Corporate Debtor as a going concern during continuation of CIRP being of primary importance as the Appellant was the sole purchaser of power from Corporate Debtor under Power Purchase Agreement, the termination of which on account of triggering of CIRP

The explanation is clarificatory in nature and provides in unambiguous terms that a licence, permit, registration, quota, concession, clearances or similar grant or right given by Central Government, State Government, Local Authority, Sectoral Regulator or any other authority shall not be suspended or terminated on the ground of insolvency. The only condition is that such protection against suspension or termination of licence or permit or concession, as the case may be, is that there should be no default in payment of current dues relatable to use or continuation of such licence etc. during the moratorium period

Hence, in the event of spectrum being subjected to proceedings under I&B Code, protection would be available to Telecom Licences and spectrum under Section 14(1) of the I&B Code.

SPECTURM & SECTION 18 IBC- TAKING CONTROL BY IRP

Spectrum being the property of Nation is in possession of the State as a Trustee, however, right to use spectrum under the Licence Agreement vests in the Licensees/ TSPs, who are in occupation of the same being its actual users irrespective of whether they have a right to hold the same in their possession or not

It being the duty of the IRP to collect all information relating, inter alia, to the assets of the Corporate Debtor for determining its financial position, monitor its assets and manage its operations until Resolution Professional is appointed by Committee of Creditors (CoC) and take control and custody of assets over which the Corporate Debtor has ownership rights as recorded in the balance sheet of Corporate Debtor with such assets including intangible assets falling within the purview of Section18 of I&B Code, there should be no hesitation in holding that the right to use of spectrum under the Licence Agreement or falling within the ambit of Tripartite Agreement can be subjected to proceedings under Section 18 of I&B Code.

Hence, spectrum being intelligible assets of corporate debtor had to be taken in custody of IRP as per Section 18 to prepare information memorandum, etc.

LICENSE CAN BE TRASFERRED WHEN DUES ARE PENDING?

combined reading of these two guidelines in conjunction with the terms and conditions of the Licence Agreement would lay bare that the entire control vests with the Licensor i.e. DOT and

(I)                 the Licensee would not be competent to assign or transfer the Licence without prior written consent of the Licensor

 

(II)               licence can be suspended if public interest or interest of security of State or proper conduct of telegraph so warrants.

 

(III)             licence can be terminated by a written notice of 60 days in situations including failure to perform obligations under the licence which include timely payment of fee and other charges due to the Licensor.

 

(IV)             Trading in spectrum is clearly subject to the Seller having a valid and subsisting right as licensee competent to trade under the Spectrum Trading Guidelines with the prior consent of the DOT.

 

(V)               If the Licensee has assigned or transferred the licence by way of sub-leasing/ partnership/ creation of third party interest without the prior written consent of Licensor or the transferee/ assignee is not fully eligible, transfer of licence and trading of spectrum shall not be valid

 

These guideline cannot be read independently. 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 and a self-confessed defaulter who has triggered insolvency by taking recourse to Section 10 of the I&B Code.

 

Hence, though spectrum can be transferred in CIRP being intelligible assets of corporate debtor in general circumstances but that is subject to fulfillment of guidelines and agreement of licensee with DOT and since licensee itself defaulter, so no such assets can be transferred in CIRP unless dues are cleared and you cannot take recourse to CIRP because these guidelines do not operate in independently

SPECTRUM CAN BE TREATED AS SECURITY INTEREST WHEN DUE IS TOO HUGE

NOC for trading has been declined by the Government for non-compliance of the terms and conditions stipulated in the Licence Agreement. If the spectrum can be subjected to insolvency resolution proceedings, it is stated to have the effect of wiping off the dues of the Government accumulating to more than Rs.40,000 Crores. In comparison thereto the liability of lenders is much less.

This is not a case where a Financial Creditor or an Operational Creditor is seeking initiation of Corporate Insolvency Resolution Process against the Corporate Debtor but the Corporate Debtor itself is seeking such initiation. This would therefore, require to be examined along with the question whether such dues as are payable to Government can be wiped off by resorting to the proceedings under the I&B Code and whether insolvency proceedings are bonafide

Right to use spectrum is an intangible asset in the hands of Corporate Debtor/ Licensee though the spectrum is not the property of the Corporate Debtor/Licensee and it being the admitted case of the Corporate Debtor/ Licensee in “Union of India & Anr. vs. Association of Unified Telecom Service Providers of India and Ors.”, (AGR Judgment decided on 1st September, 2020) before the Hon’ble Apex Court that the Licensees /TelCos used the spectrum without paying for it which could have been rectified by paying the AGR dues

As per terms of agreement, first charge is to DOT and spectrum cannot be treated as security interest by the lenders because enforcement of security interest by the Lenders will be subject to compliance of terms and conditions of Tripartite Agreement which envisages satisfaction of Bank’s claims only after settling the dues of DOT.

Hence, spectrum cannot be utilized without payment of requisite dues which cannot be wiped off by triggering CIRP under I&B Code

NCLT SHOULD HAVE USED SECTION 65 MALAFIDE TO DISMISS IT INSTEAD OF SECTION 31 TO APPROVE

Section 53 IBC treats Operational and financial creditors differently in terms of their payment and in present case Govt. Dues being operational debt are too huge to swallow.

If CIRP mechanism is allowed to prevail, it would be immensely detrimental to and jeopardize the legitimate interests of the Central Government. It is of relevance to refer to the fact that the Adjudicating Authority, while dealing with the Resolution Plan of Successful Resolution Applicant qua the Corporate Debtor observed that ‘the plan does not appear to be a resolution plan but appears to be a winding up, liquidation plan’. This observation appears to have been made after noticing that through the Resolution Plan the Resolution Applicant was planning to monetize most of the assets and continue only with a small portion of the business operations.

The Adjudicating Authority in the given circumstances should have examined the bonafide of the Aircel Entities in initiating CIRP by filing applications under Section 10 of the I&B Code which, on the face of it, aimed at monetizing most of the assets for meeting obligations of the Resolution Applicant towards the Banks which too would depend on when and how the spectrum would be sold, more so as the Aircel Entities had stopped operations before initiating insolvency proceedings and the spectrum continued to go waste and unutilized

Hence, NCLT should have dismissed the petition under Section 65 because contents of resolution plan seem like a winding up plan and there seem malafide intention on part of Aircel Corporate debtor