Supreme Court: IBC Can't Be Guiding Principle For Restructuring Ownership And Control Of Telecom Spectrum

The Supreme Court has observed that the Insolvency and Bankruptcy Code cannot be the guiding principle for restructuring the ownership and control of telecom spectrum.

The Court had reserved judgment on a series of appeals contesting a National Company Law Appellate Tribunal (NCLAT) ruling regarding the insolvency of Aircel and Reliance Communications. The central issue was that the spectrum, classified as an intangible asset of a corporate debtor, can be included in insolvency and liquidation proceedings.

The Bench of Justice PS Narasimha and Justice Atul Chandurkar observed, "The issue is not as complicated as it seems. We could demystify the legal challenge by first understanding spectrum  as a material resource, precisely as what our constitution refers to as the material resource of the community. If that be so, it is easy to find a path by simply following the state (0:46) policy to ensure that spectrum and its benefits subserve common good, not uncommon good...For this purpose, its ownership and moral control with all its attributes, including benefits,  have to be secured for its citizen. Our judgment, therefore, is in three parts. In the first part,  we define the legal implications of spectrum. In the second part, we identify the true legal province. In the third part, we examine treatment of asset under IBC. And in this context, its application to telecommunication laws that cover spectrum can reach our conclusion as naturally as water knows the slope. IBC cannot be the guiding principle for restructuring the ownership and control of spectrum."

The legal question before the Court centred on whether telecom service providers, when faced with demands for license fee arrears from the Department of Telecommunications (DoT), are entitled to seek a moratorium on those payments. Specifically, the Court had to decide if these companies could use the "voluntary corporate insolvency resolution process" under the Insolvency and Bankruptcy Code (IBC) as a legal shield to halt the recovery of statutory dues and natural resource obligations.

The Apex Court further held, "Under the insolvency bankruptcy code for restructuring their asset, the asset in question is the spectrum allocated to the TSPs through auction. The endeavor to treat spectrum as an asset in the hands of TSPs gives rise to a fundamental question as to its ownership, possession, use, transfer, or assignments. Its definition and legal province are the subject matter of our inquiry."

The judgment of the NCLAT had held that while the "right to use" spectrum is an intangible asset that can be part of insolvency proceedings, this right does not constitute absolute ownership. Spectrum is a scarce natural resource owned by the Government of India, which holds it as a trustee for the public. Consequently, any use or transfer of this right remains strictly governed by the terms of the license agreement and the Indian Telegraph Act, 1885.

Regarding the transfer of spectrum within a Resolution Plan, the NCLAT had noted that while a license can theoretically be transferred as an intangible asset, it is subject to the Spectrum Trading Guidelines. These guidelines require the prior written approval of the Department of Telecommunications (DOT) and the settlement of all past dues by the seller or buyer. The Tribunal clarified that a Resolution Plan cannot substitute these requirements; therefore, a company in default of its license conditions does not qualify to transfer its spectrum rights through the insolvency process without first securing the interests of the government.

The Tribunal had ruled that the right to use spectrum is a limited permission granted in exchange for the payment of fees, including Adjusted Gross Revenue (AGR) dues and deferred spectrum acquisition costs, which are classified as "operational dues". These dues must be cleared as a precondition for any transfer or trading of spectrum. A Corporate Debtor in default cannot bypass these statutory and contractual obligations simply by triggering the Corporate Insolvency Resolution Process (CIRP).

Cause Title: State Bank of India v. Union of India & Ors. and connected matters [Civil Appeal No. 1810/2021]