Perceiving Spectrum Through NCLAT’s Lens

The recent order of the National Company Law Appellate Tribunal (“NCLAT”) has caused worry to the debt-ridden telecom companies (“Telcos”) including Aircel and Reliance Communications. The order states that spectrum cannot be utilised without payment of dues to the government. It is now feared that once these dues are paid, then recovery from these companies will not be feasible for the financial creditors.¹ Therefore, they are planning to challenge this order in the Supreme Court (“SC”).

The matter came up in the NCLAT after the order of the SC in September 2020. The SC had framed certain questions for NCLAT to consider and pass reasoned order thereof. The first question dealt by the Tribunal was as to whether spectrum is a natural resource which was answered in the affirmative. Referring to the principles that have developed so far from a number of case laws regarding the treatment of natural resources, NCLAT emphasised that Doctrine of Public Trust govern the use of natural resources i.e. “use guided by public interest and public good”. Therefore use of spectrum must also be based on this Doctrine.

The right to use of spectrum is granted by the Department of Telecommunication (“DOT”) through issuance of licences. The next issue, therefore, pertained to whether this right vests in the Licensee as an asset and if it is the case, what is the nature of this asset? Whether it can be traded/transferred?

An argument was advanced by the Telcos that spectrum is an intangible asset of the companies which are given the license. NCLAT referred to definitions of ‘asset’/ ‘intangible asset’ as provided under various legal dictionaries. Further, by reference to the convenience compilation of Aircel, it noted that the particulars of intangible asset mentioned under the compilation did include license fees and spectrum. As per the Tribunal, an ‘asset’ means something that has the potential to produce economic benefits which spectrum does and therefore finds mention as part of the Licensee’s asset. Spectrum is therefore an asset and can be subjected to insolvency proceedings under ordinary circumstances.

Regarding the trading of this asset, reference to the ‘Guidelines for Trading of Access Spectrum by Access Service Providers’, 2015 (“Guidelines, 2015”) was made. The Tribunal noted that trading of limited nature is allowed where the buyer satisfies the eligibility criteria provided for getting a License. Additionally, DOT holds the right to recover dues prior to the effective date of trade.

For answering the question as to whether a license can be transferred under the insolvency proceedings especially when trading is subjected to payment of dues, Guidelines, 2015 were considered especially Guidelines No. 10, 11 and 12. Under Guideline No. 10, the licensees that have decided to trade access spectrum have to provide an undertaking that they are in conformity with the terms and conditions of the Guidelines as well as of the license agreement. In case of non-conformity, the government shall have the right to take appropriate action including annulment of the trading arrangement.

The seller has the duty to clear all the dues prior to the concluding of the trading arrangement and afterwards, it shall be buyer’s duty. However as per Guideline No. 11, the government shall have the discretion to recover the dues from the effective date of trade from buyer or seller, jointly or severally. After reading these two guidelines, NCLAT came to the conclusion that prior consent of the licensor is required for trading in spectrum.

The Tribunal classified the dues payable to the Central Government as ‘Operational Dues’ and thereby government as the Operational Creditor. Further as per the Tripartite Agreement between DOT, Licensee and lenders, priority has been accorded to DOT. Therefore, spectrum cannot be considered as a security interest. Additionally, licensor has the right to suspend, revoke or terminate the License Agreement. Security interest in the hands of the lenders would have adverse impact on its enforcement. Overall, the Telcos cannot use the process provided under the IBC to delay the payment of dues and these have to be cleared beforehand. They cannot initiate the insolvency against themselves to avoid paying dues.