NCLAT ruling on spectrum could make resolution tough if Vodafone Idea files for bankruptcy

The National Company Law Appellate Tribunal (NCLAT)’s April 13 order in the Aircel matter has precipitated various issues which will have implications on financing of assets such as telecom spectrum and restructuring of corporate debtors entitled to use said assets. The case has added relevance at this point of time as Vodafone Idea battles for survival with Rs 1.8 lakh-crore in debt.

In the order, NCLAT has held that the spectrum – which a company can use after being granted a licence by the government — is an intangible asset, and as such can be subject to the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC). However, spectrum cannot be treated as a security interest capable of being enforced by lenders.

This ruling goes to the root of financing of companies entitled to the use of spectrum-like assets granted through a license from an authority. By holding that the spectrum cannot be treated as security interest of a debtor, this ruling could severely impact the ability of companies in industries such as telecom and infrastructure to raise bank debt.

The NCLAT’s order is also contradictory. On one hand, it has classified all payments due to the authorities for using the spectrum as operational dues under the IBC. That means, the government will rank as an operational creditor in the pay out under resolution or liquidation. On the other hand, the NCLAT has said that the corporate debtor’s right to use natural resources like spectrum and trading in such assets is subject to payments of requisite dues is contradictory.

NCLAT is of the view that any transfer of the license that may happen if they corporate debtor is acquired by a third party as part of an insolvency proceeding will only be permitted if the dues for such license are cleared. Thus, the spectrum cannot be utilised without payment of dues to the Department of Telecommunications (DoT), and the dues cannot be wiped off on account of the CIRP under the IBC. This condition will make resolution of similarly placed companies such as Reliance Communications and Vodafone Idea (if it has go the IBC route) difficult. Vodafone Idea owes the government Rs 96,270 crore in spectrum payment dues.

In a situation where no resolution is feasible, the corporate debtors will end up in liquidation. This would result in the spectrum vesting back in the authorities; however, the subsequent bidding processes by the DoT of the spectrum will get severely impacted as financers would be wary of such an asset.

The IBC is a framework that enables resolution of a corporate debtor as a going concern. Once a corporate debtor is admitted to the IBC, there is a moratorium that kicks in to ensure there is no adverse action allowed against the corporate debtor while the process of finding a resolution is underway. A resolution plan will need to factor in payment of dues to creditors as of the date of admission of the corporate debtor into the National Company Law Tribunal (NCLT). The resolution applicant offers a price to acquire the corporate debtor factoring in the overall assets of the corporate debtor, including the intangible assets such as the spectrum to discharge the overall liabilities in the manner as the Committee of Creditors (COC) deems fit or as per the waterfall set out under Section 53 of the IBC.

Post-admission of the corporate debtor into the NCLT, all costs incurred to run as a going concern forms part of the insolvency resolution process cost and needs to be paid on priority to the creditors. After the implementation of the resolution plan, all costs for running the corporate debtor will need to be borne by the acquirer. The dues of the authorities prior to admission of the corporate debtor is potentially subject to haircut.

However, by the above-mentioned NCLAT order, such dues need to be paid by the acquirer in full without any hair-cut bringing about a differential treatment.

Payments due to the authority despite being an operational creditor, is sought to be safeguarded, whereas all other operational creditors get monies in accordance with the decision of the COC or the waterfall under Section 53 of the IBC.

Thus, the DoT will receive all its dues and other operational creditors though in the same category as the DoT will take a hair-cut accorded to them as part of the CIRP. Further, the financial creditors who rank higher than operational creditors in the pay-out scheme under the CIRP will end up receiving amounts with hair-cut in most instances, and the authorities will receive all amounts due to it. This in effect prioritises pay out to the authorities over financial creditors, in disregard to a fundamental principle enshrined in the IBC.

This order will potentially have a far-reaching effect on all companies in the CIRP who have been granted a license by an authority (including public private partnership projects) as the authorities will now try to recover their dues which may render the resolution under the CIRP unviable. This, therefore, is now a subject matter before the Supreme Court.