CAN THE BANKRUPTCY CODE (IBC) OVERRIDE SPECTRUM GUIDELINES?

BY RISHI BHARGAVA

LEGAL INTERN, H.K. LAW OFFICES

Recently the committee of creditors and successful bidder, UV Asset Reconstruction Company, of Aircel Insolvency case knocked the door of the apex court to challenge the order passed by the Principal Bench of NCLAT, Delhi. The petitioners highlighted that the tribunal failed to consider the overriding nature of IBC which prevails over other laws vis s vis  universal access service licence conditions, tripartite agreement and the spectrum trading guidelines in this case. Section 238 of the code does envisage to override other laws to the extent of their inconsistency with the code in order to effectuate the object of the code which is to ‘keep the entity as a going concern’. However the test of inconsistency must satisfy existing judicial pronouncements laid down by the judiciary over period of time. In this piece, an attempt has been made to analyse the overriding nature of IBC and its application on the spectrum and trading guidelines. 

In the case of Union of India v. Association of Unified Telecom Service Providers of India (AGR-I), The Supreme Court ruled the Adjusted Gross Revenue (AGR) dues deriving from the spectrum licenced by the government to telecom service providers (telcos). However, certain businesses, including Reliance Communication, Aircel Group, and Sistema Shyam Teleservices, were facing Insolvency and Bankruptcy Code 2016 (IBC) proceedings, and there was great ambiguity as to how the large dues from these entities would be recovered. In view of this, the Supreme Court in the case of Union of India v. Association of Unified Telecom Service Providers of India (AGR-II) raised a number of questions for the NCLAT to answer. 

Before going to the intricacies of the appeal pending before the apex court, it is imperative to take a note of the observations laid down by NCLAT Delhi in the present dispute. 

  • Relying on “Centre for Public Interest Litigation & Ors vs. Union of India[1], the Tribunal held that spectrum is natural resource and therefore the doctrine of public trust must be invoked while distribution to private players.
  • The court also held that use of spectrum under license constitutes an asset under the code and thereby subjected to insolvency proceedings. In addition, it further observed that the dues of telecom companies are in the nature of operational dues. 
  • However the bench concluded by observing that a license can be transferred as an intangible asset of the corporate debtor in case of ordinary circumstances, however the dues of the licensor i.e. Dept. of Telecom must be cleared first before initiation of any trading under the code. 

In lieu of the same observation, the appellants approached the Apex Court highlighting that the tribunal failed to take cognizance of the overriding nature of Section 238(IBC), which was enshrined in order to keep the Corporate entity as a going concern. 

At this point, an analysis of earlier pronouncements of the courts on the same issue is inevitable. One of the foremost case law[2] on this issue upheld the application of the code over a state legislation by observing that the two were in direct collision with each other. In the same case the court also laid down the test of inconsistency which are- firstly, whether there exist direct conflict between two statutes; secondly, whether the intention of the legislature was to formulate a complete code on a particular subject matter; and lastly, whether the two statutes operate within the same field. 

However, it is imperative to note the decision of NCLT in ICICI Bank Ltd vs ABG Shipyard Ltd[3] wherein the tribunal acknowledged that the Electricity Act and the IBC operate in different fields, but nevertheless opined that the code would have an overriding effect in order to further its objectives. 

Another Judgement of significance here is Shobha Ltd. v. Pancard Clubs Ltd., 2017 wherein the tribunal has to decide the overriding application of IBC over SEBI Regulations, 1999. Both the given laws operate to enhance sustainability of a business entity, but nevertheless the tribunal held that the doctrine of inconsistency would not applicable. It also highlighted caution that there was a possibility that the IBC, 2016 might be used as a tool to “take out the company as well as the investments already frozen from the claws of SEBI.[4]

After a bare reading of all the above case laws, it is clear that the doctrine of inconsistency must be used judiciously and not as a general rule to render the other allied laws as inoperable. 

In the present dispute, the objectives of bringing the spectrum trading guidelines were to enhance competition, provide incentive for innovation and better services to consumers at cheaper tariffs. The Guidelines also clearly laid down that only the central government owns the spectrum on behalf of people of India and only the right to use can be parted with keeping in mind the doctrine of public trust. Apart from guidelines the constitutional provisions like Article 38, 39, 48, 48A and 51A(g) also cast a duty on the state for protection and distribution of natural resources. 

There is also a concern emerging that Corporate Debtors would use this as a weapon to wriggle out of their liabilities by resorting to triggering of CIRP by seeking initiation of CIRP under Section 10 of I&B Code, not for purposes of resolution but fraudulently and with malicious intent of withholding the huge arrears payable to Government. 

As a result, granting a waiver to corporate debtors to pay off their debts before transferring any rights under the 2015 guidelines would have a significant impact on the government’s finances, especially since other telecom companies, such as Reliance Communication, are also facing similar proceedings. The DoT has modified gross revenue dues from both Aircel and Rcom. The dues of Aircel stand at Rs 12,389 crore, RCom’s is at Rs 25,199.27 crore. Aside from the telecom sector, such a waiver would encourage other insolvent enterprises to seek government debt relief. As a result, it is now up to the Supreme Court to decide whether the discrepancy would prevail over such rules or not. 


[1] (2012) 3 SCC 1  

[2] Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407

[3] ICICI Bank Ltd. v. ABG Shipyard Ltd., 2017 SCC OnLine NCLT 12031

[4] Shobha Ltd. v. Pancard Clubs Ltd., 2017 SCC OnLine NCLT 7486

Published by meghachaturvedi

Associate Partner, H.K. Law Offices

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