Setback for lenders: NCLAT rules govt dues to be cleared before spectrum sale

The apex court had said that since the two companies were undergoing insolvency it would not be appropriate for it to interfere in the matter at that stage.

In an order which will have adverse consequences for lenders of bankrupt telecom operators, the National Company Law Appellate Tribunal on Tuesday ruled that spectrum can be transferred as part of insolvency resolution plan but only after clearing all government dues. Though NCLAT maintained that the DoT in this case is an operational creditor, still the clauses relating to spectrum trading guidelines and licence agreement stipulate that government dues need to be cleared in full before spectrum is transferred and can be further used.

“The defaulting licensees/telcos cannot be permitted 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, obtaining moratorium to abort the government’s move to suspend, revoke or terminate the licences and in the event of a resolution plan being approved, subjecting the Central government to be contended with the peanuts offered to it as ‘Operational Creditor’ within the ambit of distribution mechanism contemplated under Section 53 of IBC,” acting chairperson of NCLAT, Justice Bhat said in the 107-page order.

The order was pronounced in the matter of Aircel, where the Mumbai bench of the National Company Law Tribunal had in June, 2020 approved a Rs 6,630 crore resolution plan of UV Asset Reconstruction Company (UAVRCL). The DoT had challenged this in NCLAT last year in September on the ground that spectrum does not belong to telecom operators but is given to them on lease and upon non-payment it has the right to seize it back.

Though the NCLAT order relates to Aircel’s insolvency, it would have implications on similar proceedings of another company, Reliance Communications. There also the committee of creditors have approved UVARCL’s resolution plan.

Both Aircel and RCom owe adjusted gross revenue dues to the DoT. While the dues of Aircel stands at Rs 12,389 crore, the dues of RCom is of Rs 25,199.27 crore.

While settling the matter of payment of AGR dues of telecom operators like Bharti Airtel, Vodafone Idea, and Tata Teleservices last year in September, the Supreme Court had left the matter of Aircel and Rcom as they were being adjudicated in the NCLT/NCLAT at that stage. The apex court had said that since the two companies were undergoing insolvency it would not be appropriate for it to interfere in the matter at that stage. However, during the course of the hearing it had observed that government dues need to be cleared and responsibility as to who pays them needs to be fixed. Now the NCLAT order would be put before the SC.

If the NCLAT order prevails the real losers would be banks as they would not be able to recover anything of their bad loans with respect to telecom companies. In the event of the buyer of spectrum refusing to pay in full the government dues, the spectrum would go back to DoT which may put it up for auction in future. “Prima face, there appears to be some glaring inconsistencies where the judgment on the one hand holds that the right to use spectrum is an asset of the corporate debtor and that the DoT is an operational creditor, while on the other, it holds that the spectrum cannot be utilised without payment of the requisite dues of DoT which cannot be wiped off under the IBC. Thus, in effect, the judgment appears to be contrary to the IBC where crown debts do not have priority over claims of other creditors,” a senior lawyer for lenders told FE.

Though a part of spectrum of Aircel was acquired by Bharti Airtel through trading and that of Rcom by Reliance Jio, they cannot be made to pay for the AGR dues as the SC had ruled that buyers can only be asked to pay the arrears if they acquire the entire spectrum, not some portion of the whole.

In the matter of Aircel the total dues of a consortium of lenders led by the State Bank of India stood at Rs 58,670 crore. Of this UVARCL had proposed to pay Rs 19,600 crore. UVARCL had proposed to pay Rs 6,630 crore through zero-coupon optionally convertible debentures. It had proposed converting the balance amount into 24% equity to be issued at premium to the financial creditors. The proposal was that initially UVARCL would hold 76% equity and financial creditors 24% but after a five year period the financial creditors would get 74% equity against outstanding debentures if their dues could not be paid back by UVARCL through asset monetisation.