STATE BANK OF INDIA VS UNION BANK OF INDIA & ORS  : CASE SUMMARY

The Supreme Court in State Bank of India Vs Union of Bank of India & Ors.  ( Civil Appeal No. 1810 of 2021) reiterated  that the jurisdiction of the NCLT and NCLAT is confined to matters that arise purely within the insolvency framework and does not extend to adjudicating the legality of sovereign actions.

FACTS OF THE CASE

Aircel Group Entities  i.e. Aircel Limited, Aircel Cellular Limited and Dishnet Wireless Limited  were granted telecom licenses by the DoT under Unified Access Service Licenses (UASL) pursuant to Licence Agreements dated 05.12.2006, which were valid for a term of twenty years. In spectrum auctions conducted by DoT during the years 2010, 2014, 2015 and 2016, these companies acquired rights to use spectrum in the 900 MHz, 1800 MHz and 2100 MHz bands.  These companies failed to pay license fees. They initiated Corporate Insolvency Resolution Processes under Section 10 IBC and were admitted to insolvency by NCLT, Mumbai Bench. The DoT was invited to participate in the CoC meeting held on 06.06.2018, and thereafter filed its claim in Form-F.

A resolution plan submitted by UV Asset Reconstruction Company was approved by the CoC on 13.05.2019 and thereafter sanctioned by the NCLT by order dated 09.06.2020. DoT challenged the resolution plan before Hon’ble NCLAT.

During pendency of proceedings before NCLAT, the Supreme Court in the matter of Union of India v. Association of Unified Telecom Service Providers of India (2020) 3 SCC 525 referred the NCLAT to determine several issues arising out of treatment of spectrum licenses in IBC proceedings. Appeals were preferred to the Supreme Court against findings of the NCLAT.

FINDINGS OF THE SUPREME COURT

The Supreme Court noted that the electromagnetic spectrum is a finite, non-renewable resource comprising of frequencies ranging from extremely low frequency (ELF) waves to gamma rays, which is owned by government in trust. The grant of a telecom license, including the right to use spectrum, does not effect a transfer of ownership or proprietary interest. What is conferred is a limited, conditional and revocable privilege to use spectrum for specified purposes and for a defined duration.

The Supreme Court noted that a cumulative reading of the License Agreement leaves no manner of doubt that effective and pervasive control over the license and spectrum vests with the Licensor notwithstanding the fixed tenure of the license and payment of consideration. The licensee’s rights are circumscribed by regulatory oversight, disclosure obligations, restrictions on transfer, and the ever-present power of the Licensor to suspend or terminate the license for breach, liquidation, or winding up of the licensee. The license does not confer an unfettered or absolute right, but merely a conditional and defeasible permission to use spectrum, which remains subject to statutory control under the Telegraph Act and the regulatory framework administered by TRAI. The ability of the Licensor to withhold consent, impose conditions, and enforce compliance demonstrates that the licensee’s interest is limited and subordinate to statutory and regulatory imperatives of telecommunication laws. The ownership, particularly as a trustee of the natural resource, by the Licensor, coupled with the power to suspend or terminate the license for default in payment or performance, negates any claim of proprietary ownership in the licensee. Where the licensee has defaulted in payment of license fees or failed to perform its obligations, the very substratum of its right to use spectrum stands impaired.

The Supreme Court noted that recognition of  licensing rights as an intangible asset in the balance sheet is not determinative of recognition/transfer of ownership of the spectrum to TSPs. It only indicates control over the future economic benefits flowing from the grant of the right to use the spectrum. Hence, even if the right to use spectrum exhibits property-like features such as longer licensing terms, exclusivity, transferability, tradability, etc., they merely represent different sticks in the bundle of rights and falls short of conferring complete ownership of the spectrum on TSPs.

The Supreme Court observed that IBC explicitly excludes from the scope of insolvency and liquidation framework, assets over which corporate debtor does not have ownership rights. The Supreme Court noted that explanation to Section 18 specifically provides that for the purpose of this section, assets shall not include those assets owned by a third party but are in possession of the corporate debtor held under trust or under other contractual agreements. Similarly, during liquidation Section 36 (4) provides that the liquidation estate shall exclude assets owned by a third party in possession of the corporate debtor, including under other contractual arrangements which do not stipulate transfer of title but only the use of the assets.

The Supreme Court concluded that the framework of IBC is clear in excluding assets over which the corporate debtor has no ownership rights. Mere recognition of spectrum licensing rights as an intangible asset by TSPs in the Financial Statements is not conclusive of their ownership, as it only represents control over future economic benefits. Even assuming that licensing of spectrum rights is one among the bundle of rights, in the absence of transfer of title over the spectrum, no ownership rights are created in TSPs either in the spectrum or in its right to use as governed by licensing conditions. Hence, under the IBC framework, spectrum licensing rights is not a part of the pool of assets for insolvency or liquidation.

The Supreme Court observed that it’s decision in Embassy Property Developments (P) Ltd. v. State of Karnataka (2020) 13 SCC 308 is a case in point to put substance into the view that the jurisdiction of authorities under the Code, 2016 must take a backseat when the same is in conflict with public law. The jurisdiction of the NCLT and NCLAT is confined to matters that arise purely within the insolvency framework and does not extend to adjudicating the legality of sovereign actions.

The Supreme Court observed that the statutory regime under IBC cannot be permitted to make inroads into telecom sector and re-write and restructure the rights and liabilities arising out of administration, usage, and transfers of spectrum which operate under exclusive legal regime concerning telecommunications. The disharmony caused by applying IBC to the telecom sector which operates under a different legal regime was never intended by the Parliament.

The Supreme Court held that spectrum allocated to TSPs and shown in their books of account as an “asset” cannot be subjected to proceedings under Insolvency and Bankruptcy Code, 2016.

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