Settling the Law, Unsettling the Framework: Implications of Excluding Spectrum from Corporate Insolvency Proceedings

[Raghuvir is a student at Dr Ram Manohar Lohia National Law University.]

In its recent decision in Union of India v. State Bank of India and Others, the Supreme Court has held that in an insolvency proceeding of a telecom corporate debtor, the spectrum allocated to a telecom service provider (TSP) cannot be treated as part of the asset pool. The matter originated from insolvency proceedings of Aircel and Reliance Communications.

The moot question before the court was whether telecom spectrum could be subjected to proceedings under the Insolvency and Bankruptcy Code 2016 (IBC). The court held in the negative and described spectrum as the “material resource of the community” held in public trust by the Union of India under Article 39(b) of the Constitution. The court stated that the TSPs only have the conditional right over the spectrum and are devoid of any ownership rights. 

While the judgment ensures the much-needed doctrinal clarity and uniformity across the NCLTs, it generated substantial contradictions within the framework. The ruling affects the core fundamental objective of ensuring corporate debtors as a going concern, maximising the asset value and equitable treatment of creditors. Additionally, it fails to settle how government-granted usage rights should be treated in other regulated sectors. 

Court's Reasoning  

The reasoning of the Supreme Court is based on three main points. Firstly, it relied on Article 39(b) of the Constitution and called spectrum a "material resource of the community" and by using the public trust doctrine, the court ruled that the Union of India holds spectrum as the trustee of the citizens and hence cannot be privately owned. Secondly, the court described a TSP's right as no more than a conditional "right to use" to use spectrum under licences that the Department of Telecommunications issues. This was compared to a statutory license or leasehold interest, devoid of ownership, proprietary character, or inherent transferability. Thirdly, the court ruled, under the doctrine of "distinct legal provinces", that the IBC and the telecommunications regulatory framework (which includes the Telegraph Act 1885, the Wireless Telegraphy Act 1933, and the TRAI Act 1997), are in different legal provinces. The telecommunications statutes are a complete and exhaustive code in relation to sovereign natural resources and therefore protects spectrum from the IBC.

This judgment makes several salutary contributions. Most notably, it brings much-needed clarity on the treatment of spectrum under the IBC and, by establishing a binding precedent, ensures procedural uniformity across insolvency tribunals. It also affirms parliamentary control over the regulation of natural resources and protects sectoral regulatory frameworks from being displaced by the IBC’s broad remedial provisions. By treating telecom legislation as a complete code, the court recognises the specialised statutory scheme governing scarce public resources.

The Pre-Judgment Position 

Prior to the Supreme Court's intervention, it was generally accepted that the IBC, as a unified insolvency framework, included intangible rights over natural resources within the asset pool for the purpose of the corporate insolvency resolution process (CIRP). However, this position remained ambiguous due to contradictory judicial pronouncements and divergent stakeholder opinions.

The spectrum and other such licenses that were granted to the private players were considered to be the ‘right to use’ in favour of the TSPs and no ‘right to ownership’ was established and such ownership rights rested with the Government of India as the trustee of the citizens of the country. Despite this distinction, several factors supported treating spectrum as an insolvency asset.

Firstly, accounting and regulatory recognition affirmed spectrum's asset character. The Indian Accounting Standard 38 (Ind AS 38), as part of the applicable accounting framework, recognizes all licenses that provide rights of use over natural resources as intangible assets and additionally, TRAI's Consultation Paper on Spectrum Auction characterized the ‘right to use’ spectrum as an intangible asset essential for telecom operations. In the context of spectrum licenses the apex court ruled that ‘right to use’ spectrum is an intangible asset for taxation considerations in Vodafone India Limited.

Secondly, legislative provisions under Section 18(f) mandate the resolution professional to assume control over all corporate debtor assets. The statutory explanation clarifies that this leaves all the assets that are only under the possession of the corporate debtor and not owned by it.  Significantly, Section 18 empowers the Central Government to notify excluded asset classes, yet no such notification exists. The prevailing position so far has been that, although the spectrum itself cannot form part of the asset pool, the ‘right to use’ or license associated with it can be included. Accordingly, the moratorium under Section 14 may apply, since preserving the spectrum is essential to maintain the telecom service provider as a going concern during the CIRP, a view that was also judicially recognised by the NCLT in Aircel Limited.

Thirdly, the NCLAT in Union of India v. Vijaykumar V Iyer held that intangible rights to use spectrum constitute corporate debtor assets under Section 18(f), capable of being subjected to IBC proceedings. This decision now stands overruled, creating substantial implications for the industry and IBC's overriding effect.

Major Implications of the Judgement

Rendering going concern preservation impossible and undermining asset maximisation 

Spectrum can be regarded as the sine qua non for the telecom companies and excluding it from insolvency asset pool means that resolution applicants must bid for a company's infrastructure, customer base, and brand without acquiring the fundamental regulatory right to actually provide telecom services. The corporate debtor will now only be contained as a shell and not as a viable going concern. 

The legislative intent of the IBC, consistently affirmed by the judicial decisions, is to prioritise the corporate insolvency resolution over the liquidation to preserve enterprises as going concerns and maximise value for all stakeholders. In Swiss Ribbons Private Limited v. Union of India, the court ruled that the preamble of the IBC imbibe that the liquidation of the company should be the last resort when there is absence of viable resolution plan. Yet the judgment makes telecom resolution structurally impossible as without spectrum, there is no 'going concern' to keep, only separated assets to be liquidated. Simultaneously, the IBC also seeks to maximise the value of the assets for the effective recovery, but the judgement also makes this difficult as spectrum which is an essential element of the telcos would not form part of the asset pool. Secured creditors whose collateral arrangements may have factored in spectrum value find that their primary security has effectively vanished.

Elevating government dues above statutory parity and undermining Section 238's overriding effect

The Union of India participated as an operational creditor under Section 9, filing claims totalling INR 9,894 crores and engaging in committee of creditors proceedings. However, through this judgment, the Government secures effective primacy over other creditors by conditioning any spectrum transfer on clearance of pre-CIRP dues, despite those dues being classified as operational debt within the resolution framework. 

This causes a violation of the pari passu principle which is mandated under Section 30 and 53, which requires equal treatment of creditors within the same class. Once DoT's dues are admitted as operational debt, their treatment is crystallized and governed exclusively by the approved resolution plan under Section 31(1). To condition the post resolution spectrum usage contingent upon clearance of residual pre-CIRP dues amounts to an impermissible reordering of priorities outside the statutory waterfall, effectively elevating one operational creditor above others. 

Moreover, the judgment undermines Section 238's non-obstante clause, which explicitly provides that the IBC "shall have effect, notwithstanding anything inconsistent therewith contained in any other law. Section 31(1) makes approved resolution plans binding on "the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law" is owed. Now as the judgement has given primacy to the sectoral statutes over the IBC, there is a creation of fundamental uncertainty about the IBC's overriding application.

Uncertainty across regulated sectors with government-granted usage rights

The judgment characterizes spectrum as a "material resource of the community" under Article 39(b), excluding it from IBC's scope. However, it provides no framework for determining which other government-granted usage rights fall within or outside the Code's jurisdiction, creating immediate uncertainty across multiple regulated sectors.

Mining leases assigned under the Mines and Minerals (Development and Regulation) Act 1957 pertain to minerals that also count as natural resources lying in the Union under Article 297. Similarly, petroleum exploration and production licenses granted under NELP/OALP regimes involve hydrocarbon resources held by the Union. There is no clarity whether the reasoning of the judgement extends to all these government-granted rights over natural resources. The judgment's invocation of Article 39(b) and public trust doctrine provides no clear test for distinguishing which government-granted usage rights remain subject to IBC proceedings. Resolution professionals and creditors may face profound uncertainty about which assets can be included in resolution plans across infrastructure, extractive, and utility sectors.

Affect over financing of the telecom sector 

The effect of the judgement would be severe on the financing of the telecom sector as banks cannot rationally lend against an asset that is legally non-existent for insolvency purposes. Traditionally banks have been relying on the “tripartite agreement” to protect their interest in licence-dependent sectors. In the absence of such protection for the banks and the lenders, the government retains the ultimate authority to deny a transfer if statutory dues (like AGR or royalties) are not cleared in full. This causes an effective subordination of the bank's security interest to the state's regulatory claims, creating a "super-priority" for sovereign dues.  The ability of the bank to reclaim its dues is now severely contained.  

Conclusion

The judgment of the Supreme Court has provided doctrinal clarity on the vexed issue of the treatment of spectrum under the IBC, but this clarity has come at a considerable cost. By categorically excluding spectrum from the insolvency estate, the judgment undermines the IBC's foundational objectives–preserving going concerns, maximizing asset value, and ensuring creditor parity. It elevates government dues above statutory equality, weakens Section 238's overriding effect, and creates profound uncertainty across regulated sectors.