INTRODUCTION
The Insolvency and Bankruptcy Code (‘IBC’), since its inception, aimed at providing an adequate framework for the resolution of the assets of the Corporate Debtor and to ensure the maximisation of assets in a time-bound manner, making the distribution of assets as per the waterfall mechanism under Section 53 IBC. In the scheme of post-resolution distribution of assets to various stakeholders, it is a time-tested debate that the Crown Debts belonging to the government exchequer would stand below the sub-stratum of the private debts, where the latter are debts owed to the Financial Creditors, Workmen Dues, among others. Despite the fact that IBC had a clear legislative intent that Crown Debts would not take precedence over the debts of the secured creditors, the apex court’s ruling in State Tax Officer v. Rainbow Papers Ltd. (Civil Appeal No. 1661/2020) turned the table upside down and gave precedence to the Sovereign Debt-cum-Tax dues in parlance to the Secured Creditors, placing them to the 2nd category from the 5th category in the distribution mechanism under Section 53 IBC (Rainbow Papers judgment has been distinguished in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (Civil Appeal No. 7976/2019), however was not overruled, meaning Rainbow Papers judgment still holds the good law).
Despite such judicial underpinnings whereby precedence was accorded to the Govt. Dues in the asset distribution list, the said ruling was met with another fallacious ruling recently laid down by the apex court in State Bank of India v. Union of India (Civil Appeal No. 1810/2021, 2026 INSC 153) (‘Spectrum Dues Ruling’) wherein, it subjected the Spectrum and the ancillary licensing dues to fall outside the realm of IBC, and subjected them to Telecom Disputes Settlement and Appellate Tribunal (‘TDSAT’) under the Telecom Regulatory Authority of India Act, 1997 and the Telegraph Act, 1885.
In light of such findings of the apex court, the author would pen down that how the Spectrum Dues ruling strikes a blow to the conventional concept of ‘debt’ and ‘default’ under the IBC framework, how the instant ruling fails the legislative intent of the IBC and the contradictions it brings upon for the stakeholders, and how the muddled up position as laid down by the apex court can be assuaged with respect to the recent introduction of the IBC (Amendment) Bill, 2025.
RELEVANT EXCERPTS OF THE RULING
In determining whether the Spectrum service as a right and the dues arising thereon are subject to the provisions of IBC, the apex court while placing reliance upon its judgment in Bharti Airtel v. Union of India (Civil Appeal No. 2803/2014) to buttress that a license granted Section 4 of the Telegraph Act, though is a contract, it is in substance not an ordinary commercial arrangement since it emanates from a statutory grant of sovereign privilege and is indelibly shaped by constitutional and public law obligations. The court further placed its reliance upon Embassy Property Developments (P) Ltd. v. State of Karnataka (Civil Appeal No. 9170/2019) to lay down that the jurisdiction of authorities under IBC takes a backseat when the same is in conflict with public law, and dispute relating to the exercise of statutory or sovereign power by the State, particularly in matters involving public interest and natural resources, such issues fall outside the domain of the insolvency adjudicatory framework.
While deciding the nature of the Spectrum License and the underlying contract contained therein, the apex court in Para 33 of the judgment categorically observed as under:
“Spectrum access, as explained in Bharti Airtel (Supra), is in the nature of State largesse. While such largesse must be distributed in conformity with Article 14, ensuring fairness, transparency and adequate compensation to the public, it does not translate into transfer of ownership or creation of proprietary rights in favour of the licensee. The grant of a telecom licence, 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.”
In the conspectus of such observations, the apex court excluded the Spectrum as a right and its dues from the application of the IBC framework, and gave primacy to the aspect of ‘Ownership’ of Assets under IBC, which they held, was missing with respect to the Spectrum and its dues given the fact that 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, and no ownership rights are created in Telecom Service Providers(TSPs) either in the spectrum or in its right to use as governed by licensing condition.
SPECTRUM AS RIGHT AND DUES AS AN ASSET – ARE THEY INALIENABLE?
While the apex court overturned the decision of NCLAT, Principal Bench in Union of India v. Vijaykumar V Iyer (CA (AT) (Ins.) No. 733/2020), the said decision does not hold a good law due to multifold reasons.
The first and foremost reason is the NCLAT’s instant ruling wherein, an important aspect was very well discussed by the Appellate Authority – the alienable nature of ‘Spectrum’ as Right and ‘Dues’ arising thereon by the TSPs as an Asset under IBC. The NCLAT took a microscopic view of Spectrum and held that, per the Tripartite Agreement existing between Corporate Creditors, Debtors and the Telecom Regulatory Authorities, the license is treated as a tradable asset and such transfer/ assignment of licence is executed with the Lenders financing the project setup by the Licensee to protect and secure Lender’s interest arising out of grant of financial assistance.
The NCLAT while determining the nature of Spectrum Dues, distinguished between ownership and occupation and held that the right to use of spectrum vests in the TSPs/ Licensees. Possession is co-related to ownership and entitlement to possession cannot be divorced from the title to property, and Spectrum being the property of Nation is in possession of the State as a Trustee, however, right to use spectrum under the Licence Agreement vests in the Licensees/ TSPs, who are in occupation of the same being its actual users irrespective of whether they have a right to hold the same in their possession or not.
In furtherance of the NCLAT’s observation in bifurcating ownership and possession in terms of the arising spectrum dues, the NCLAT took efforts in building a nexus between the Spectrum as a right and Dues arising therefrom as alienable however having a cumulative effect, leading to the conclusion that the Adjudicatory Authorities due to such nexus effect are well within their rights to affix Dues as a debt and an asset under IBC, while placing reliance upon the apex court’s ruling in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (Civil Appeal No. 9241/2019). Additionally, NCLAT, while taking note of its observation basis the ruling in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority (Civil Appeal No. 12248/2018), categorically held that license holders (TSPs-cum-Corporate Debtors in the present case) are the occupiers of the license, and for the application of the extant provisions of IBC, the intangible property concerned should be either occupied or possessed by the Corporate Debtor, the TSPs in the instant case were within their rights to invoke CIRP under Section 10 IBC.
THE RULING CONTRADICTS THE SETTLED PROVISIONS OF IBC
Whilst, the NCLAT in its ruling had differentiated Spectrum as a sovereign right from the inter-woven yet separable dues (arising from the spectrum licensing under the Spectrum guidelines), there are other reasons why the judgment needs to be revisited, with the second reason being that Spectrum dues ruling holds primacy of ‘Ownership’ over mere occupation and possession of the intangible assets. Rather, a cursory look of the explanation given by NCLAT in its ruling, coupled by the fact that the definition of ‘Security Interest’ under Section 3(31) IBC containing an expression ‘title or interest or claim to property’ makes it evidently clear that a mere interest in the intangible property among the bundle of rights creates a security by the Creditor over the concerned property. This can also be buttressed by the fact that the ‘claim’ in Section 5(21) IBC fructifies mere possession/occupation as an interest among the bundle of rights into a claim for its classification as an Operational Debt.
Thirdly, Explanation to Section 14(1) IBC and Section 14(2) IBC r/w Regulation 31 IBBI (CIRP) Regulations 2016 elucidates the superseding position being accorded to the telecom regulatory authorities. A cumulative effect of the aforementioned provisions, anyway, gives primacy to the Telecom Services over the extant provisions of IBC, in contradistinction to the other services as regulated under IBC. Moreover, the legislative intent behind according primary rights to the Telecom Service was that the contribution of the sector to the economic growth of the Indian territory is huge owing to which, excluding the dues arising out of the Spectrum service would turn the aforementioned provisions of the IBC otiose, leading to glare inconsistencies and contradictions between the extant provisions.
Fourthly, the judicial precedents provides an impetus to the alienable nature of Spectrum as a sovereign right and dues out of the Spectrum license, the latter being governed by IBC. To buttress further, NCLAT Principal Bench in Ellison Oil Field Services Pvt. Ltd. v. CITOC Ventures Pvt. Ltd. (CA (AT) (Ins) No. 1876/2024) has held that sovereign rights of the tax authorities qua dues under the GST Act was assignable as per the Assignment Agreement, and hence the sovereign dues were classified as operational debt. Similarly, the NCLAT Principal Bench in Jaipur Trade Expocentre Pvt. Ltd. v. M/s Metro Jet Airways Training Pvt. Ltd. (CA (AT) (Ins.) No. 423/2021) has explained that the dues arising out of the use of license service constitutes provision of service, and thus amounts to an operational debt under IBC.
Nevertheless, a more prudent approach would have been that the apex court ought to have emphasised upon the timely enforcement of the IBC (Amendment) Bill 2025 which in order to overturn the ratio of the Rainbow Papers case, aims at amending the definition of Security Interest under Section 5(31) IBC, which although brings down the Crown debts/sovereign dues from the 2nd category to the 5th category (Waterfall mechanism), the same has been altered vide Explanation to Section 5(31) IBC which says: “Explanation.—For the removal of doubts, it is hereby clarified that the security interest shall exist only if it creates a right, title or interest or a claim to a property pursuant to an agreement or arrangement, by the act of two or more parties, and shall not include a security interest created merely by operation of any law for the time being in force;”. The legislative intent behind such alteration seems to suppress the State Largesse created by the other statutes over the private debts, and give ultimate primacy to the Waterfall mechanism. In the instant case as well, the IBC Amendment Bill would have still landed the Spectrum Dues in the 2nd category since the dues arises from the Agreement contained therein, thereby classifying Govt. as the Secured Creditors.
CONCLUSION
The recent judicial trajectory, oscillating from the precedent set in the Rainbow Papers case to the Spectrum Dues Ruling, represents a profound departure from the legislative intent of the Insolvency and Bankruptcy Code. By elevating Sovereign Debt-cum-Tax dues and subsequently excluding Spectrum and ancillary licensing dues from the insolvency adjudicatory framework, the apex court has effectively dismantled the sanctity of the waterfall mechanism under Section 53 IBC. This shift toward prioritizing State largesse and sovereign privilege over the commercial realities of debt and default creates significant contradictions for Financial Creditors, Workmen, and other stakeholders who rely on the time-bound maximisation of assets.
The refusal to recognize the right to use spectrum as an alienable asset, despite its treatment as a tradable asset in Tripartite Agreements strikes a blow to the settled definition of Security Interest under Section 3(31) IBC, which encompasses any ‘title or interest or claim to property’. By emphasizing ownership over occupation and possession, the court renders the explanation to Section 14 otiose and ignores the operational debt classification established in the NCLAT rulings in Ellison Oil Field Services & Jaipur Trade Expocentre.
To resolve this muddled legal position, the IBC (Amendment) Bill, 2025 must be leveraged to clarify that security interests arising from agreements should be prioritized within the distribution of assets, rather than being sidelined by public law exceptions. The IBC serves as a comprehensive resolution mechanism that keeps the interests of all the stakeholders in consideration, which might not be possible if the Spectrum as a dispensation of the Telecom service is subjected to TDSAT under the Telecom Regulatory Authority of India Act, 1997 and the Telegraph Act, 1885. Hence, the apex court must revisit the aforesaid ruling to strike a necessary balance between the determination of dues under IBC and the adjudication of the ancillary rights related to the Spectrum as a service under the rules and regulations of the telecom sector.
Author Bio
