AGR case exposes telcos' tricks; current rules put banks' dues over DoT dues

Ever since the Supreme Court bench led by Justice Arun Mishra has started daily hearings of the Adjusted Gross Revenues (AGR) issue, new facets of the case are coming out in the open. On Thursday, arguments presented by Ravi Kadam, representing the monitoring committee of Aircel, and Ranjit Kumar, representing Committee of Creditors (CoC) of Aircel seem to have put the government in a fix. How?

Kadam reportedly told the court that the Department of Telecommunications (DoT) was part of the Aircel's CoC meetings, and the resolution plan of UVARCL (the asset reconstruction firm) which was approved by CoC, entails selling of spectrum. This is in stark contrast to DoT's argument in the same court that the spectrum can never be subject matter of insolvency proceedings, and it has been a consistent stand of the DoT.

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For the uninitiated, the recent arguments in the AGR case have been revolving around three areas: whether Reliance Jio is liable to pay AGR dues for the Reliance Communications' spectrum that it has been using for the past three-odd years, and whether the sale of spectrum is allowed for bankrupt telcos like Aircel, RCom and Videocon Telecom who are under insolvency process. The third issue pertains to court's demand that the AGR dues of DoT must be cleared before the dues of the financial creditors under the resolution plan.

Kadam reportedly told the court today that DoT itself has applied as operational creditor. For the record, the dues of financial creditors take precedence over dues of operational creditors under the Insolvency and Bankruptcy Code (IBC) rules. What it means is that if DoT has considered itself as an operational creditor, it slips below banks in the priority list of creditors. But the court wants it the other way round.

To support Kadam's argument, Kumar reportedly said that the payment to banks after the payment of AGR dues would be a violation of IBC rules. "The requirement to pay AGR dues is entirely contractual. If it's all contractual, then one contractor cannot get more than the other contractor," Kumar reportedly told the court. Kumar also said that if the government has allowed keeping spectrum as collateral, and then it can't be the case that the government will get all the money and banks don't get anything. A similar point was raised by Harish Salve who is representing Jio and RCom's CoC in this case.

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However, IBC rules specifically say if a company undergoes liquidation, government dues are specifically mentioned, and are considered first amongst other operational creditors. As per section 53 of IBC, in case of distribution of assets as per order of priority payment, financial creditors will get their dues in priority over operational creditors' debts. Government dues (state and Centre) are mentioned separately and ranked fourth just above other operational creditors.

As on May 2019, the claims of Aircel's financial creditors stood at Rs 19,913.43 crore. The share of State Bank of India in these claims is 36.4 per cent followed by Punjab National Bank at 15 per cent. DoT's AGR demand from Aircel Group of Companies stood at Rs 12,389 crore as on October 2019. In comparison, the resolution plan for Aircel submitted by UVARCL (which has been reportedly approved by the National Company Law Tribunal) is for Rs 6,630 crore.

Sonam Chandwani, managing partner at KS Legal & Associates says in 2019, the telecom tribunal had ruled that spectrum usage rights belong to the telco but it didn't dispute that spectrum is owned by the government. "This had put the debate of whether spectrum can be sold to the bidder without taking on the liability of AGR payment to rest. The current lacuna allows operators to take a ride without paying for the horse [spectrum]. The apex court's decision that spectrum cannot be used until AGR dues are cleared addresses the free-ride concern and discourage bidders attempting to evade statutory dues under the guise of selling spectrum under IBC," she says.

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