Government departments pose major hurdle in bankruptcy cases

The tax departments did not like being put behind others in the IBC, but they accepted it. Some other departments have not quite reconciled to the Code’s basic premise

Published: 23rd September 2021 12:30 AM  |   Last Updated: 22nd September 2021 11:18 PM   |  A+A-

Express Illustrations by Amit Bandre

Express Illustrations by Amit Bandre

There have been many heated debates of late about the 90% or higher haircuts that lenders have taken in several high-profile bankruptcy resolutions. Erstwhile promoters, resolution professionals and even the committee of creditors have all been blamed by turns for the state of affairs. Opinion writers have written angry columns and TV channels have carried heated panel discussions. Policymakers have not been sitting idle either. Several IBC clauses are being tweaked and other new clauses are being introduced to plug loopholes and make the process smoother and more robust.

One issue that has cropped up as a major hurdle in multiple bankruptcy cases but has seen very little discussion though is the role of some government departments. There have been a number of cases where either an arm of the Union government or a state government department or a regulator has thrown a spanner at the resolution process.

This should not be happening because the IBC is fairly clear where the government dues stand in a bankruptcy proceeding. For all extents and purposes, the government is an operational creditor and not seen at par with financial creditors. This includes statutory dues such as unpaid taxes, as well as fees for various licences or other approvals that the bankrupt firm has acquired and needs to pay.

In practice though, things have become complicated in taking the resolution to conclusion in several sectors. Some of the biggest cases stuck belong to the telecom sector. Take the case of bankruptcy proceedings in telecom such as R Com, Aircel and Videocon. The Department of Telecom insists that any firm that bids and wins a bankrupt company will need to pay the past AGR dues on spectrum before it can use them. Potential bidders balked at this and the case went up to the Supreme Court, which sent it to the NCLAT.

In April, the NCLAT ruled that spectrum dues of defaulting companies cannot be transferred without paying the old dues. R Com owes Rs 26,000 crore as spectrum dues, Aircel owes Rs 12,389 crore and Videocon about Rs 1,376 crore. This ruling has pretty well sent bidders scurrying for cover.

Several corporate lawyers argue that the ruling makes little sense. Mansoor Ali Shoket, co-founding partner of RegLaw Chambers, points out that dues of Central government/ DoT under the licence (which would include spectrum dues) fall within the ambit of operational dues under the Insolvency Code. Sarvaank Associates founder Ankita Singh says that there needs to be clarity on the spectrum dues issues as do several other senior corporate lawyers.

A partner specialising in IBC cases in one of the biggest corporate law firms in the country points out that apart from telecom, various authorities are playing spoilsport in several other sectors. One of them is the real estate sector in several districts of Uttar Pradesh like Noida, Greater Noida and Ghaziabad. The authorities here want to be treated as financial, and not operational, creditors and want to be paid full dues including land for the projects of insolvent developers before any other builder can take the project over. Potential buyers say this makes the projects a non-starter. This is holding up the resolution of multiple bankruptcy cases involving defaulting builders.

The aviation sector is seeing a slightly different issue. As anyone who follows the sector will tell you, the most important asset any airline has are the slots—the authorisation to take off or land from a particular airport at a particular time period. The most prized slots allow an airline to charge a premium for its seats and also pretty well guarantee a full load of passengers. Airplanes can always be leased and pilots and other staff can be hired, but slots are the most difficult to come by.

As one of the first private airlines in India, Jet historically had some of the best slots. Initially, when it defaulted and bankruptcy proceedings were initiated against it, the civil aviation ministry had indicated that the slots would go to anyone who won in the resolution process. However as the process dragged on, the slots were given to other airlines that were still flying. The ministry gave the impression at first that this was only temporary until a winner emerged in the resolution. Now it has said that historicity cannot be the principle on which slots will be given to the new owners of the airline. The winning bidders have said that Jet flying again will depend on whether it gets good slots or not.

These are just three prominent sectors but corporate lawyers say that unless the government and the Supreme Court take a firm stand, such issues will keep arising. The IBC was passed to remove confusion about who got precedence when it came to dues from a bankruptcy proceeding. The hierarchy of creditors was clearly laid out. The tax departments did not like being put behind a host of others in the IBC, but they accepted it. But it appears that some other departments have not quite reconciled to the basic premise of the IBC.

Prosenjit Datta
Senior business journalist



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