The NCLAT upheld the supremacy of the IBC over the TRAI Act, ruled that financial disincentives constituted operational debt, and rejected TRAI's trust claim on subscriber deposits during the CIRP.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed two appeals and held that the IBC, by virtue of its non-obstante clause under Section 238, prevails over the TRAI Act. It rejected TRAI’s claim that unspent balances and security deposits were held in trust and should be excluded from the insolvency process. The Tribunal further ruled that financial disincentives imposed by TRAI constituted operational debt, which must be resolved under the approved Resolution Plan and could not be enforced independently during the CIRP.
The Telecom Regulatory Authority of India (TRAI) filed two appeals challenging the orders dated 05.12.2023 and 19.12.2023 passed by the National Company Law Tribunal (NCLT), Mumbai Bench-I, in I.A. No. 88 of 2020 and I.A. No. 4124 of 2019, respectively. The NCLT had allowed both applications in terms of the directions provided in the orders. Aggrieved by these decisions, TRAI filed the present appeals, which raised common questions of fact and law.
TRAI, constituted under Section 3 of the Telecom Regulatory Authority of India Act, 1997, had framed various regulations, including the Telecommunication Consumers Education and Protection Fund Regulations, 2007, and the Quality of Service Regulations, 2009. It directed telecom service providers to submit compliance reports and imposed financial disincentives for non-compliance. During the Corporate Insolvency Resolution Process (CIRP) of Reliance Telecom Ltd., which commenced on 15.05.2018, TRAI filed an application before the NCLT seeking directions for the resolution professional (RP) to ascertain unspent balances and security deposits payable to subscribers and to provide for their payment in the resolution plan. Additionally, TRAI sought payment of statutory dues amounting to Rs. 85,10,000/-.
The Adjudicating Authority allowed the applications, leading TRAI to appeal. It argued that unspent balances and security deposits held by the Corporate Debtor should not be treated as ‘operational debt’ under the Insolvency and Bankruptcy Code, 2016 (IBC), as they were held under a ‘constructive trust’ and remained the subscribers’ property. TRAI contended that IBC, being a general law, could not override the TRAI Act, a special law governing telecom regulations.
In response, the Respondent asserted that the Corporate Debtor did not hold these amounts in trust and had not maintained a separate account for them. The RP argued that these amounts were liabilities recorded in the books and should be treated as operational debt. The Respondent further contended that financial disincentives imposed by TRAI were in the nature of penalties and, under Section 14 of the IBC, could not be enforced during the CIRP. It was also submitted that TRAI failed to file a claim within the prescribed timeline and instead sought relief through an application before the NCLT, bypassing the resolution process.
The matter was heard, and both parties presented their arguments regarding the classification of the claims under IBC and the interplay between TRAI regulations and insolvency proceedings.
The NCLAT dismissed the appeals, holding that no grounds were made out to interfere with the impugned order. The Tribunal relied on the Supreme Court's decision in A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited and Others, REEDLAW 2021 SC 03531, reaffirm that the IBC, being a special statute with a non-obstante clause under Section 238, prevails over any conflicting laws, including the TRAI Act. Consequently, the Appellant’s contention that the TRAI Act should override the IBC was rejected.
The disincentives imposed by TRAI on the Corporate Debtor for non-compliance with the Quality of Service Regulations, 2009, were held to be in the nature of penalties and were to be treated as operational debt under the IBC. The liability for these dues, which remained outstanding on the date of CIRP commencement, was to be settled as per the approved Resolution Plan. The Appellant’s prayer for a separate payment outside the IBC framework was rejected.
Further, the NCLAT examined the treatment of security deposits from post-paid subscribers and unspent balances of prepaid subscribers. The Appellant argued that these amounts were held in trust by the Corporate Debtor and should not be considered part of its assets. However, the Tribunal found that the Corporate Debtor had accounted for these liabilities in its financial statements under "Other Current Liabilities," which included security deposits, advance payments from customers, and statutory dues. Additionally, the RP demonstrated that the amounts received as security deposits and prepaid balances were utilized in the business of the Corporate Debtor without any statutory prohibition.
The Tribunal also rejected the Appellant’s reliance on the Gujarat High Court’s decision in Baroda Spg. & Wvg. Mills Co. Ltd. v. Baroda Spg. & Wvg. Mills Co-operative Credit Society Ltd. and the Madras High Court’s ruling in Kodak Ltd. v. South Indian Film Corporation, holding that those cases were factually distinct and had no application to the present matter. The security deposits and unspent balances were not impressed with a trust character, and their refund obligations were to be governed by the terms and conditions of the service agreements and the IBC process.
Regarding the Appellant’s alternative submission to treat the security deposit balances and prepaid balances as CIRP costs under Section 5(13)(c) of the IBC, the NCLAT found no supporting material on record. It held that CIRP costs must pertain to expenses incurred in running the Corporate Debtor as a going concern, and there was no foundation for treating the amounts in question as CIRP costs.
Based on these findings, the NCLAT upheld the Adjudicating Authority’s decision, dismissing both appeals and all pending interlocutory applications, with no order as to costs.
Mr. Ankur Sood and Mr. Dhaman Trivedi, Advocates, represented the Appellant.
Mr. Krishnendu Datta, Sr. Advocate, with Mr. Anoop Rawat, Mr. Saurav Panda, Ms. Shally Bhasin, Mr. Gaurav Arora, Mr. Udbhav Nanda, Mr. Mohana Nijhawa and Mr. Akhil, Advocates, appeared for Respondent No. 1 & Respondent No. 2.
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