When regulation overrides insolvency

Despite the Supreme Court acknowledging that two statutory enactments appearing in conflict should be interpreted harmoniously such that effect is given to the objectives of both, it arrived at the conclusion that telecoms law must override insolvency law because of policy considerations that spectrum is a national asset.

Licences, public assets and lenders

However, the Supreme Court failed to distinguish between the role of the regulator/government as a trustee of national assets and as a creditor. While the regulator may impose conditions relating to technical standards and licensing conditions applicable to the sector, the characterisation of mere economic positioning of the regulator as a regulatory condition is questionable.

The implications of the spectrum judgment are not just limited to the telecoms sector but are far-reaching and may also extend to other regulated sectors (such as oil and gas and mining) where similar natural resources form the substratum of the business.

In such cases, the underlying natural resource remains public property in trust with the government; and the licensee holds only a conditional and revocable privilege of use, which may fall outside the insolvency estate, constraining the ability to resolve regulated entities.

Lenders extend credit to regulated licensees on the premise that the underlying licence or natural resource constitutes the most valuable asset, which would be available for resolution through the insolvency process under the IBC.

Spectrum judgment chills regulated sector credit

In the absence of the ability to enforce against or realise the principal revenue generating asset, the lenders are left with recourse only to the residual and often depreciated tangible assets of significantly lower value, which may also be incapable of independent commercial exploitation without the accompanying resource. This fundamental erosion of recovery prospects is likely to compel lenders to either restrict credit or demand higher risk premia, increasing capital costs and contributing to the already high barriers to entry in such regulated sectors.

The spectrum judgment creates a paradox: while the Supreme Court sought to safeguard the public interest in natural resources, the resultant chilling effect on the willingness of the financial sector to fund the exploitation of those very resources may, in the long run, undermine the policy objectives in the sector.

The courts in more mature bankruptcy jurisdictions such as the US, recognising this paradox, have rejected the contention that regulatory conditions like “full and timely payment of statutory dues” cannot be classified as “dischargeable debts” in bankruptcy (see FCC v NextWave Personal Communications Inc [2003]).

Pertinently, the line of reasoning adopted by the US Supreme Court to arrive at the said conclusion, i.e. a “dischargeable debt” in bankruptcy is defined as a “liability to claim”, where “claim” means “right to payment”, irrespective of whether such right to payment is also a regulatory condition, is equally applicable in the Indian context.

Based on the said reasoning, it was held that a “policy preference” of regulators to sell licences on credit (to reduce barriers to entry and increase competition) does not translate to their claims being superior to other parallel claims.

Sectoral regulation and IBC coexist

To conclude, it is possible for the IBC and sector-specific laws to coexist harmoniously, since both frameworks ultimately aim to achieve the optimum utilisation of resources through separate lenses. While sectoral laws govern matters of technical compliance and licensing, the IBC is and must remain available as the governing mechanism for insolvency resolution in the absence of a sector-specific law for the same.

This article was originally published in Asia Business Law Journal on 16 October 2026 Co-written by: Anoop Rawat, National Practice Head – Insolvency & Restructuring; Akham Khan, Senior associate; Ayushi Sareen, Associate. Click here for original article

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