“The theory of “priority of crown debts” is based on the principle of “Law of Prerogative” which is the baby of Law of necessity and good sense.”

Dr. Kotagiri Srinivasa Rao


In order to revive a Corporate Debtor and to make it a going concern, Courts and Tribunals have often disregarded the interests of the Statutory authorities. This is evident from the fact that the claims arising under any law, encompassing the dues payable to the Central Government, State Government or any local authority, can beextinguished if they are not included in the approved resolution plan. Even if they form a part of the plan, they will be given priority only after the claims of Financial and Operational Creditors are cleared. This discriminatory treatment of statutory dues cannot be overlooked as they involve higher stakes, especially in the sector of telecom infrastructure, directly leading to loss of revenue to the government. This article endeavors to study the waterfall mechanism during resolution proceedings, analyses some of the prominent cases dealing with the treatment of statutory dues in the Telecom infrastructure sector, and attempts to provide some solutions amidst the inconsistent viewpoints of the Indian Courts and Tribunals.


In pursuance of unifying laws and reengineering the process of resolution, theInsolvency and Bankruptcy Code, 2016 (“IBC” or “The Code”) was introduced which aims to provide equilibrium to the concerns of all the stakeholders in this process. Despite serving multiple advantages to the insolvency regime, IBC is also plagued with its own set of rules that infringe upon the basic principles of equality stated in the Constitution, because it has changed the sequence of payment of payable dues, putting government dues, alternatively crown debts, at the last. As a last remedy to de-stress the burden of a corporate debtor, IBC offers liquidation of an asset in case the Corporate Insolvency Resolution Process (“CIRP”) fails. The dispersal of the waterfall of revenues generated from the sale of the liquidated assets is addressed inSection 53, in the terms of precedence stated therein. Accordingly, secured creditors are given greaterpriority in this process compared to the government in terms of distribution of amounts, by granting the former the power to vote duringCommittee of the Creditors (“CoC”) meetings and the authority to designate an Insolvency Resolution Professional (“IRP”), and out and out discretion in assisting the entire Insolvency Resolution Proceedings. Furthermore, thedisposition of dues is regulated by the CoC’s resolution plan, which has to be authorized by the Adjudicating Authority and then becomes applicable to all parties involved in the resolution plan, including government bodies to whom statutory dues are payable.

Coming to the Telecom infrastructure, recently the government in September 2021 hasdeclared reliefs to telecom companies in repaying their statutory dues by giving them a four-year moratorium period. These dues relate to the bricks of their infrastructure i.e., License fee and Spectrum usage charges, therefore these telecom companies, who choose to be covered under this scheme before initiating or to avoid any resolution proceeding, will be charged interest for deferring their outstanding statutory dues. But, if these companies, owing to their long list of debts, opt for resolution proceedings then the statutory dues will have a different story altogether.

As it has already been mentioned, statutory dues to government entities will be determined first by the CoC and then by the Adjudicating Authority after reviewing the resolution plan, therefore, this poses before us a question regarding the fate of the government dues in the Telecom infrastructure sector, since their recovery is one of the last sought-after during the insolvency proceedings, despite it being an essential source for the disposal of Centre’s functions.

The Waterfall Mechanism under the Code

The concept of Crown debts surfaced for the first time in the Bombay High Court in 1868 wherein Westropp, Jdrew parallels between the dues payable to the State of Bombay and to the crown in England, in the case of Secretary of State in Council for India vs. The Bombay Landing & Shipping Co. (Limited), and held that the realization of such dues will be allocated to the State treasury so that it can discharge its functions. In post-independent India, the question as to what constituted crown debt came up before the Supreme Court in theSicom Limited case against the Centre whereby it was held that the King (here, State) has the prerogative to demand priority over all other unsecured creditors while receiving payment of dues.

While tracing the treatment of the dues of corporate debtors during the resolution process, it can be observed that before the enactment of IBC, the issue related to the priority of government dues was determined by those provisions which created first charge over the property under any of the statutory enactments. However, after the enactment of IBC, in case of default by debtors when Resolution Professional (“RP”) is appointed by the Tribunal, payments are first made to the professional, workmen and employees, followed by an invitation of claims from creditors (financial and operational), and only then from the government.

After the liquidation of assets, Revenue authorities are supposed to submit their claims before the RP along with all other Resolution Applicants and rival Applicants. If the CoC approves the plan, it is then brought before the Tribunal, and accordingly, the creditors will be paid. This Waterfall mechanism, provided under Section 53 (1) which is the heart of the Code, was recentlyupheld in the order given by the National Company Law Appellate Tribunal (“NCLAT”) while dealing with charge creation over Surana Power’s assets by Bharat Heavy Electricals Ltd.

Government dues are usually paid in insignificant sums without any further relief and are sometimes even extinguished, as recently seen in the case ofGhanshyam Mishra  and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd in view of amendment inSection 31. Therefore, there is no recovery outside the provisions of the Resolution Plan. If the Resolution Plan collapses for any reason, or if the plan is deemed to be unsustainable, the Debtor will be liquidated, and the priority of the Revenue is almost at the bottom of all creditors. This contrasts greatly with the waterfall mechanism provided in Company Act, 1956, as well as Company Act, 2013, wherein the government dues have been given the priority in payment. The reason for this deviation can be found in theReport of Bankruptcy Law Reforms Committee whichreasoned that such an arrangement would boost the flow of credit, lower capital expenditures, entrepreneurial development, and accelerate the economic growth, eventually benefitting the government, as additional revenues will result from growth in the economy.

Judicial Interpretation

It can be observed from the cases that the pre-independence Indian judiciary had kept crown doubts on a higher pedestal than the dues of the creditors. In Builders Supply Corporation vs. Union of India, the doctrine of crown debts wasrecognized within the expression ‘law in force’ under Article 372(1) of the Constitution and continued to remain in force. Moreover, this expression also included custom or usage having the force of law.

Even after Independence, statutory claims were paid before others, if the Statute created a first charge over the asset, as evident fromState Bank of Bikaner and Jaipur vs. National Iron and Steel Rolling Corporation wherein the statutory charge created by virtue of section 11AAAA of the Rajasthan Sales Tax Act, 1954 was given preference over a mortgage created over the same property.

However, this practice observed a tilt towards secured creditors inDena Bank vs. Bhikhabhai Prabhudas Parekh and Co. and Others, wherein the doctrine of priority to crown debts was dealt with extensively by the Supreme Court. The Court has given a restricted interpretation to these debts by allowing to claim such a right only after secured creditors have claimed their rights.

Later, inUTI Bank Ltd. vs. The Deputy Commissioner of Central Excise, Chennai II Division, the Madras High Court held that dues to the government can get priority over ordinary debts only when there is a specific provision in any legislation wherein the first charge over the property has been created, and an absence of the same will never result in claiming priority by the government over the claims of the secured creditor. Therefore, it was noted in previous rulings also, including the judgement in the case ofBuilders Supply Corporation, that the notion of government debt priority was based on the rule of necessity and public policy, and that it could only be levied after secured creditors.

Recent Judgements of the Indian Courts and Tribunals

The NCLAT in theSynergies case held that statutory dues are included within the definition of ‘operational debts’ under the Code and the authorities to which these dues are owed shall be given the same treatment as that of operational creditors. Upon placing reliance on theSwiss Ribbons Pvt. Ltd. case, the NCLAT said that statutory liabilities like income and VAT taxes arise only when the corporate debtor is active or operational in its functioning which is clearly the result of benefitting from the infrastructural services provided by the government. Thus, government dues have a direct relationship with the operation of the Company. There is a high probability that this decision will not be welcomed by the tax authorities and will end up in the Supreme Court because of its direct impact on tax revenues.

The blow to the tax authorities came when the Karnataka High Court in June, 2021reasoned that since Section 238 of IBC stipulates for the predominant effect of the IBC over all other statutes, Crown debts do not supersede over secured creditors. This follows the Supreme Court’s decision in Ghanshyam Mishra and Sons Private Ltd vs. Edelweiss Asset Reconstruction Company Ltd., in which it upheld the essence of amendment to Section 31 of the Code which stamps out statutory dues if they are not included in an approved resolution plan. The apex court noted that the principal object of this Code is to make a positive effort towards the revival of the Corporate Debtor and to make it a going concern, and to remedy the mischief by which tax and other authorities used to keep pursuing such companies to pay their dues leading to a situation which made resolution plans for their revival unworkable.

Crown Debts vis-a-vis the Telecom Infrastructure Sector

With respect to the government dues in the Telecom Infrastructure sector, NCLATstands in favor of the priority of payment of government dues. While dealing with the question related to the transfer of Spectrum amidst undergoing a resolution process, NCLAT gave a crystal-clear answer to Aircel and said that though it is treated as an asset of the Telecom companies but it cannot be transferred or assigned to someone unless the statutory dues aren’t met while carrying out the process as per Section 53 of the Code. It further added that initiation of CIRP with an intention to rub out statutory dues cannot be permitted. This decision will have direct implications on Reliance Communication (“RCom”), which is also going under insolvency and the CoC has approved the resolution plan. Both Aircel and RComowe to the Directorate of Telecommunication gross revenue dues amounting to Rs 12,389 crore and  Rs 25,199.27 crore, respectively.

Unfortunately, for a long time, the telecom companies have been awaiting exemption or recalculation of their statutory dues arising from their infrastructural requirements of Spectrum and airwaves. The Courts and Tribunals have time and again reprimanded these companies in addition to giving them sufficient time to clear their dues. The Supreme Court in July 2021 haddenied requests of Bharti Airtel and Vodafone for revisions to the government’s estimate of their dues for use of airwaves and license fees, causing their share prices to plummet as the latter’s debt is ten times of its operational profit. This was rejected after they had missed a January deadline to pay about $13 billion, and an extension of ten years until 2031 to clear their statutory dues. However, within a month, the Central governmentoverturned this position by introducing a relief package to these companies which included a 4-year moratorium to clear their statutory dues. The hypothesis of such a package is to ease their liquidity and ensure a regular flow of income, eventually streamlining it with the Digital India Mission.

Notwithstanding the fact these reliefs on statutory dues are as of now to stimulate the cash flows of Telecom companies, however, there can be an adverse impact on their infrastructure if these dues are constantly overlooked. This is apparent from the past if we trace back to 2012 when the governmentinflated the 3G spectrum prices owing to prolonged delays in payment of spectrum charges, resulting in increased cost in upgrading 3G infrastructure and re-auction of 2G licenses.

Unpaid dues on government-approved infrastructure services have jammed the country’s economic monetary base and will have a detrimental effect on both the government and telecom companies’ revenues. As a consequence, past experiences and present reliefs should be taken into account in order to keep a balance between the flow of infrastructure services and the timely payment of fees and charges. A system to oversee the payment of government dues should also be devised.

The Way Forward

The High Court of Madras inRuchi Soya Industries v. Union of India opined that the amendment to Sec 31 has put the entire tax administration into a ‘pell-mell state’. Tax authorities are forced to run to NCLT to recover tax dues whenever a corporate entity goes in for IBC proceedings. While there may be a basis to this, a lot of the problem arises because of the fact that tax authorities are not taking timely action to file claims and get dues through resolution. Treatment of crown debts needs a different approach.

Since the statutory dues are not on the priority order under the waterfall mechanism, there is a huge loss of revenue for the various Government authorities, popping the question relating to corruption, inflation and inefficiency. There should be a proper mechanism so that the debtors don’t have to pay a fraction of the amount to the statutory authorities to revive/liquidate themselves. Stringent statutory penal provisions need to be introduced for recovering the statutory dues from the debtors. It is very important to understand that statutory dues come under the umbrella of Operational debt because these dues help the Telecom entities to build their infrastructure, i.e., provide services for their daily operation. When a company is going into CIRP or liquidation, these authorities, without whom they probably wouldn’t have been able to carry their business, are the ones facing discrimination in receiving their dues.

A resolution plan may seek redress from some pending statutory dues under the umbrella of IBC and the amendment relating to extinguishing the same. The tax authorities, on the other hand, will be reluctant to accept such a shortfall in their revenue especially when such a process has been initiated with malicious intentions. The Code, too, despite giving last preference to the government dues does not allow any relief from the debtor’s outstanding tax obligations. The uncertainties due to the lack of express bar on waiver of statutory dues induce certain companies to take advantage of the same.

Reforms should be introduced to put the Income Tax Department and other Revenue Department on the priority list while paying the dues. Statutory Dues should be given more involvement in the Companies as they involve higher stakes. The Insolvency and Bankruptcy Board of India should maintain a Centralized database to keep a check on the continuous fraudsters. In order to find a solution amidst the inconsistent viewpoints of the Indian Courts and Tribunals, as can be gauged from the above mentioned cases, it is imperative to note that certain steps can be taken by the tax authorities to get their payments, which include: timely submission of claims before the RP to make their case a strong one in the first attempt itself, and involving alternate dispute resolution mechanism in the process because this gives parties an opportunity to revive their interests and bring forth innovative solutions which could be financially beneficial for the debtor as well as the government, instead of relying upon the court to draw or come up with a fixed resolution plan. This will also avoid delays in the entire process because of which the value of the non-performing assets falls.

About the Authors

Ms. Namrata Langade is a Legal Associate at Surana & Surana International Attorneys.

Ms. Vidhi Saxena is a 4th Year Law Student at National Law Institute University, Bhopal.

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Aakaansha Arya and Akanksha Goel

Senior Editor: Jhalak Srivastav

Associate Editor: Vidhi Saxena

Junior Editor: Sukrut Khandekar

Preferred Method of Citation

Namrata Langade and Vidhi Saxena “The Unfortunate Saga of Crown Debts in the Telecom Infrastructure Sector” (15 November 2021)


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