The Role of Mediation in Resolving Insolvency Disputes
Aishwarya
3rd Year, B.A. LL.B.(Hons.), Chanakya National Law University, Patna
Mediation is a process wherein the disputing parties make an attempt to reach a settlement with the help of a common mediator. With the Insolvency and Bankruptcy Code 2016, distressed businesses were prevented from being bankrupt by offering resolution or liquidation. According to the latest statement by the minister of state for corporate affairs, there have been a pending of 12,963 insolvency cases before the NCLT as of March 2023. [1] Since there exists such a huge backlog of cases, an alternative to litigation will prove to be beneficial.
Mediation can prove to be a useful alternative to litigation for settling cases of insolvency and bankruptcy. Mediation processes are cost-effective and also save up the cost from the advertising component which may be involved in case of protecting legitimate corporate debtors from bankruptcy and the stigma associated with it.
Mediation in Insolvency
The IBC 2016 suggests using formal mediation in the insolvency process, either before or after filing a case, to help financial institutions recover money from defaulters more effectively. While this may not immediately solve delays at the National Company Law Tribunal (NCLT) level, it can reduce the losses banks face. Other groups, such as employees and operational creditors, would also benefit from early mediation, as it could help save jobs and increase the chances of receiving payments. Mediation can also help maintain the value of assets, which might otherwise decrease due to delays in insolvency proceedings, and reduce the workload on the already busy NCLTs and National Company Law Appellate Tribunals (NCLATs).
By June 2022, 643 Corporate Insolvency Resolution Process (CIRP) applications were withdrawn, and 774 cases were settled or decided. These numbers are significant compared to the 3,637 cases resolved so far and the 1,999 cases still pending by the end of June 2022. The IBC has influenced stakeholder behavior, with 22,411 CIRP applications involving ₹7.10 lakh crores being resolved before reaching the admission stage.[2]
Due to the involvement of public interest and in-rem rights in the IBC process, the committee suggests that the Mediation Act of 2023 should be specifically amended, or a notification should be issued under First Schedule Entry 13 of the Mediation Act, to allow for an exemption. This approach recognizes the nature of insolvency cases and the importance of a customized mediation framework.
Enhancing Insolvency Resolution through Voluntary Mediation
A report released by the Insolvency and Bankruptcy Board of India on January 31, 2024 unveiled the “Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016”.[3] This report introduces the concept of voluntary mediation as an ADR within the framework of the IBC 2016. The committee suggests gradually introducing voluntary mediation to uphold the integrity of current insolvency resolution schedules. The framework is designed to be independent and flexible, allowing for quick adaptation based on implementation experiences. Mediation is proposed as an ADR under the IBC, conforming to current statutory timelines and procedures. The Central Government and the Insolvency and Bankruptcy Board of India (IBBI) are granted powers for making rules, establishing infrastructure, setting timelines for mediation, and defining the role of the National Company Law Tribunal (NCLT) as the Adjudicating Authority. IBBI regulations will align with the new provisions in the IBC, covering mediation conduct, mediator appointment and removal, secretariat functions, mediator training programs, and the enforcement of “Mediated Settlement Agreements” (MSAs).
The framework describes different stages of mediation, covering issues that arise after institution, specific disputes during insolvency proceedings, and ‘process disputes’. Mediation can be initiated at the pre-institution stage if the disputes are suitable for mediation. Post-institution but pre-commencement reference is also possible, with mediators’ mandates automatically terminating upon CIRP admission or 30 days after the mediation reference.[4] The post-commencement mediation of ‘process disputes’ is decided by a 66% majority of the Committee of Creditors (CoC) or the creditor during claims collation.[5] Disputes within these processes involve gathering claims, conflicts among creditors at the Committee of Creditors (CoC) level, and actions to avoid insolvency in individual cases that do not involve fraud allegations.
The timelines for mediation are aligned with the statutory timelines set by the IBC. For example, mediations initiated after institution but before commencement of the Corporate Insolvency Resolution Process (CIRP) will conclude within 30 days of referral or upon the NCLT’s admission of the CIRP, whichever occurs first. It is proposed to establish a dedicated insolvency mediation cell affiliated with the NCLT, along with an independent secretariat to manage mediation under the Code. There is a focus on developing infrastructure for electronic meetings and filings to support streamlined online or paperless mediation processes. Parties are also instructed to seek enforcement from the Adjudicating Authority without separate legal proceedings. MSAs are enforced by including them in orders issued by the NCLT or appellate authorities, following a process similar to Rule 8 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. During the post-admission stage, disputes regarding processes can be settled according to Section 12A of the IBC, which provides legal validation to settlements documented in NCLT orders.
Costs in mediation will be shared equally by the parties or as mutually agreed, excluding those incurred during CIRP mediation from the overall insolvency resolution costs. Reimbursement provisions for expenses at the NCLT, NCLAT, or Supreme Court are to be included. The mediator roster is diverse which features retired NCLT/NCLAT members, senior advocates, former senior officials of financial regulators, and specialists in insolvency matters. Additionally, potential mediators include legal practitioners with extensive experience in insolvency disputes, individuals adept in mediating commercial conflicts, and experts in fields like insolvency, accounting, valuation, and industry operations. Training for mediators is emphasized, and a Code of Ethics is proposed to ensure high standards of professionalism and ethical behaviour.
The Critical Role of Mediation in Streamlining Insolvency Proceedings
Mediation plays a crucial role in making insolvency proceedings more efficient, resolving disputes among multiple creditors, and reaching an agreement among various stakeholders. It helps reduce delays, costs and increases the chances of successful restructuring for businesses and providing better returns for creditors. This is particularly true during the “pre-insolvency” stage, where a viable but financially distressed business seeks informal solutions outside of court. In countries without effective pre-insolvency frameworks, where individual enforcement is emphasized over collective solutions, mediation can be an effective tool for insolvency and restructuring.
In formal insolvency cases, mediators can help trustees negotiate with creditors to implement a reorganization plan that the creditors can accept. As Justice Ramesh noted in a 2018 Singapore High Court case, mediators can be invaluable in building consensus and trust between debtors and creditors during the development of restructuring plans.[6] Justice Arjan Kumar Sikri, a former Judge of the Supreme Court of India and a current International Judge of the Singapore International Commercial Court, described mediation as one form of “democratic decision-making” in his book “Constitutionalism and the Rule of Law in a Theatre of Democracy.” Justice Sikri has highlighted how mediation can advance creditor negotiations and facilitate the approval of restructuring plans during a corporate insolvency resolution process (CIRP) under IBC. He notes that mediation can reduce delays caused by litigation in tribunals and courts, and that mediated resolution plans can be more innovative than those reached through typical CIRPs.[7]
In both restructuring and liquidation scenarios, mediators play a crucial role in ensuring procedural coherence and managing intricate creditor claims. This helps in avoiding a prolonged and expensive litigation that could deplete assets and obstruct effective rescue efforts. Mediation becomes particularly vital in cross-border contexts, where harmonizing creditors with conflicting claims across diverse jurisdictions and under varying insolvency laws presents significant challenges.
Reference:
[1] ‘More than 21,200 cases were pending before NCLT till January-end: Govt’, Economic Times, March 14, 2023.
[2] ‘Mediation Bill: Empowering Dispute Resolution in India’s Insolvency Framework’, Devashish Bhattacharyya and Vaishnavi Sharma, IBC Laws, visited on https://ibclaw.in/mediation-bill-empowering-dispute-resolution-in-indias-insolvency-framework-by-devashish-bhattacharyya-and-vaishnavi-sharma/ (July 13, 2024).
[3] ‘Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016’, January 2024, Insolvency and Bankruptcy Board of India.
[4] Id. at page 16.
[5] Id.
[6] ‘Shaping the Future: A Comprehensive Framework for Mediation in Insolvency and Bankruptcy’, visited on https://www.reedlaw.in/articles/shaping-the-future%3A-a-comprehensive-framework-for-mediation-in-insolvency-and-bankruptcy on (13 July, 2024).
[7] Id.
