Transforming Insolvency: The Promise of Mediation in India’s Bankruptcy Landscape
Lakshya Sharma
4th Year, B.A. LL.B. (Corporate law) at School of Law UPES, Dehradun
Introduction
Background of Insolvency and Bankruptcy Code (IBC)
An Act to establish an Insolvency and Bankruptcy Board of India, to combine and amend existing laws pertaining to the reorganization and timely resolution of corporate entities, partnership firms, and individual insolvencies in order to maximize the value of those entities’ assets, to encourage entrepreneurship, to make credit available, and to balance the interests of all parties involved, including changing the priority order of government dues payment. Under the Insolvency and Bankruptcy Code, 2016 (Code), the Insolvency and Bankruptcy Board of India was founded on October 1st, 2016. It is a crucial component of the ecosystem that oversees the application of the Code, which unifies and modifies the laws pertaining to the timely reorganization and insolvency resolution of corporate entities, partnership firms, and individuals in order to maximize their asset values, encourage entrepreneurship, increase credit availability, and balance the interests of all parties involved. Under the Companies (Registered Valuers and Valuation Rules), 2017, it has also been recognized as the “Authority” for the regulation and advancement of the valuer profession in the nation. Since its establishment, the IBC has improved creditor rights, strengthened the institutional structure, and expedited the bankruptcy resolution process. It has also given creditors the authority to file for bankruptcy against noncompliant borrowers, resolving the long-standing problem of non-performing assets (NPAs) in the Indian banking industry. Nevertheless, despite its achievements, difficulties still exist in optimizing asset recovery, minimizing litigation, and quickening the resolution process.
Emergence of Mediation in Insolvency Proceedings
Within the framework of the IBC, mediation has become a competitive alternative dispute resolution procedure. Mediation provides a cooperative and amicable means of resolving conflicts, in contrast to traditional litigation, which frequently results in combative processes and drawn-out legal fights. It entails the involvement of a mediator—a third party who is impartial—who helps the parties involved communicate, negotiate, and explore ideas for workable solutions.The IBC’s incorporation of mediation provisions highlights the understanding of mediation’s ability to limit value erosion in distressed assets, maintain corporate value, and speed up bankruptcy processes. Through the resolution of disputes, maintenance of commercial ties, and resolution of underlying issues, mediation offers stakeholders the chance to create an atmosphere that is favorable to restructuring and revitalization.
The current mediation framework under the Code
There are currently no special rules under the code for the mediation of insolvency issues. Although mediation hasn’t been made official in India, it has been a huge success in other countries where it has been used to settle bankruptcy issues. Although mediation has been employed in India, it has not yet been applied as a means of resolving bankruptcy cases. That could soon change, though, as the IBBI is now prepared to acknowledge the potential value and importance of mediation. Settlements in compliance with the law are recognized and encouraged by the IBC, rather than being prohibited. Because of this, Section 12A of the Code provides legislative recognition for the settlement of disputes under the IBC and permits the withdrawal of a CIRP application upon its admission.7. Furthermore, reading through the NCLT orders reveals that the NCLT has used its authority to address issues pertaining to the Code in accordance with Rule 8 of the 2016 Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules (“AA Rules”).
2022: The NCLAT held that the authority granted to NCLT under Section 442 is restricted to the Companies Act, 2013 and does not encompass provisions under the Code, while interpreting the jurisdiction of NCLT under the Code (under Section 60 as ‘AA’) to refer issues to mediation. No particular clause, authority, or jurisdiction under the Code granting NCLT the status of “AA” to send cases to mediation within its framework is present. A party may opt out of the bankruptcy procedure under Section 12A with the approval of 90% of the Committee of Creditors (CoC). The Corporate Insolvency Resolution Process (CIRP) Regulations’ Regulation 30A (1) also allows for application withdrawal and settlement both prior to and during the formation of the CoC. In addition, the Supreme Court of India made it clear that a party may immediately approach the NCLT in the absence of a CoC in the Swiss Ribbons v. Union of India case. Using its inherent powers, the NCLT has the right to determine whether to approve or reject the withdrawal application.
Notably, information about the withdrawals and settlements of cases under the Code indicates that many cases involving insolvency may be settled out of court, which would reduce the NCLT and NCLAT’s caseload. There is no official study to determine how the settlement and mediation process affect the Code because there is no specific provision for mediation in the IBC or anywhere else for resolving insolvency disputes. After the application was filed but before admission, more than 23,500 applications for the start of CIRP with an underlying default of Rs. 7.21 crores were settled, according to the NCLT disposal data for CIRP proceedings between 2017 and 2022. Compared to previous phases, the CIRP pre-admission settlement rate has been higher. These settled cases make up over 68.74% of all NCLT cases that are disposed of. According to the IBBI FY 23–24 Q2 Report, as of September 2023, there were 7054 CIRPs that had been started since the IBC was passed, and through the resolution plans, the creditors had realized a total of Rs. 3.16 lakh crores. Of the 7054 cases, 5057 have been closed. Of these, the CD was saved in 1053 cases that were resolved, closed on appeal, or withdrawn under Section 12A of the Code; in 947 cases, the CD was withdrawn; and in 808 cases, the resolution plans were approved. Liquidation was started in 2249 cases.
In the context of bankruptcy cases, mediation is not a new idea, and it seems that the parties have used it. For instance, in VK Parvinder Singh v. Intec Capital Ltd., a report was presented to the NCLAT and entered into the record following a successful mediation made possible by J. AK Sikri. This led to the NCLT judgment admitting CIRP to be set aside. But after the FC contacted NCLT, CIRP was reactivated, and the case is still open. The Delhi High Court and the Supreme Court have also mentioned mediation under the Code on a few occasions, but they haven’t been successful.
Mediation Act, 2023 and IBC, 2016
The 2023 Act acknowledges mediations in “commercial or otherwise” conflicts and offers a framework for them. The 2023 Act permits the voluntary and consensual mediation of such conflicts, but it also encourages and gives mediated settlement agreements legal validity. Since the 2023 Act neither specifically excludes nor includes the Code within its purview, it is silent on the Code. There is no mention of any limitations on mediation under the Code or mediation in bankruptcy cases in the 2023 Act. The Code does not seem to be covered by the 2023 Act since it is special legislation and no particular adjustment has been made to allow mediation under the Code as per the 2023 Act. The adoption of a mediation mechanism under the Code does not seem to be restricted by the 2023 Act. The expert committee has determined that a self-contained code is necessary to accomplish the goal of the statutory deadline under the code, and that the “one size fits all” approach under the 2023 Act is not appropriate for insolvency mediation.
Suggestive Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016
A specialized framework for bankruptcy mediation aims to expedite the resolution of insolvency disputes that reach the court system while upholding the statutory timeliness by recognising mediation as a statutory dispute resolution option. It is suggested that the code’s mediation component be added gradually so that lessons learned from its application can be incorporated. It is imperative that the timetables established by the Code for the various insolvency resolution procedures are not jeopardized by this innovation. The insolvency procedure in India appears to be best suited for the voluntary character of mediation, wherein parties come to an agreement for mediation.
Pre-institutional mediation is one area that is not tightly governed by the Code because it is a process that begins with an application submitted in default. It is also stressed that agreements reached during this phase cannot change the statutory waterfall process found in S.53 of the Code or grant additional rights during CIRP proceedings. It is recommended that cases involving Operational Creditors (OCs) commence CIRP matters through voluntary mediation; the NCLT will not extend deadlines. It is advised to include explicit clauses that specify how a mediator’s mandate will automatically stop upon admission, when time limits under the Code expire, or 30 days after mediation begins. It is suggested that matters at the post-admission stage not be included in mediation.
Effective conflict resolution in business transactions is seen to depend on respecting party autonomy. The designation of mediators with the necessary experience and a committed effort to seek a resolution in conjunction with the CIRP proceedings would be necessary for the mediation to be successful. Mediation might not be an appropriate dispute resolution procedure in situations involving avoidance transactions that call for an investigation of fraud or wrongdoing. Nonetheless, in pre-packaged insolvencies, mediators can help with negotiation and the development of mutually acceptable settlement plans. It is advised to include voluntary mediation in individual insolvency resolution procedures at both the pre-institution and post-filing phases.
The conditions of a Mediation Settlement Agreement (MSA) are binding on all parties after they are verified by the NCLT and included in a court order. Enabling parties to directly contact the NCLT or competent appellate authority for enforcement without starting separate legal actions is a recommended way to streamline the enforcement of MSAs. The adjudicating authority’s MSA confirmation procedure need to be required and finished quickly. In terms of expenses, it is suggested that parties split the costs equally and be free to determine how much each party is willing to pay. The Insolvency Resolution Process Costs (IRPC) should not include mediation fees incurred during the CIRP process.
The Committee suggests that the pool of mediators should include retired members of the NCLT and NCLAT, senior advocates with a wealth of insolvency expertise, former senior officials of financial sector regulators, and seasoned insolvency experts. In order to facilitate paperless mediation, e-meetings and e-filings are suggested, as well as a Code of Ethics for Mediators that outlines basic standards. The disqualification standards for mediators ought to be customized based on the goals and structure of the Code, taking cues from the Consumer Protection Act and Companies Act’s current frameworks. To ensure that insolvency mediation is implemented effectively, it is advised that a mediation secretariat be established under the IBC for NCLT and NCLAT.
Case Studies of Successful Mediation in Insolvency Cases
Case Study 1: The Reliance Communications Insolvency Case
One of the top telecom firms in India, Reliance Communications (RCom), filed for bankruptcy under the IBC in 2017 as a result of escalating debt and fierce competition in the industry. Financial institutions, operational creditors, and government agencies were among the several creditors involved in the insolvency procedures. The intricate disagreements were settled through mediation, which also made it easier for RCom to restructure its debt. The parties participated in mediation sessions led by a skilled mediator under the oversight of the National Company Law Tribunal (NCLT). The creditors came to an agreement on a debt restructuring plan that included debt reduction, asset sales, and equity infusion through amicable discussion and discussions.
After a successful mediation, the NCLT approved the settlement plan, preventing liquidation and protecting RCom’s asset value. The resolution strategy made it possible for RCom to carry on with business as usual, protecting jobs and preserving client services. In addition, the mediation process facilitated stakeholder engagement, reduced legal expenses, and accelerated the settlement timeframe, all of which contributed to a successful outcome for all parties.
Case Study 2: The Amtek Auto Insolvency Resolution
Due to operating difficulties and cash limitations, Amtek Auto, a well-known maker of automotive components, experienced financial crisis and processes towards insolvency. A wide range of creditors, including banks, financial institutions, and operational creditors, were involved in the bankruptcy case. In order to settle the disagreements and create a restructuring strategy for Amtek Auto, mediation proved to be an essential instrument. The creditors participated in productive negotiations and considered different restructuring solutions during mediation sessions guided by a qualified mediator.
The mediator assisted in resolving conflicts, addressing issues, and assisting the parties in reaching an agreement. Following a successful mediation, a resolution plan involving asset sales, debt restructuring, and the infusion of capital from strategic investors was approved. The resolution plan made it possible for Amtek Auto to resume operations, protect jobs, and maximize creditor recovery. In addition, the mediation process lowered the likelihood of litigation, encouraged stakeholder collaboration, and helped save money, all of which helped the business and its creditors come out on top.
Prospects and Future Directions
Potential Impact of Mediation on Insolvency Landscape
The incorporation of mediation within the framework for insolvency resolution possesses significant potential to revolutionize the field by cultivating a collaborative, transparent, and efficient culture. Mediation offers the ability to speed up the resolution process, lower the expense of litigation, and optimize value realization for all parties involved by offering a platform for amicable discussion and negotiated solutions. Additionally, mediation encourages adaptation and flexibility, enabling parties to customize solutions to the particulars of each case, improving the likelihood that distressed companies would successfully undergo restructuring and rehabilitation.
Moreover, by assisting in the prompt and efficient resolution of insolvency cases, mediation can support the more general goals of investor confidence and economic revival. Mediation promotes economic stability and prosperity by limiting disruptions to corporate operations, protecting jobs, and ensuring the continuation of supply networks. Furthermore, by making mediation the go-to method for resolving bankruptcy disputes, the Indian market will become more alluring to creditors, investors, and companies, which will promote entrepreneurship, investment, and innovation.
Adoption of Best Practices from International Jurisdictions
In order to fully utilize mediation in the context of insolvency, it is imperative to incorporate best practices and insights gained from global jurisdictions where mediation has been effectively included into the legal system. Strong mediation systems have been formed in nations like the US, Singapore, and Australia, which give priority on efficiency, impartiality, and party autonomy when settling bankruptcy issues.
The selection of knowledgeable and skilled mediators, the offering of institutional support and training to mediators and other stakeholders, and the creation of precise procedural norms and guidelines for mediation are important practices. Additionally, the implementation of cooperative strategies and multi-stakeholder projects, like sector-specific task forces, industry-specific mediation panels, and public-private partnerships, might improve the efficiency and accessibility of mediation services in resolving intricate bankruptcy cases. Jurisdictions can enhance access to justice for parties living in remote or underserved areas, expedite case administration, and promote remote mediation sessions by utilizing technology and internet platforms.
Additional Investigation
Even while mediation’s potential advantages in insolvency resolution are becoming more widely acknowledged, there are still a number of areas that might use more study and investigation to improve comprehension, efficacy, and application. Important research topics include of: empirical research assessing how mediation affects the timeliness, creditor recovery rates, and stakeholder satisfaction of insolvency outcomes. comparative evaluations of mediation procedures used in various legal systems, emphasizing successes, difficulties, and lessons discovered. Research looking into how mediators help with discussions, handling disputes, and encouraging cooperation and trust between parties. studies on the creation of specific training curricula and certification standards for insolvency mediators, encompassing the application of interdisciplinary legal, financial, and psychological studies looking into how mediation and other ADR procedures—like conciliation, arbitration, and expert determination—might work together to resolve complicated bankruptcy conflicts. Research can contribute to the formulation of policies, strengthen institutional frameworks, and increase the efficacy of mediation in fostering the quick, fair, and long-lasting resolution of bankruptcy cases by expanding knowledge and providing evidence-based insights.
In conclusion, mediation’s future in the context of insolvency appears bright, as it may boost productivity, cut expenses, and encourage stakeholder cooperation. Through the utilization of global industry best practices, research, and capacity-building endeavors, stakeholders may fully unleash the potential of mediation to revolutionize the process of bankruptcy resolution and foster economic expansion and recuperation.
Conclusion
The addition of mediation to India’s insolvency resolution procedures is a big step in the direction of a more effective and cooperative method of settling complicated financial conflicts. Even though the Insolvency and Bankruptcy Code (IBC) has done a remarkable job of simplifying resolution processes, there are still issues with maximizing asset recovery and accelerating the process. A viable substitute that promotes stakeholder cooperation and protects company value is mediation. Despite the absence of formal mediation procedures under the present IBC framework, a number of cases have been settled out of court in recent times, suggesting that mediation is becoming increasingly valued. The efficaciousness of mediation in mitigating intricate bankruptcy issues, exemplified by the Reliance Communications and Amtek Auto instances, underscores its capacity to safeguard asset value and promote stakeholder involvement. In the future, the implementation of specific guidelines for mediation in bankruptcy cases may improve its efficacy inside the IBC framework. Stakeholders may fully realize the potential of mediation to propel economic recovery and prosperity in India by utilizing best practices from other international jurisdictions and funding research and capacity-building projects. In summary, mediation has great potential to be a revolutionary instrument for resolving insolvencies since it provides fairness, efficiency, and stakeholder satisfaction. India may effectively utilize mediation as a means of navigating intricate financial difficulties and fostering a more resilient and successful future for all parties involved in the insolvency process by adopting proactive measures and maintaining ongoing engagement.
References
1. https://ibbi.gov.in/uploads/whatsnew/1256aa8a9e2c89bd09d8186dae2e6019.pdf.
2. https://ibbi.gov.in/en/about
4. https://ibbi.gov.in/en/whats-new?page=3
