December 23rd, 2024 | by Sanjay H. Sethiya and Varun Jain
Insolvency Proceedings at a Glance
The Insolvency and Bankruptcy Code was enacted in 2016 to provide a time-bound and structured resolution mechanism for distressed companies and individuals. The Insolvency and Bankruptcy Code replaced the fragmented and protracted processes that previously governed the insolvency processes. However, despite its many successes, it did not meet the expectations as its implementation has revealed many challenges, including delays, high litigation costs and inefficiencies in resolution processes. According to the latest statement by the minister of state for corporate affairs, there have been 19,770 cases pending before the NCLT as of June 2024. Since such a huge backlog of cases exists, an alternative to litigation will be beneficial. One of the alternative modes which proves to have great potential in resolving disputes relating to insolvency and bankruptcy is mediation.
Understanding Mediation as an Alternative Method of Dispute Resolution
Mediation is a voluntary and confidential process in which an impartial third party, the mediator, facilitates communication and negotiation between disputing parties to help them reach a mutually acceptable resolution. Unlike arbitration or litigation, mediation focuses on collaboration rather than adversarial proceedings, making it an effective tool for resolving disputes without resorting to lengthy court battles.
Mediation has been successfully employed in various legal and commercial contexts, including family law, labour disputes, and commercial contract disputes. However, its application in insolvency cases, is still evolving and holds immense potential, particularly in complex jurisdictions like India. Mediation has been made a mandatory step in divorce matters wherein the main aim is to enable to parties to arrive at an amicable settlement. Along similar lines, mediation might prove an important tool for enabling the parties under insolvency proceedings to arrive at a settlement and enable for early disposal of the matter.
Scope of Mediation Under the Existing Framework of Insolvency Proceedings
The Insolvency and Bankruptcy Code 2016 was enacted to serve as a mechanism for restructuring or liquidating distressed companies to protect the rights of the Creditors of such companies. The enactment has pretty much achieved the objective with which it was introduced. However, the rate of disposal of proceedings under the said act is relatively low. Mediation as an alternative method of dispute resolution can be the key to this. Under the present Insolvency framework, the NCLT appoints a Resolution Professional who takes over the distressed company’s management. Then, the Resolution Professional forms a committee involving all the Creditors of the said company. Then, the Committee of Creditors, along with the Resolution Professional, come up with a plan known as the Resolution Plan wherein they work out the ways in which the Creditors’ debt may be cleared. In this whole process, the say of the original management of the company is extremely limited. Mediation may provide a solution to such situations. With mediation, the management of the distressed company, along with the creditors of the company, can come up with an amicable settlement wherein they could work out ways in which the debts of the creditors could also be cleared without the substantive loss of interest of the company itself. This could reduce the number of cases proceeding to the insolvency stages and subsequently reduce the burden on the National Company Law Tribunal.
Several countries have successfully integrated the process of mediation into their insolvency frameworks. In the United States of America, mediation is widely used in bankruptcy cases under Chapter 11 of the Bankruptcy Code. Further, Singapore has actively promoted mediation as a part of its broader dispute resolution strategy. The Singapore International Mediation Centre (SIEC) and the Singapore Mediation Act provides a robust framework for mediation in commercial and insolvency proceedings.
Mediation, as an alternative method of dispute resolution, will play a crucial role in making the present insolvency framework more efficient by enabling the resolution of disputes involving multiple creditors and helping to reach an agreement between various stakeholders. This will help to increase the chances of successfully restructuring the businesses and provide for better returns to the creditors. Mediation will particularly help during the “pre-insolvency” stages when a business that is distressed financially but has some chance of surviving can seek informal solutions outside the Court.
In both the liquidation and restructuring processes, mediators play a vital role ensuring adherence to procedural norms as well as managing the creditor claims. This results in avoiding an expensive and prolonged that could deplete the assets of the litigants as well as prevent effective rescue methods from being adopted. Mediation also becomes particularly effective in cross border claims, where the creditors who are across diverse jurisdictions across the globe having varying insolvency laws. Conflict in jurisdictions and laws can pose a serious challenge and in such cases Mediation might prove to be an important tool that would help the litigants resolve their disputes without divulging deep into the technicalities and procedures of litigation
With a view of integrating mediation under the existing framework of Insolvency and Bankruptcy Code the Insolvency and Bankruptcy Board of India constituted an eight-member committee on 06.03.2024 to examine the scope of use of mediation in respect of processes under the Insolvency and Bankruptcy Code and submit its report. The committee in its report introduced the concept of voluntary mediation as an alternative method of dispute resolution under the framework of Insolvency and Bankruptcy Code. This framework shall be independent and flexible allowing for quick adaptation.
Due to the involvement of public interest and in-rem rights in the IBC process, the committee suggests that the Mediation Act, 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. The committee further suggested that the Central Government and the Insolvency and Bankruptcy Board of India shall be empowered to make the rules and set up the infrastructure and further define the role of the National Company Law Tribunal (NCLT) as the adjudicating body for giving effect the voluntary mediation under the Insolvency and Bankruptcy Code, 2016.
Conclusion
Mediation can potentially transform India’s insolvency process by reducing delays, lowering costs, and fostering collaboration among stakeholders. By integrating mediation into the IBC framework, India can address the systemic challenges that currently hinder the efficiency of its insolvency regime. Drawing on international best practices and tailoring them to India’s unique legal and cultural context, mediation can become a cornerstone of a more effective and efficient insolvency resolution system. With the proper legislative, institutional, and cultural support, mediation can play a pivotal role in streamlining India’s insolvency process and encouraging and supporting economic development.
~ Sanjay Sethiya is the Managing Partner at Law Square, Advocates & Solicitors.
~ Varun Jain is an Associate at Law Square, Advocates & Solicitors