Integrating Mediation Under IBC – A Step Towards Achieving Objective Of IBC

Introduction 

Before the introduction of the Insolvency and Bankruptcy Code, 2016 (“Code”)  i.e. prior to 2016, when a distressed company went into insolvency, its creditors often found themselves competing over a limited pool of assets which was rarely enough for them. This situation often led to the liquidation of that company, resulting in the end of the business for the promoter(s), loss of jobs for the various employees of the Company, and loss of tax revenue for the government. This is a typical example of a lose-lose situation. With the introduction of the Code, the Government had two main objectives – rehabilitation of the distressed company and wealth maximisation of the stakeholders by streamlining the process and reducing litigation. There is no doubt that the Code has provided many companies with a second chance and where it’s not possible, the Code has ensured an increase in the recovery rates for the stakeholders compared to the old regime. That is not to say that the Code has not faced its fair share of challenges, including but not limited to its misuse as a debt recovery mechanism and the Adjudicating Authority’s frequent failure to complete the process within the stipulated timeframe of 330 days. These issues have raised concerns about the effectiveness of the Code in its current form and highlighted the need for reforms that can address these shortcomings while preserving its primary objectives. It is in light of the aforesaid, that the Author is of the view that the next obvious step is perhaps the specialised integration of mediation into the existing insolvency regime.

Why Mediation 

Unlike the traditional methods of dispute resolution which are designed to result in, at least in theory, a win-lose situation, mediation encourages a collaborative approach which increases the likelihood of a a win-win outcome. This negotiation process is guided by a neutral third party i.e. Mediator, who assists in separating the problem from the people in order to achieve a mutually agreeable solution, which is often not possible when parties are left to their own. This approach reduces the risk of a lose-lose situation, where both parties end up dissatisfied, which is common when the matter is decided by a third party (Courts). It is important to underscore that mediation encourages the ongoing dialogue between the parties which can lead to eventual settlements even if the mediation process itself does not yield an immediate agreement. Furthermore, mediation excels in preserving relationships between parties.

By fostering collaboration, preserving relationships, and providing flexibility, mediation can complement the existing framework and lead to more effective and equitable outcomes. The aforementioned becomes evident from the bare perusal of the data collected by the Insolvency and Bankruptcy Board of India (“IBBI”) in the Framework for Use of Mediation under the IBC, 2016 (“Framework”) which suggests that the Code would actually benefit from the integration of mediation into the Code. The data collected from various NCLTs for the years 2017-2022 demonstrate that over 68.74 per cent of the cases are resolved at the pre-admission stage, a number which would only increase after the integration of mediation in the Code. Further, the data suggests that distressed companies are proactively resolving issues early, with 26518 CIRP applications withdrawn before admission.

It is important to emphasize that integrating mediation into the Code could significantly alleviate the burden on the overburdened Ld. NCLTs and Hon’ble National Company NCLAT. By incorporating mediation as a preliminary step, many disputes could be resolved outside of formal adjudication, leading to expedited disposal of cases. Moreover, a reduction in the number of cases listed before these tribunals on a daily basis would contribute to a faster resolution of even those cases where mediation does not succeed, streamlining the adjudication process and enhancing overall efficiency. Having said so, it may not be possible to have a pre-mediation concerning every aspect of the insolvency proceedings, in fact as suggested by the Expert Committee in the Framework, while pre-meditation is recommended for proceedings to be initiated by Operational Creditor[s] or in cases of Personal Insolvency, but in cases of insolvency proceedings to be initiated by Financial Creditors mediation so far has not been suggested.

Existing framework 

Currently, the Code lacks specific provisions for mediation in insolvency matters. There is no provision under the Code granting Adjudicating Authority i.e. Hon’ble NCLT the authority to mandate mediation. In fact, an application Section 7 of the Code envisages just two options for the Hon’ble NCLT i.e. admission or rejection. The Hon’ble NCLT can neither suggest mediation nor keep the matter in abeyance in order to give time for the parties to settle the matter.
However, with the introduction of Section 12A to the Code, the legislators have allowed for Settlement under specific conditions, even after the admission of the company into  CIRP. Further, from time to time, the Hon’ble NCLT has also utilized its authority under Rule 8 of the 2016 Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules to allow withdrawal under the Code.  

Need for a specialised integration

Mediation Act, 2023 provides for mediation in “commercial or otherwise” matters and offers a framework for voluntary and consensual mediation, giving mediated settlement agreements legal validity. It is important to mention that the first schedule of the Mediation Act, 2023, which enlists matters not fit to be referred to mediation does not include matters pertaining to Insolvency & Bankruptcy. Implying, thereby that Insolvency & Bankruptcy cases are amenable to be referred to mediation.
It is important to emphasise that for the successful implementation of mediation in the insolvency proceedings, it is important that a specialised mediation framework is incorporated in the Code. In view of the aforesaid, IBBI, in the Framework, has recommended incorporating a specialized framework under the Code given the fact that IBC is a timebound process. It is important to acknowledge herein that while mediation could be beneficial for pre-packaged insolvencies however, it may not be suitable for every case under the Code such as cases involving avoidance transactions, further emphasising the need for a specialized framework.

Proof of Concept

Although mediation has not been formally integrated under the Code, it has proven immensely successful in some cases where it was voluntarily used. In an appeal filed against an admission order in the case of V.K. Parvinder Singh v. Intec Capital Ltd. & Anr (Company Appeal (AT) (Insolvency) No. 968 of 2019), the Hon’ble NCLAT, observing the willingness amongst the Creditors to settle the claims of the Financial Creditor, appointed Justice [Retd] A Sikri to mediate the process. After the mediation was concluded, the final report was presented before the Hon’ble NCLAT and it was pleased to set aside the admission order passed by the Ld. NCLT, recognising the settlement between the parties. Recently, the success of mediation in resolving complex bankruptcy issues, as seen in the Reliance Communications and Amtek Auto cases, further highlighted mediation’s potential to safeguard asset value and promote stakeholder involvement. Further, it is crucial to emphasise that countries like the US, Singapore, and Australia have established robust mediation systems that prioritize efficiency, impartiality, and party autonomy in their Insolvency framework.

Conclusion

Mediation fosters collaboration, preserves relationships, and provides flexibility. Therefore, integration of a specialized framework for mediation under the Code is the logical next step towards further streamlining the Insolvency regime in India and expediting proceedings. The need for mediation and its potential in India is evident from the growing number of out-of-court settlements.
 

References-

1.    https://businessworld.in/article/mediation-in-corporate-insolvency-a-game-changer-171872

2.    https://www.nortonrosefulbright.com/en/knowledge/publications/50ba6f9d/mediation-as-a-bankruptcy-and-insolvency-game-changer

3.    https://ibbi.gov.in/uploads/resources/1acc8439aab101c013221a481fe108a6.pdf

4.    https://www.nortonrosefulbright.com/en/knowledge/publications/50ba6f9d/mediation-as-a-bankruptcy-and-insolvency-game-changer

Neeha Nagpal

Guest Author Founder, NM Law Chambers

Malak Bhatt

Guest Author Founder, NM Law Chambers