*Shravani Shendye
- Introduction
Mediation, a form of Alternate Dispute Resolution, is still at a nascent stage of development in India. It is starting to gain popularity as a successful dispute resolution mechanism with the Supreme Court furthering its use to solve various kinds of disputes in the country,[1] but there is one area where the use of mediation is still unexplored, i.e. cases pertaining to insolvency law under the framework of the Insolvency and Bankruptcy Code, 2016 (IBC).
The IBC was introduced to tackle the issue of Non-Performing Assets (NPAs) and increasing bankruptcy cases in the country in a time-bound manner. It aims to consolidate and streamline laws relating to reorganisation and insolvency resolution.[2] The Preamble of the Code states the intent of the Code as “reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.”[3] Additionally, the Code sets up National Company Law Tribunal (NCLT) and the Debts Recovery Tribunal (DRT) as Adjudicating Authorities to resolve insolvency and bankruptcy disputes via litigation. However, the IBC at present does not have a mechanism for out-of-court settlement of disputes related to insolvency and bankruptcy.
In this context, this article aims to explore the scope of insolvency mediation and study its efficacy as a dispute resolution mechanism under the IBC. The article supports the proposition that speedy redressal as envisioned under the IBC can be better achieved via mediation—a time and cost-effective, consensual as well as collaborative process of dispute resolution.
- Advantages of Insolvency Mediation
Debtor Rehabilitation
The primary advantage of insolvency mediation is that it promotes rehabilitation and reorganisation of the corporate debtor under the insolvency resolution process. The Code encourages a fresh ‘earned start’ for the debtor which can fruitfully be attained through mediation.[4] The consensual approach of mediation can allow the debtors to exercise certain control over their assets while also curing their over-indebtedness. Thus, mediation is an excellent dispute resolution tool for creditors and debtors who aim to ensure repayment of debt as well as sustainability of the business enterprise.[5]
Development of Holistic Resolution Plan
Mediation allows parties to come up with creative out-of-the-box solutions that incorporate the common interests of all parties to the mediation. This contributes to the possibility of development of a holistic resolution plan that is financially beneficial for all creditors—financial as well as operational.[6] Such a resolution plan would provide impetus to rehabilitation and resolution of the corporate debtor rather than purely serve as a debt recovery mechanism.
Time and Cost Efficiency
Under the IBC, the corporate insolvency process is ideally stipulated to be completed in 270 days.[7] However, due to practical difficulties, this deadline is usually extended.[8] Mediation, a time-efficient mechanism, can help not only in easing the burden of cases on courts but also ensuring a time-bound resolution process as envisioned under the Code. Additionally, mediation reduces the procedural complexity of the process and makes it a cost-efficient alternative. This is economically viable for the parties and helps in maximizing the value of assets as envisaged under the Code.[9] Thus, mediation helps both the debtor and creditor to avoid long-drawn court proceedings and reduce expenses in terms of time and money.
Consideration of Common Interest
The corporate insolvency resolution process (CIRP) under the IBC is collective in nature where debts of all creditors are sought to be settled.[10] Mediation can help facilitate a process that accounts for the needs and interests of all stakeholders—the financial creditors, the operational creditors, the corporate debtors and the new investors.
Preserving Reputation and Relationships
The private and confidential nature of mediation ensures that the reputation of the insolvent corporate debtor is not damaged beyond repair. The goodwill of the corporate debtor is preserved as financial information about the corporate debtor is confined between stakeholders. Thus, mediation ensures that the credit history of the debtor is not impacted in a detrimental manner and the debtor avoids the stigma[11] associated with insolvency. Additionally, the inclusive and cooperative nature of the mediation ensures that the relations between the creditors and debtors are preserved for future collaborations. The debtor may have an incentive to make a higher offer to creditors as the resources exhausted in court procedures are saved, benefitting creditors and improving the creditor-debtor relationship.[12]
A possible drawback of insolvency mediation can be the absence of a formal binding decree as given under court proceedings. Insolvency proceedings are proceedings in rem[13] and affect multiple stakeholders like employees, creditors, workmen etc. who should be assisted with equitable treatment under a binding decree. This can make it unsuitable for large insolvency cases involving multiple stakeholders. However, taking everything into account, mediation has preponderant advantages that can help in successful implementation of the insolvency resolution process envisaged under IBC.
- Insolvency Mediation in Comparative Jurisdictions
USA
USA has a robust mediation mechanism under Chapter XI of the Bankruptcy Code.[14] Insolvency mediation is either court-ordered or initiated at the instance of a party. It has been successfully used in various high-profile cases such as the Lehman Brothers case where out of the 77 proceedings that were finally mediated, only 4 were terminated.[15]
Singapore
In 2018, the Singaporean Ministry of Law accepted insolvency mediation for dispute resolution as suggested by the Committee to Strengthen Singapore as an International Centre for Debt Restructuring.[16] The approved recommendations pertaining to use of insolvency mediation in the following cases include the resolution of individual creditor disputes with a debtor in a multi-creditor restructuring, management of multiple creditor disputes of the same nature, and achieving consensus in the restructuring plan between a debtor and its creditors.[17]
Netherlands
The Bankruptcy Act, 1893[18] is the formal statute that governs mediation in restructuring, liquidation, insolvency and bankruptcy matters if agreed to between the parties. In a 2012 report by the District Court of Amsterdam, in over 70% of the cases, insolvency mediation proved to be a successful solution for the disputes.[19]
European Union
In 2016, the European Commission in its Report on the application of the EU Mediation Directive recommended a new approach to business failure and insolvency that incorporates mediation.[20] It has encouraged the “appointment of mediators by courts where they consider it necessary in order to assist the debtor and creditors in the successful running of negotiations on a restructuring plan.”[21]
- Scope for Reform under IBC
Firstly, insolvency mediation can be used to resolve disputes for individuals and partnership firms. In cases of personal insolvency, court proceedings help in managing repayment and availing discharge under the Code.[22] However, this process alone may not adequately achieve the aim of personal insolvency—rehabilitating the debtor and avoiding repeated insolvency.[23] Here, mediation can be a useful tool that can act supplementary to court proceedings. The Insolvency and Bankruptcy Board of India (IBBI) Working Group on Individual Insolvency recommended mediation for personal insolvency as “majority of insolvency and bankruptcy proceedings involving individuals may not involve contentious issues, voluminous stakeholders, and high amount of debt or disputes justifying adjudication by authorities such as the Debt Recovery Tribunals (DRT).”[24] Following this recommendation, the Code can be suitably amended to allow for court-ordered informal and out-of-court mediated settlements in individual insolvency cases.
Secondly, mediation can be used to facilitate collective settlement of multiple claims of the creditors on the corporate debtor company through multi-party negotiations.[25] In such a scenario, mediation could be under the initiative of the committee of creditors and the insolvency resolution professional. As mentioned earlier, this would help in development of a holistic resolution plan where common interests of all stakeholders would be taken into consideration.
Lastly, with the IBC being a recent legislation and mediation being at a developing stage in the country, a court-ordered mediation on a case-by-case basis will be more suited than compulsory pre-litigation mediation for all types of insolvency cases. In this context, there is a need for development of judicial guidelines on triggering of insolvency mediation. These guidelines should deal with judicial referral of insolvency cases to mediation as under the Code. These can be developed based on stipulated criteria of income, assets and debts. Thus, taking everything into account, it can be concluded that there is a scope for reform under insolvency law in introducing a time-bound mediation process that incorporates debt negotiation and settlement to build a robust insolvency resolution regime in the country.
* Shravani Shendye, Candidate for BA-LLB (Hons.), NALSAR University of Law, Hyderabad, India.
[1] M.R. Krishna Murthi v. The New India Assurance Co. Ltd., 2019 SCC OnLine SC 315.
[2] Insolvency and Bankruptcy Code (IBC), 2016, No. 13, Acts of Parliament, 2016, Preamble.
[3] Id.
[4] Insolvency and Bankruptcy Board of India (IBBI), Report of the Working Group on Individual Insolvency, IBBI (June 15, 2020, 20:05 PM), https://ibbi.gov.in/uploads/resources/Final-Report_of_WG_on_Indiv_Insol-Aug_2017.pdf.
[5] Ministry of Corporate Affairs (MCA), Report of The Insolvency Law Committee, MCA (June 13, 2020, 10:15 AM), http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf.
[6] Justice A.K. Sikri & Anuroop Omkar, Mediation In Corporate Insolvency: A Game Changer, Business World, June 14, 2019, http://www.businessworld.in/article/Mediation-In-Corporate-Insolvency-A-Game-Changer/14-06-2019-171872/.
[7] Insolvency and Bankruptcy Code, 2016, No.13, Acts of Parliament, 2016, Section 12.
[8] Sikri & Omkar, supra note 6.
[9] IBC, supra note 2.
[10] Chitra Narayan, The best way to settle corporate disputes, Business Line, Jan. 03, 2018, https://www.thehindubusinessline.com/opinion/the-best-way-to-settle-corporate-disputes/article10010263.ece.
[11] MCA, supra note 5.
[12] IBBI, supra note 4.
[13] IBBI & VIDHI Centre for Legal Policy, Understanding the Insolvency and Bankruptcy Code,2016, IBBI (June 13, 2020, 11:00 AM), https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Jun/190609_UnderstandingtheIBC_Final_2019-06-09%2018:20:22.pdf.
[14] Gert-Jan Boon, Maciek Bednarski, Carlotte Dessauvagie & Milan Pastoors, The Mediator in Insolvency Law: Exploring New Terrain, leidenlawblog ( June 13, 2020, 13:50 PM), https://leidenlawblog.nl/articles/the-mediator-in-insolvency-law-exploring-new-terrain.
[15] Kayjal Dasan & Samuel Seow, Seminar Review: Mediation in International Insolvency, International Arbitration Asia (June 12, 2020, 12:30 PM), http://www.internationalarbitrationasia.com/mediation_in_international_insolvency_disputes.
[16] Oon and Bazul LLP, Alternative dispute resolution in insolvency and restructuring proceedings, LEXOLOGY (June 11, 2020, 15:00 PM), https://www.lexology.com/library/detail.aspx?g=fd180e88-ba4a-4470-880f-0766a0023e9c.
[17] Id.
[18] Windt Le Grand Leeuwenburgh, Restructuring & Insolvency in the Netherlands, LEXOLOGY (June 10, 2020, 16:30 PM), https://www.lexology.com/library/detail.aspx?g=63095802-77ce-414a-9e2a-2a9a0b272346.
[19] Boon et al., supra note 14.
[20] Id.
[21] Id.
[22] IBBI, supra note 4.
[23] MCA, supra note 5.
[24] IBBI, supra note 4.
[25] Narayan, supra note 10.
URL – https://www.businesstoday.in/magazine/the-buzz/mediation-for-faster-resolution/story/342419.html