Can Insolvency Disputes Be Referred to Mediation?
Key Takeaways
- Insolvency-related disputes can be referred to mediation in India, particularly where the disagreement concerns debt, payment, contractual obligations or settlement between specific parties.
- Mediation is especially useful before an insolvency application is admitted because the dispute may still primarily concern the creditor and corporate debtor.
- Once the Corporate Insolvency Resolution Process (CIRP) begins, insolvency becomes a collective statutory process affecting several creditors and stakeholders.
- A settlement reached after admission of CIRP does not automatically terminate insolvency proceedings. Withdrawal must comply with Section 12A of the Insolvency and Bankruptcy Code, 2016.
- The Mediation Act, 2023 places limitations on mediation of matters involving rights in rem and rights of third parties who are not participating in the mediation.
- The IBBI Expert Committee has recommended a specialised voluntary mediation framework for insolvency-related disputes while protecting IBC timelines and creditor rights.
- Mediation should therefore be understood as a complementary mechanism for resolving suitable insolvency disputes rather than a substitute for the statutory insolvency process.
Can Insolvency Disputes Be Sovled Through to Mediation?
Yes. Certain insolvency-related disputes can be referred to mediation, provided the dispute is capable of settlement and the mediation does not interfere with statutory rights under the IBC.
The possibility of mediation is particularly strong before admission of an insolvency application. At this stage, the disagreement may still primarily be between the creditor and the corporate debtor.
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For example, an operational creditor may claim that ₹50 lakh is payable for goods supplied, while the corporate debtor may dispute the amount because of defective goods or incomplete performance. Such a commercial dispute may potentially be resolved through mediation.
The position changes once a Corporate Insolvency Resolution Process (CIRP) has been admitted. Insolvency then becomes a collective statutory process rather than merely a dispute between the applicant creditor and the debtor.
The IBC is designed for time-bound reorganisation and insolvency resolution while maximising the value of assets and balancing the interests of stakeholders.
Therefore, mediation may assist in reaching a settlement, but it cannot independently terminate or override an ongoing CIRP.
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Why Is Mediation Relevant to Insolvency Cases?
Many insolvency applications arise from commercial disagreements that may potentially be settled without taking a financially distressed business through the entire insolvency process.
Mediation can be useful because insolvency proceedings may involve significant legal costs, commercial uncertainty and deterioration in the value of the debtor’s business.
A mediated settlement may allow parties to restructure payments, settle disputed claims or agree upon commercially workable terms.
The Insolvency and Bankruptcy Board of India (IBBI) has also recognised the possible role of mediation. In 2024, an Expert Committee constituted by the IBBI recommended the introduction of mediation as a complementary mechanism for disputes connected with processes under the IBC.
The recommendation is important because mediation is not intended to replace insolvency law. Instead, it may operate alongside the IBC where an appropriate dispute can be resolved consensually.
Can Mediation Take Place Before an Insolvency Application Is Filed?
Pre-institution mediation is one of the areas where mediation can have significant practical value.
Before a creditor files an application under the IBC, the parties may attempt to settle the dispute through negotiation or mediation. If a settlement is reached, the need to initiate insolvency proceedings may disappear altogether.
This approach can be particularly relevant to applications by operational creditors under Section 9 of the IBC. The distinction between financial debt and operational debt under the IBC is important because the nature of the creditor determines the procedure through which insolvency proceedings may be initiated.
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Operational creditor disputes frequently arise from:
- Unpaid invoices or bills: The corporate debtor may dispute the amount payable or contend that contractual obligations were not properly performed. Mediation may help the parties reconcile accounts and negotiate an acceptable settlement.
- Supply contracts: Disagreements may concern delivery, defects in goods, quantity, quality or compliance with contractual specifications. Such disputes may be capable of commercial settlement without commencing insolvency proceedings.
- Service agreements: Parties may disagree over whether services were properly completed or whether the amount claimed is actually payable. Mediation allows both sides to examine these issues without immediately invoking the insolvency framework.
- Delayed payments: A corporate debtor may acknowledge the liability but seek additional time or an instalment arrangement because of temporary financial difficulty.
- Continuing commercial relationships: Where both parties wish to maintain a business relationship, mediation may help settle the outstanding dispute while preserving future dealings.
The IBBI has examined the possibility of voluntary mediation by operational creditors before filing applications under Section 9. The proposal reflects the possibility of resolving appropriate disputes before commencement of formal insolvency proceedings.
Thus, mediation at the pre-filing stage may help distinguish genuine insolvency from ordinary commercial disputes capable of settlement.
Can Mediation Take Place After Filing but Before Admission?
A settlement may also be reached after an insolvency application has been filed but before the National Company Law Tribunal (NCLT) admits the application.
This stage remains important because the consequences of formal CIRP have not yet fully commenced.
Where the creditor and debtor resolve the underlying dispute, the application may no longer need to proceed.
For instance, the corporate debtor may agree to pay part of the debt immediately and the balance through an agreed schedule. Alternatively, the creditor may accept a negotiated settlement amount in full and final satisfaction of its claim.
Mediation can facilitate such arrangements by creating a structured environment for negotiation.
The procedures for initiation of insolvency proceedings under Sections 7, 9 and 10 of the IBC differ depending on whether the applicant is a financial creditor, operational creditor or corporate applicant. A settlement reached before admission may prevent these proceedings from progressing into CIRP.
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This is significantly different from what happens after admission because, before admission, the insolvency machinery affecting the wider body of creditors has generally not begun operating.
What Happens If Settlement Is Reached After CIRP Has Started?
Settlement remains possible even after an insolvency application has been admitted. However, the settlement does not by itself terminate CIRP.
A statutory procedure must be followed.
Section 12A of the Insolvency and Bankruptcy Code
Section 12A of the IBC provides a mechanism for withdrawal of an insolvency application that has already been admitted under Section 7, Section 9 or Section 10.
This provision recognises that the parties may resolve the dispute even after admission.
The withdrawal of a CIRP application under Section 12A of the IBC allows a settlement to be given effect within the statutory insolvency framework.
Once the Committee of Creditors has been constituted, withdrawal generally requires approval of 90% of the voting share of the Committee of Creditors, followed by the prescribed process before the adjudicating authority.
Mediation may therefore help produce the settlement, but implementation of that settlement must take place through the mechanism recognised under insolvency law.
A mediated agreement cannot independently bring CIRP to an end merely because the original creditor and corporate debtor have settled their dispute.
Why Does the Position Change After Admission of CIRP?
Before admission, a dispute may largely concern two parties: the creditor and the corporate debtor.
After admission, the character of the proceeding changes.
CIRP is a collective process dealing with the financial position of the corporate debtor and the interests of its creditors as a whole. Other creditors may submit claims, the resolution professional becomes involved and the Committee of Creditors under the IBC exercises important statutory decision-making powers.
A settlement between the creditor who originally filed the application and the debtor could therefore affect persons who were not parties to that settlement.
This is why a private agreement cannot simply override the CIRP after admission.
The law must protect the interests of all stakeholders while allowing genuine settlements within the statutory framework.
How Does the Mediation Act, 2023 Apply to Insolvency Disputes?
The Mediation Act, 2023 provides a statutory framework for mediation in India. It seeks to promote mediation for commercial and other disputes and provides a comprehensive legal framework governing the mediation process.
However, not every dispute is suitable for mediation.
The First Schedule to the Mediation Act identifies categories of matters that are generally not considered fit for mediation.
Relevant examples include:
- declarations having the effect of rights in rem; and
- disputes affecting the rights of third parties who are not parties to the mediation proceedings.
These restrictions are important in insolvency matters because a formal insolvency proceeding can directly affect several creditors and stakeholders who are not parties to a private mediation.
Therefore, the Mediation Act cannot be interpreted as permitting two parties to privately restructure rights belonging to the entire body of creditors.
What Is the Difference Between Rights in Personam and Rights in Rem?
The distinction between right in rem and right in personam helps explain why some insolvency disputes can be mediated while others raise greater difficulty.
Rights in Personam
Rights in personam are rights enforceable against particular persons.
A contractual payment dispute between a supplier and a company is generally bilateral in nature. If the dispute affects only those parties and can legally be compromised, mediation may be appropriate.
For example, where a supplier claims payment under a particular contract and the company disputes the amount due, the dispute primarily concerns rights and obligations between identifiable parties.
Rights in Rem
Rights in rem operate more broadly and may affect persons beyond the immediate parties.
Formal insolvency proceedings have collective consequences. Once CIRP begins, decisions concerning the company may affect secured creditors, unsecured creditors, operational creditors and other stakeholders.
Private mediation cannot ordinarily be used to determine such collective rights without complying with the IBC.
This distinction explains why mediation may resolve the underlying bilateral dispute but cannot automatically substitute the statutory insolvency process once wider stakeholder rights become involved.
What Did the IBBI Expert Committee Recommend on Insolvency Mediation?
The IBBI constituted an Expert Committee to examine the scope of mediation under the Insolvency and Bankruptcy Code.
The Committee submitted its report on 31 January 2024. Its recommendations were publicly released by the IBBI in February 2024.
The Committee supported a specialised mediation framework for insolvency-related disputes.
Importantly, it recommended that mediation should operate as a complementary mechanism rather than replace the statutory insolvency framework.
Voluntary Nature of Mediation
The Committee favoured voluntary mediation. Parties should generally be able to decide whether mediation is suitable for the dispute rather than being forced into a process that may delay insolvency resolution.
The voluntary nature of settlement remains one of the central features of mediation. A mediator assists negotiations but does not compel parties to accept particular settlement terms.
Separate Insolvency Mediation Framework
The Committee recommended a self-contained framework within the insolvency system.
This is significant because insolvency disputes raise issues that may not arise in ordinary mediation, including multiple creditors, statutory voting rights and strict timelines.
A specialised framework can accommodate these features while maintaining the basic principles of consensual dispute resolution.
Protection of IBC Timelines
The IBC places great importance on timely resolution.
Mediation should therefore not become a mechanism for delaying insolvency proceedings or frustrating statutory deadlines.
Any mediation framework dealing with insolvency disputes must operate without undermining the time-bound nature of CIRP.
Maximisation of Value
A negotiated settlement may sometimes preserve the value of a functioning business better than prolonged litigation.
The Committee therefore considered mediation capable of supporting one of the central objectives of insolvency law: maximisation of value.
Which Insolvency Disputes May Be Suitable for Mediation?
Mediation may be particularly useful where the controversy remains capable of consensual commercial settlement.
Examples include:
- Disputed operational debts: Parties may disagree over invoices, supply obligations, service quality or calculation of the amount payable. Mediation can help settle these questions before they develop into full insolvency proceedings.
- Payment and repayment arrangements: A financially stressed company and creditor may agree upon revised payment schedules, instalments or another lawful settlement structure.
- Contractual disputes connected with insolvency: Certain disagreements concerning commercial contracts may be mediated where resolving them does not prejudice collective creditor rights.
- Pre-admission insolvency disputes: Mediation can help prevent commencement of CIRP where the underlying disagreement is capable of commercial settlement.
- Settlement discussions during CIRP: Mediation may facilitate negotiations, although implementation of any resulting settlement must comply with Section 12A, Regulation 30A and other applicable requirements.
The suitability of mediation therefore depends less on whether a dispute has some connection with insolvency and more on whether the particular rights in dispute can lawfully be settled between the participating parties.
Which Insolvency Matters Are Difficult to Resolve through Mediation?
Mediation has limits in insolvency law.
It cannot ordinarily be used to bypass mandatory statutory processes involving collective rights.
For example, private mediation cannot override:
- voting rights of the Committee of Creditors;
- statutory requirements for the approval of a resolution plan by the Committee of Creditors;
- the priority of claims prescribed under insolvency law;
- rights belonging to creditors who are not parties to mediation;
- orders of the NCLT or NCLAT merely through a private agreement; or
- mandatory CIRP or liquidation procedures required under the IBC.
The distinction is therefore between mediating an insolvency-related dispute and privately replacing the insolvency process itself.
The former may be possible. The latter is generally not.
What Are the Advantages of Mediation in Insolvency Disputes?
Mediation can offer several advantages when used at the correct stage and for an appropriate dispute.
Faster Commercial Settlement
A dispute concerning payment or performance may sometimes be resolved more quickly through focused negotiations than through prolonged proceedings.
Early settlement can be particularly useful where the dispute concerns the amount payable rather than genuine inability of the corporate debtor to meet its liabilities.
Lower Litigation Costs
Settlement at an early stage may reduce the legal and administrative costs associated with continuing insolvency litigation.
This can be valuable where the cost of prolonged litigation may itself reduce the financial value available to the parties.
Preservation of Business Relationships
Creditors and debtors may have long-standing commercial relationships. Mediation allows arrangements to be negotiated without necessarily ending those relationships.
A supplier and corporate debtor, for example, may prefer restructuring an outstanding payment while continuing their commercial relationship rather than pursuing prolonged adversarial proceedings.
Flexible Solutions
Courts and tribunals generally decide disputes through remedies recognised by law. Mediation allows parties greater flexibility in designing commercially workable settlements, including payment schedules and negotiated restructuring arrangements.
Such flexibility can be particularly useful where the underlying commercial relationship is more complex than a simple claim for immediate payment.
Confidential Discussions
Mediation also provides a private environment in which parties can explore settlement options more freely, subject to the applicable legal framework.
Confidential negotiations may allow parties to discuss financial difficulties, repayment proposals and commercial compromises without treating every proposal as an admission of liability.
Can a Mediator Stop CIRP?
No. A mediator does not possess the powers of the NCLT, NCLAT, resolution professional or Committee of Creditors.
A mediator facilitates negotiation and helps the parties attempt to reach settlement. The mediator cannot order withdrawal of CIRP, alter statutory creditor rights or approve a resolution plan.
If mediation results in settlement after admission of CIRP, the parties must take the necessary steps under the IBC and applicable regulations for that settlement to have the required legal effect.
Therefore, mediation may provide the commercial solution, but the formal legal consequences must follow the statutory insolvency framework.
Is Mediation Likely to Become More Important in Insolvency Law?
There is clear institutional interest in developing mediation for suitable insolvency disputes.
The IBBI Expert Committee’s 2024 report proposed a dedicated voluntary framework, while subsequent discussions have considered the use of pre-institution mediation for operational creditors before Section 9 applications.
This reflects an important policy distinction.
Mediation may help resolve disputes that do not genuinely require the entire insolvency machinery, while the IBC remains available where collective insolvency resolution is necessary.
A specialised framework can therefore reduce unnecessary insolvency litigation without weakening creditor protections or the statutory structure of the Code.
The development also fits within the broader expansion of mediation in different types of disputes in India, while recognising that insolvency presents special concerns because of collective creditor rights and statutory timelines.
Conclusion
Insolvency disputes can be referred to mediation in India, but the scope of mediation depends heavily on the nature and stage of the dispute. Pre-admission debt and contractual disputes are particularly suitable for consensual settlement. Even after commencement of CIRP, mediation may assist parties in reaching an agreement, but the settlement must operate through the statutory mechanisms provided under the IBC.
Section 12A provides an important route for withdrawal after admission, while the Mediation Act, 2023 places limits on disputes involving rights in rem and third-party rights. The IBBI Expert Committee has also recommended a specialised voluntary mediation framework for insolvency matters.
Therefore, mediation should be understood as a complementary dispute resolution mechanism in insolvency law, not as a substitute for the statutory insolvency process. Its greatest value lies in resolving suitable commercial disputes efficiently while preserving the timelines, collective creditor rights and value-maximisation objectives of the Insolvency and Bankruptcy Code.
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