Scope of Mediation in Insolvency Proceedings

Mediation, according to BLACK’s legal dictionary, is a non-binding conflict settlement approach employing a neutral third person who attempts to assist disputing parties in reaching a mutually accepted solution. However, using a mediator to reach an agreement is a novel addition to the corporate insolvency resolution procedure.

Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code of 2016, (IBC) was enacted to protect creditors’ rights to the timely payment of their debts and to decrease non-performing assets. This Act empowers creditors to seize control of debtor corporations and devise a resolution plan for the company’s reorganization and rebirth. On behalf of the creditors, the insolvency experts authorized under the Code assume control of the company, its management, and its assets. This is a time-limited process that is estimated to take 180 days to complete, with a maximum extension of 90 days.

Mediation is an essential kind of alternative dispute resolution. It’s a private, voluntary process in which parties interact and negotiate with the help of a neutral third-party mediator. It’s a cost-effective and quick plan of action. It’s a method that allows all stakeholders to directly participate in the process.

Three objectives of insolvency mediation

• resolution of a plan and bankruptcy-related disputes; (b) facilitation of negotiations on a restructuring plan; (c) prevention of insolvency.

Scope for Reform under Insolvency and Bankruptcy Code

Firstly, insolvency mediation is used to resolve disputes between individuals and also partnership firms. Court procedures assist in managing payments and obtaining discharge under the Code in cases of personal insolvency. However, this method may not be sufficient to meet the goal of personal insolvency rehabilitation and avoidance of recurring insolvency.

Because “the majority of insolvency and bankruptcy proceedings involving individuals may not involve contentious issues, voluminous stakeholders, and high amounts of debt or disputes justifying adjudication by authorities such as the Debt Recovery Tribunals,” the Insolvency and Bankruptcy Board of India (IBBI) Working Group on Individual Insolvency recommended mediation for personal insolvency (DRT). The Code can be changed to provide for court-ordered informal and out-of-court mediated settlements in individual insolvency cases based on this recommendation.

Secondly, through multi-party negotiations, mediation can be utilized to aid the collective settlement of several creditors’ claims against the corporate debtor company. In this case, mediation could be initiated by the creditors’ committee and the bankruptcy resolution expert. As previously stated, this would aid in the formulation of a holistic resolution strategy that takes into account the shared interests of all stakeholders. 

Finally, Because the IBC is a new law and mediation in the country is still in its early stages, court-ordered mediation on a case-by-case basis will be more suited for all sorts of insolvency cases than required pre-litigation mediation. In this case, judicial guidance on when insolvency mediation should be initiated is required. These provisions should meet the Code’s requirement that insolvency matters be referred to mediation by the courts. These can be made based on a set of standards for income, assets, and debt.

Mediation is a type of ADR in which a neutral third party strives to assist disputing parties in reaching an amicable settlement and a mutually acceptable agreement. Mediation is a type of Alternative Dispute Resolution that has been given legal standing in India.

The Insolvency & Bankruptcy Code governs insolvency processes in the country, and it has proven to be effective in helping lenders recover their funds. Despite its strong recovery rate, it has Produced a persistent fear of persecution among businesses, particularly small and medium-sized businesses (SMEs). Under normal circumstances, corporate insolvency should take 270 days to complete from start to end. However, because of the large backlog of cases that overburdens the National Firm Law Tribunal, and the time-consuming process of choosing whether to liquidate the company or adopt a resolution plan, the pendency in most cases exceeds a year.

What happens if the parties come to a compromise?

When all parties reach an agreement, mediation is considered a success. A “mediation settlement agreement” is signed by the parties. The bankrupt will be obligated to adhere to all of the agreement’s terms.

What happens if the parties cannot agree?

Mediation of surplus income;

If mediation fails, the LIT may ask the court to set the amount the bankrupt must pay the bankruptcy estate by order.

Mediation for discharge;

If mediation fails or the bankrupt fails to follow the terms of the mediation settlement agreement, the LIT will request a court hearing to decide the case.

High Courts

The Calcutta High Court concluded in Gouri Prasad Goenka v. State Bank of India that the moratorium provided by Section 14 of the Code does not prevent a wilful defaulter declaration proceeding. This refers to the dissemination of credit information about wilful defaulters to alert banks and financial institutions so that no further bank finance is made available to them, rather than for the recovery of the corporate debtor’s debts or assets, which could stymie the insolvency resolution process (Conducting Corporate Insolvency Resolution Process). The High Court further stated that an act of intentional default done by a promoter/whole-time director/guarantor of the corporate debtor who was in charge at the time is not automatically wiped out by the statute of limitations.

National Company Law Appellate Tribunal

In Mr. Rakesh Kumar Agarwal and Others v. Mr. Devendra P. Jain, the National Company Law Appellate Tribunal (NCLAT) of New Delhi held that the government notification dated June 1, 2020, concerning changes to the classification of micro, small and medium enterprises (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006, will apply to corporate debtors whose liquidation process was still pending under the Code. The NCLAT in New Delhi overturned an adjudicating authority’s decision that the notification was inapplicable to corporate debtors because it went into effect at a later date while reiterating that the Code’s main goal is to resolve insolvency and that liquidation of a corporate debtor is only a last resort.

In Jayanta Banerjee v. Shashi Agarwal Liquidator of INCAB Industries Ltd and Others, the NCLAT in New Delhi decided that the term ‘collation’ under S. 21(1) of the Code refers to the verification of creditors’ claims, or the comparison of a copy with its original to verify its validity. According to the NCLAT in New Delhi, a meeting of the committee of the creditors (CoC) cannot be held without the verification and admission of the creditors’ claims, followed by the assignment of voting shares to such creditors.

Conclusion

Mediation is viewed as a more efficient, quick, and cost-effective alternative to going to court to resolve a disagreement. Several initiatives have been made to promote the use of insolvency mediation in practice and legislation, particularly in pre-insolvency procedures without the involvement of an insolvency practitioner. Although research is currently limited, the Dutch pilot on insolvency mediation has shown promise. In this case, views from the United States could be useful, given their success in creating a professional and seasoned practice.

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By: Sonali Singh, 5^th Year, BALLB, New Law College, Bharati Vidyapeeth Deemed to be University, Pune