[Analysis] IBBI Proposes Mediation for Operational Creditors under IBC to Streamline Dispute Resolution

Mediation for operational creditors under the Insolvency and Bankruptcy Code (IBC) is a proposed dispute resolution process that allows operational creditors to attempt settlement with corporate debtors before filing for insolvency under Section 9. This initiative, introduced by the Insolvency and Bankruptcy Board of India (IBBI), aims to resolve disputes related to payment defaults, quality of goods, and contractual issues through a mediator rather than directly proceeding to court. If mediation is unsuccessful, a non-settlement report is attached to the application, simplifying the adjudication process. This approach reduces judicial caseload, enhances efficiency, and offers a cost-effective resolution path for operational creditors.

Table of Contents

1. Problem Statement & Challenges in Section 9 Applications
2. Proposal for Mediation
3. Impact
4. Invitation for Public Comments

On November 4, 2024, the Insolvency and Bankruptcy Board of India (IBBI) published a discussion paper that puts forward a proposal for introducing mediation as an initial step for operational creditors (OCs) before they file an insolvency application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). This proposal aligns with the Expert Committee’s recommendations on the ‘Framework for the use of Mediation under the IBC’ and the Indian Institute of Insolvency Professionals of ICAI (IIIPI). Both bodies have advocated for a pre-institutional mediation step to resolve disputes early on.

1. Problem Statement & Challenges in Section 9 Applications

Applications under Section 9 often face consistent challenges, predominantly stemming from conflicts between OCs and Corporate Debtors (CDs) over issues such as:

• Disputes related to the quality or performance of goods and services delivered.
• Contractual disputes are allegations of non-compliance with the terms agreed upon by either party.
• Disagreements over the amounts due, including set-off claims.

Such disputes frequently lead to protracted legal proceedings and place an undue burden on the judicial system. Data from the Adjudicating Authority (AA) up to April 2024 reveals that out of 21,466 Section 9 applications, only 3,818 were admitted, reflecting a high rate of pre-admission settlements. Moreover, the AA is mandated to conduct hearings before deciding on an application, a process that is often lengthy. Mediation is proposed as a beneficial tool to alleviate these disputes between OCs and corporate debtors early on and facilitate quicker admissions by the AA.

2. Proposal for Mediation

In response to these ongoing issues, the IBBI proposes an optional mediation process that OCs might choose to engage in before proceeding with insolvency applications. Under this proposed system, a mediator would conduct mediation as per the Mediation Act, 2023. This could enable parties to address and potentially resolve their disputes without overburdening the AA. If mediation does not result in a settlement, the mediator would issue a non-settlement report, which would then accompany the OC’s application to the AA, thereby streamlining the admission process.

3. Impact

The proposed mediation framework for operational creditors before filing Section 9 insolvency applications is poised to improve the dispute resolution mechanism under the IBC significantly. By facilitating early mediation, the initiative is designed to reduce the caseload on the Adjudicating Authority, expedite resolutions, and enhance judicial resource efficiency. The proactive mediation approach is expected to bolster settlement rates, simplify the application process, and offer a more cost-effective method for dispute resolution.

4. Invitation for Public Comments

To further refine this mediation framework, the IBBI invites public feedback on the proposed mediation process and the associated draft regulations. Comments are requested to be submitted by November 24, 2024. After considering the public input, the IBBI plans to finalize and implement the regulations governing this mediation process. This initiative seeks to provide a quicker and more economical means for resolving disputes, thereby reducing the judicial burden and speeding up the insolvency resolution process for operational creditors.