[Analysis] Mediation’s Role in Insolvency Resolution – Insights from the IBBI’s Expert Committee Report

Table of Contents

1. Difference between Mediation, Conciliation, and Adjudication
2. Typical Mediation Process in India
3. Potential Advantages Which Mediation Can Bring to the IBC Arena
4. Existing Mediation Landscape in India
5. Navigating the Data: Resolved Insolvency Cases Out of Court
6. Maintaining Insolvency Mediations Within the IBC Framework
7. Objective of Insolvency Mediation Framework under the Code
8. Committee Recommendation: Voluntary Mediation in the Indian Insolvency Regime
9. Mediation in Corporate Insolvency Resolution Process
10. Mediators: Qualifications and Criteria
11. Conclusion

The Insolvency and Bankruptcy Code of 2016 in India is undergoing a thoughtful evaluation by the IBBI’s Expert Committee. The committee was tasked with exploring the potential use of mediation to resolve disputes within the framework of the Code. In their report, the committee has proposed for incorporating mediation as an additional method for dispute resolution. Taking a balanced approach, the committee emphasizes the fundamental goals of the Code – ensuring timely reorganization and maximizing value. Furthermore, the report acknowledges the autonomy of involved parties, encouraging voluntary ‘out-of-court’ mediation to enhance the efficiency of the resolution process. The committee suggests a gradual introduction of voluntary mediation, ensuring it complements existing insolvency resolution processes and adheres to established timelines. The key takeaways from the report are as follows:

1. Difference between Mediation, Conciliation, and Adjudication

Mediation: A non-adversarial process where a third party mainly facilitates communication and negotiation between disputing parties. The outcome is a mutually acceptable agreement, enforceable as a contract, and not subject to appeal or challenge in court.

Conciliation: Also a non-adversarial process, involving a third party who plays an active and suggestive role in assisting the disputing parties to settle. The conciliation order/decree is not appealable, and limited grounds exist for setting it aside.

Adjudication: An adversarial process where a third party, usually a court or tribunal, decides the outcome of the dispute based on evidence and arguments presented by the parties. The decision is binding and enforceable, subject to appeal or revision under applicable laws.

2. Typical Mediation Process in India

The Mediation Process in India undertakes following procedures:

• Reference of Dispute to Mediation:
• Identification of Mediator
• Mediation Proceedings Commence
• First Meeting Opening Session
• Submission of Writing Notes/Position Papers/Documents
• One-on-One Sessions with Both Parties
• Joint Session with Both Parties
• Closing Session: Mediation Outcome (Failure/Partial Settlement/Complete Settlement)

3. Potential Advantages Which Mediation Can Bring to the IBC Arena

• Time and Cost Efficiency: Mediation offers a quicker and more cost-effective alternative to litigation, addressing delays inherent in court proceedings and negotiations.
• Flexibility and Autonomy: Parties can customize the resolution process to meet their specific needs within legal parameters, unlike rigid litigation procedures.
• Business Relationship Preservation: Mediation promotes collaborative problem-solving, nurturing better relationships and mitigating adversarial dynamics.
• Confidentiality: Mediation proceedings maintain confidentiality, safeguarding sensitive business information and reputational concerns in insolvency matters.

4. Existing Mediation Landscape in India

The absence of specific provisions for mediation in insolvency and bankruptcy disputes under the IBC underscores the importance of the Mediation Act, 2023, which aims to promote mediation for the resolution of disputes across various sectors. However, the success of mediation relies on the parties’ willingness to engage in the process and trust its effectiveness.

Despite the enactment of the 2023 Act, there remains a cultural shift necessary to establish mediation as a trusted method of dispute resolution. The Committee’s examination of the changes introduced by the 2023 Act and the existing legal landscape in India reveals a need for structured frameworks and trained mediators to enhance the perception and success of mediation, particularly within commercial cases.

These insights have informed the Committee’s deliberations on implementing mediation within the IBC, recognizing the gaps within the current legal framework and the regulatory efforts initiated by the 2023 Act to address them.

5. Navigating the Data: Resolved Insolvency Cases Out of Court

The IBC data suggests the potential for resolving many insolvency cases out of court, reducing the NCLT’s burden. However, the lack of comprehensive statistical data on mediation’s use and success rates is attributed to absent Code provisions and a weak mediation culture.

NCLT disposal data from 2017-2022 shows over 23,500 CIRP applications resolved pre-admission, comprising over 68.74% of total disposals. By September 2023, 7054 CIRPs were initiated, resulting in creditors realizing Rs. 3.16 lakh crores under resolution plans.

Among these, 5057 cases closed with various outcomes including rescuing the corporate debtor in 1053 cases, settling 947 cases under Section 12A, and approving resolution plans in 808 cases. Liquidation commenced in 2249 cases. Additionally, distressed companies are proactively resolving issues early, with 26518 CIRP applications withdrawn before admission, reflecting a trend of early distress resolution.

In conclusion, the Committee acknowledges the compelling evidence from data and judicial orders indicating a significant potential for mediation in settling and withdrawing insolvency disputes. Particularly, OC-initiated CIRPs have shown promise for settlement, especially at early pre-admission stages. Thus, these cases are deemed suitable for utilizing mediation as a dispute resolution tool for achieving settlements effectively.

6. Maintaining Insolvency Mediations Within the IBC Framework

The Committee observed that while the Mediation Act, 2023 does not restrict the introduction of a mediation regime under any law such as the Code, its “one-size-fits-all” approach would not be suitable for insolvency mediation. This is due to the unique objectives and statutory timelines of the IBC, which are incompatible with those of the 2023 Act. Therefore, the Committee recommends maintaining insolvency mediations as self-contained within the IBC framework.

The Committee was of the view that the blanket introduction of mediation as contemplated under the 2023 Act does not meet the core elements or objects of IBC. Incorporation of mediation into the Indian insolvency regime will require a specific, tailor-made mechanism to suit each insolvency resolution process or its constituents.

7. Objective of Insolvency Mediation Framework under the Code

The main object of a specialized insolvency mediation framework is to facilitate and recognise mediation as a statutory dispute resolution mechanism for expediting the resolution of insolvency disputes that enter the judicial system without compromising the statutory timelines.

8. Committee Recommendation: Voluntary Mediation in the Indian Insolvency Regime

The Committee deliberated extensively on the choice between mandatory and voluntary mediation in the Indian insolvency framework. While mandatory mediation can encourage early dispute resolution and eliminate parties’ concerns about appearing weak, voluntary mediation respects parties’ autonomy and increases the likelihood of successful outcomes.

After careful consideration, the Committee recommends voluntary mediation, allowing parties to engage willingly without forcing unwilling parties into a mandatory process. Parties must approach and inform the NCLT of their intent to mediate, ensuring that mediation runs parallel to statutory processes and timelines under the Code. Moreover, provisions for mediation before approaching the NCLT in specific types of cases, such as claims’ collation stage, may be considered.

9. Mediation in Corporate Insolvency Resolution Process

The Committee examined how mediation could be applied to different stages of the Corporate Insolvency Resolution Process (CIRP) to address specific circumstances and issues more effectively than litigation before the NCLT.

9.1 Stage I: Pre-commencement stage:

The Committee suggests utilizing the significant time gap between the occurrence of default, filing, and admission of applications under the IBC for mediation to resolve differences effectively. Specifically, mediation could assist Operational Creditors (OCs) in resolving disputes with the Corporate Debtor (CD) at the admission stage.

Additionally, the Committee observed that Financial Creditors (FCs) often resolve issues amicably before approaching the NCLT under the IBC, highlighting the potential for mediation in these cases as well.

9.2 Stage II: Post-commencement/admission of CIRP

This stage involves the period after admission of the CIRP by an order of the NCLT. The Committee was of the view that limited application of mediation exists at this advanced stage of proceedings as presumably all amicable dispute resolution mechanisms have failed earlier and the dispute as such could not be resolved.

The Committee acknowledges practical limitations to the use of mediation in India’s creditor-led insolvency resolution process, particularly at the post-admission stage where hostile promoters and suspended directors may be unwilling to mediate. Additionally, Section 29A of the IBC technically prohibits negotiations with ineligible promoters.

Therefore, the Committee suggests excluding post-admission stage cases from mediation in the initial phase to assess its efficacy and prevent potential litigations. It proposes utilizing the withdrawal of the application process to encourage mediation, emphasizing the importance of preserving third-party interests.

9.3 Stage III: Approval of Resolution Plan

The Committee highlighted that litigation, especially challenges to bid rejections or resolution plan approvals, significantly delays the insolvency resolution process. Dissatisfaction among Operational Creditors (OCs) and other stakeholders when their claims are wiped away by resolution plans often leads to disputes.

While the NCLT may suggest mediation to resolve such disputes, particularly involving major OCs, it can only proceed with the consent of all parties involved. However, involving multiple parties like OCs, Committee of Creditors (CoC), and Resolution Applicants (RA) in mediation may prove cumbersome and potentially futile, ultimately failing to address delays in the resolution process.

9.4 Stage IV: Implementation of Resolution Plan

The committee suggested a mediation clause in the resolution plan to resolve disputes or conflicts that may arise during implementation. Mediation aims to prevent liquidation by resolving issues such as creditor priorities and distribution of funds. It emphasizes that mediation should adhere strictly to the agreed terms of the resolution plan, with no room for additional modifications except mutually agreed extensions.

The process assumes that all parties share the common goal of implementing the plan to avoid liquidation, thus promoting smoother implementation and contributing to the effectiveness of the IBC.

9.5 Stage V: Liquidation Stage

The Committee holds that initiating liquidation proceedings typically indicates exhaustion of options for enterprise revival or creditor settlement, minimizing the scope for mediation. As all potential issues are presumed to have been addressed by this stage, the Committee views mediation at the liquidation stage as least beneficial, potentially leading to further loss in enterprise value and hindering the IBC’s objective of maximizing value.

Additionally, mediation may not be effective when the corporate debtor’s continuation is unfeasible. Therefore, the Committee does not recommend mediation at the liquidation stage during the initial implementation phase.

10. Mediators: Qualifications and Criteria

Given the complex and technical nature of insolvency disputes, the Committee recommends that the pool of mediators include:

• Retired members of the NCLT and NCLAT;
• Senior advocates and/or advocates with advocacy experience in more than ten (10) successful insolvency proceedings;
• Ex-senior officials of financial sector regulators, such as IBBI, or scheduled commercial banks; and
• Insolvency professionals with more than ten (10) years of experience.
• To this end, the Committee recommends the formation of an additional pool of mediators comprising:
• Legal practitioners with at least ten (10) years of experience in insolvency disputes;
• Persons with experience as mediators or in mediation advocacy in commercial disputes for at least ten (10) years; and
• Persons with technical expertise in insolvency, accounting, valuation, sectoral, and industry operations possessing experience of at least ten (10) years.

11. Conclusion

In conclusion, the Expert Committee’s thorough examination of the potential integration of mediation within the Insolvency and Bankruptcy Code (IBC) framework reflects a nuanced understanding of the intricate balance between expediency and fairness in resolving disputes.

By advocating for the voluntary introduction of mediation, the Committee prioritizes the autonomy of involved parties while recognizing the need for efficient dispute-resolution mechanisms. This approach not only aligns with the core objectives of the IBC, namely timely reorganization and value optimization but also acknowledges the unique challenges and opportunities present within the insolvency landscape.

As India navigates the evolving complexities of insolvency resolution, the Committee’s forward-thinking approach underscores the pivotal role of mediation as a cornerstone in promoting a more agile, collaborative, and equitable insolvency ecosystem, poised to drive sustainable economic growth and recovery.