Mediation can play a crucial role in improving the efficiency of insolvency proceedings, resolving disputes among multiple creditors, and fostering consensus among diverse stakeholders.
With the advent of Insolvency and Bankruptcy Code, 2016 [“IBC”], the corporate insolvency resolution in India has significantly improved, offering an increased creditor-focused recovery/ resolution rate as compared to the recovery rate by other statutory actions under other statutes such as SARFAESI Act, 2002. However, several factors including but not limited to the COVID-19 pandemic, overburdened tribunals, multiplicity of litigation have caused delays in the resolution timelines, often exceeding the 330-day timeframe for Corporate Insolvency Resolution Process [“CIRP”] as provided in the proviso to Section 12(3) of the IBC.
To address the said concern, especially the scenario post the COVID-19 pandemic, the government resorted to suspending the initiation of insolvency proceedings for the defaults and debts falling in a timeline specified under Section 10A and also enhanced the threshold/ pecuniary jurisdiction of the National Company Law Tribunal [“NCLT”] to ₹1 crore.Such situations create a necessity for alternative resolution methods such as Alternate Dispute Resolution (ADR) in the insolvency process at two separate junctures i.e., pre-institution and post commencement of CIRP, which could aid the tribunals and parties by providing time-bound, cost-effective solutions thereby easing overburdened tribunals and aiding businesses in distress.
The Indian Context
The Mediation Act, 2023 [“Mediation Act”] marks a significant step forward in India’s usage of mediation as a resolution method. The Mediation Act introduced modern elements such as institutional mediation, enforcement of Mediated Settlement Agreements [“MSAs”], online mediation and cross-border dispute resolution. It also proposes codifying insolvency mediation under the IBC. However, the proposal is still under scrutiny and discussions.However, a persistent issue with mediation has been its lack of legal binding force. In the context of IBC, this issue was highlighted in the matter of Sunil Kumar Dahiya v. Union of India. In that case, a settlement was reached through mediation, accepted by over 80% of creditors, but was later challenged by one creditor on whose behest CIRP was initiated. The corporate debtor faced challenges as the mediation settlement was not binding. The fate of this conflict was, eventually, decided by the Delhi High Court in a connected matter, i.e., Col. P.K. Uberoi (Retd.) & Anr. v. Vigneshwara Developwell Pvt. Ltd. & Ors. (2020 SCC OnLine Del 399), whereby the High Court upheld the Scheme arrived upon by the parties on the basis of mediation. However, the scope of mediation in the said case was not coupled with the IBC provisions and was undertaken as a revival mechanism in company proceedings before the High Court.If such MSA agreements are given the legal validity and binding force, it would aid in eliminating conflicts, offering a quicker and cost-effective resolution process compared to lengthy litigation. These agreements can be enforced without court intervention, easing the burden on courts and aligning with a time-driven approach which is also emphasised in the IBC. As the Mediation Act gains momentum, with its aim to resolve disputes which are in the nature of “commercial or otherwise”, the role of mediation in the IBC framework is expected to grow, leading to more resolutions and reduced litigation.
Need of Mediation in Pre-institution and Post-commencement Stages
Mediation can play a crucial role in improving the efficiency of insolvency proceedings, resolving disputes among multiple creditors, and fostering consensus among diverse stakeholders. It can help reduce delays and costs, thereby increasing the likelihood of successful restructuring for businesses and delivering better returns to creditors. This is particularly important during the “pre-commencement” stage, where a financially distressed yet viable company seeks informal, out-of-court solutions.In light of the same, Section 5 of the Mediation Act becomes important as it allows parties to voluntarily resolve civil and commercial disputes through pre-institution mediation, either with or without an existing mediation agreement, before initiating any suit or proceedings in any court. Furthermore, Section 6 of the Act read with the First Schedule lays down the categories of disputes and matter which are not fit for mediation. It is seen that insolvency does not form a part of the said categories as on date, thereby creating a grey area for the use of mediation and its binding effect.However, the IBBI (Insolvency and Bankruptcy Board of India) Report highlights that pre-institutional mediation will not fall within the ambit of the IBC, as the actual process only commences when the application is made upon the occurrence of a ‘default’.Adaptation of mediation after CIRP has commenced under the terms of the IBC can facilitate negotiation between the creditors to develop and implement a formal reorganization plan which may be considered suitable to the majority of creditors specifically in cases where the corporate debtor is financially sound and viable. In such a case, a settlement can take place via legally binding MSAs and consequently, the creditors can opt for withdrawal of the proceedings under Section 12A of the IBC read with Section 30A(1) of the CIRP Regulations, which enable the withdrawal of applications pursuant to a settlement, both before and after the constitution of the Committee of Creditors.
Limitation of Mediation as an Insolvency Tool
A key challenge in aligning mediation with the IBC is that mediation is a consensual process, requiring parties to come to a consensus. This raises the question of whether mandatory pre-institution mediation, as outlined in Section 12A of the Commercial Courts Act, should be introduced in the IBC. While mediation could help prevent defaults and facilitate smoother restructuring, it may also extend statutory timelines, especially in multi-party disputes, making it harder to meet timelines as stipulated under Section 12 of IBC. A gradual cultural shift in the understanding of mediation is essential for successful implementation. One suggestion is to encourage creditors to opt for mediation when issuing demand notices under Section 8 in case of operational creditor, or when creditors are in process initiating actions under Section 7 of IBC, while aiming to establish a uniform practice to adopt mediation across the board.Furthermore, while MSAs are legally enforceable contracts, they differ from Resolution Plans approved by the NCLT, which have broader legal protection. Hence, it is required that the said agreements are given a colour of binding agreements in case the parties reach a consensus pre institution but post the occurrence of defaults and even post the commencement of CIRP. As insolvency is a young regime in India and is evolving with time and more specifically precedents, there is a dearth of expert mediators for the specific field of Insolvency which further highlights the want of institutional setups for mediation and specialized mediators training programmes in India.
Concluding Remarks
IBC has been transformative and groundbreaking for corporate insolvency in India. However, challenges such as delays caused by the COVID-19 pandemic and overburdened tribunals have visibly outlined the need for alternative mechanisms like mediation. A phased and procedurally adaptive introduction of mediation under the IBC, similar to international practices, can bridge the gap.Globally, countries like the United States, Singapore, and European nations demonstrate how mediation balances insolvency frameworks which can also be adopted in India in a phased manner enhancing its own insolvency regime with the establishment of separate insolvency mediation centres within the ambit of tribunals. The US uses expert mediators under Chapter 11 bankruptcy cases, while Singapore’s cross-border mediation framework, supported by the Singapore Convention, ensures enforceability across jurisdictions. Europe integrates pre-insolvency resolution mechanisms like Italy’s Recovery Plans and France’s conciliation processes to facilitate private settlements.India can draw valuable lessons from these models by incorporating institutional support, mediator training programs, and structured frameworks. Hence, mediation being a consensual, mutually agreed and now a quicker alternative resolution process, once adopted in phased manner should compliment the Indian insolvency regime by providing quicker legally binding resolutions and closure of disputes exponentially.
About the authors: Ashish Kumar is a Partner (Litigation and Head of Japan Desk), Lokesh Malik is a Senior Associate and Atika Chaturvedi is an Associate at SNG & Partners.
