Reimagining Insolvency: The Transformative Power of Mediation in India’s Bankruptcy Landscape

[by Rucha Ganu- Student at Symbiosis Law School, Pune]

Introduction

Mediation, one of the alternate dispute resolution methods in India, is a voluntary process where disputing people mutually find a solution to their legal problem by appointing a mediator and entering into an understanding. The insolvency regime in India has witnessed significant evolution, especially since the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). However, the traditional adversarial mechanisms under the IBC often lead to prolonged litigation and delayed resolution. In this context, Mediation has emerged as a promising tool to address inefficiencies in insolvency proceedings.

Globally, countries like Singapore and the United States have successfully integrated Mediation into insolvency frameworks. Concerning international disputes, India is a signatory to the Singapore Convention (United Nations Convention on Mediation), which promotes mediation settlement under several other Indian laws

Effects of Mediation and its Role

Mediation can facilitate consensus-building and minimize friction in insolvency cases, where stakeholders include creditors, debtors, employees, and shareholders. The Reserve Bank of India recognizes IBC as one of its report's most commonly used processes for recovering from corporate distress. The National Company Law Tribunal (NCLT) can decide on insolvency and liquidation proceedings.

The NCLTs have had twin responsibilities in carrying out their IBC and Companies Act obligations. As of September 2020, more than 1,440 cases have been in the pipeline for more than 270 days out of the 1,942 cases being resolved. Mohit Kapoor & Ruchita Krishnan, 'Mediation: The panacea for case pendency under the IBC' (Bar & Bench, 2022) Due to the pending work and incoming new matters, the NCLT's efficiency in resolving insolvency proceedings has decreased. Before the IBC's introduction, India lacked a unified legal framework governing insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy were dispersed across numerous statutes, including the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA Act); the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002; and the Companies Act, 2013. Impact of IBC While Mediation has traditionally been underutilized in India, legislative frameworks such as the Commercial Courts Act, 2015 and Section 89 of the Code of Civil Procedure, 1908, reflect a growing recognition of alternative dispute resolution (ADR).

In insolvency, Mediation could address various disputes, including valuation disagreements, the priority of claims, and inter-creditor conflicts under Section 21 of the IBC. Although Mediation remains unexplored mainly in the Indian insolvency regime, the National Company Law Appellate Tribunal (NCLAT) has, in a few cases, encouraged parties to pursue settlement discussions. This trend mirrors global best practices, where courts encourage mediated settlements to save time and resources.

Adjudication ensures that creditors' claims are treated equally, that the debtor's assets are collected and distributed fairly, and that the insolvent organization is liquidated promptly. However, over the last two decades, this attitude has shifted globally, as more bankruptcy problems have been addressed through adjudication and Alternative Dispute Resolution (ADR) processes, most notably Mediation Krish Parashar, Alternative Dispute Resolution during Insolvency Proceedings: Special Emphasis on the Insolvency and Bankruptcy Code, 2016, 3 INDIAN J.L. & LEGAL RSCH. 1

A well-known example is the Lehman Brothers lawsuit from 2008. As of 2016, Lehman Brothers reacquired $333 million out of $9 billion through Mediation. Additionally, In MF Global Holdings Mediation as a gamechanger, for multiple entities undergoing competing insolvency processes in the United States and the United Kingdom, a court-appointed mediator helped to facilitate agreements between the United States bankruptcy trustees and the special administrators of MF Global in the United Kingdom, which avoided expensive litigation and produced a global settlement maximizing returns for creditors.

In nations like the USA, Mediation became a factor in insolvency cases in 1986 when the California bankruptcy court implemented the mediation program. Due to the many successful ADR instances, the rise in bankruptcy cases, and the high expenses associated with litigation, a legislative framework for ADR was developed. The Alternative Dispute Resolution Act in 1998, which mandated that every federal district court permit ADR in "all civil actions, including adversary proceedings in bankruptcy," was a significant legal step toward using ADR in insolvency matters in the US.

For instance, in the USA, ADR is utilized in three contexts for insolvency disputes:

1.   to resolve disputes and achieve a consensus concerning plans for reorganization;

2.   for single creditor disputes and

3.   for multiple-creditor claims of the exact nature Mediation in Insolvency matters.

In recent years, developments like the rising number of insolvency cases and the complexity of cross-border insolvency disputes have underscored the need for alternative mechanisms. In the UK, the Chancery Court Guide 2009, which sets out rules by which insolvency cases before it is managed, provides, in Chapter 17, for the general use of alternative dispute resolution (ADR), including, in particular, Mediation and makes it clear that it will refer cases to Mediation where appropriate and that the parties' lawyers should consider the use of ADR in all cases. Moreover, the increasing use of moratoriums under Section 14 of the IBC has led to prolonged disputes, often eroding the value of the corporate debtor's assets. In 2023, the Insolvency Law Committee recommended the inclusion of pre-packaged insolvency resolution processes (PPIRP) for stressed MSMEs. These pre-packs rely on a collaborative resolution process, hinting at the growing recognition of ADR methods.

Though India lacks a dedicated framework for Mediation in insolvency cases, pre-pack success indicates the potential of consensual processes. Internationally, the Singapore Convention on Mediation has set a benchmark by providing enforceability to mediated settlements. India's ratification of this convention in 2021 has opened doors for its integration into the domestic framework.

The adversarial nature of insolvency proceedings often results in significant delays and value erosion. Mediation could provide a cost-effective and time-efficient alternative, particularly in disputes involving creditors' committees or valuation challenges. It allows stakeholders to explore creative solutions beyond the rigid framework of the IBC, enhancing outcomes for all parties involved.

However, implementing Mediation in insolvency proceedings faces several challenges. Firstly, the absence of a legislative framework explicitly promoting Mediation under the IBC limits its adoption. Secondly, Mediation requires trained professionals with expertise in insolvency law and negotiation—a skill set still developing in India. Lastly, a cultural preference for litigation over consensual resolution could hinder Mediation's acceptance.

Despite these challenges, the potential benefits are significant. Mediation is private, unlike public procedure, allowing parties to avoid publicizing the issue. This is a very advantageous incentive in business relationships (securing commercial secrets and other relevant information). By contrast, all conflicts requiring adjudication become public (unless in certain circumstances), and the court must allow public access to proceedings on a widespread basis. Furthermore, precedents such as Binani Industries v. Bank of Baroda have displayed issues where internal issues with stakeholders have vastly delayed the CIRP process, with several intermittent delays predominantly owing to litigation. While these issues certainly need to be acknowledged and resolved, Mediation allows such issues to be addressed and tackled creatively and time-efficiently rather than causing severe delays.

Mediation enables avoiding some of the inherent weaknesses of adjudication (e.g., cost, notoriety, and lack of flexibility) in bankruptcy issues. This is advantageous because the debtor's assets are not being squandered on litigation and other expenses. The filing of an insolvency petition shows the debtor's precarious financial status and hinders business. The unique feature of ADR in insolvency cases is that not all the creditors usually participate in the dispute resolution. In contrast to insolvency adjudication, the debtor usually resolves the dispute with the principal creditors (who are likely to initiate insolvency proceedings), and a formal insolvency case is not initiated.

About the IBC, Shri Anurag Singh Thakur, Minister of State for Finance and Corporate Affairs, stated in a written reply to the Rajya Sabha, "According to data provided by the National Company Law Tribunal, a total of 19,771 cases were pending with NCLT benches as of 30 September 2019, including 10,860 cases under the Insolvency and Bankruptcy Code, 2016. "

Recommendations

India needs a multi-pronged approach to realize the potential of Mediation in insolvency proceedings.

1.   Legislative Reform: Amend the IBC to include specific provisions for Mediation in insolvency cases, akin to the PPIRP framework.

2.   Institutional Support: Establish specialized mediation centres under the aegis of the NCLT and train professionals in insolvency-specific Mediation. The Report of the Working Group on Individual Insolvency, published by the IBBI in August 2017, recommended that the code be amended to provide time-bound Mediation regarding the insolvency of individuals and partnership firms. The report recommended recognizing a new cadre of professional mediators and specific mediation centres to provide mediation facilities.

3.   The same concept of Mediation can also be applied to corporate insolvency cases. A mandatory pre-mediation or compulsory reference to Mediation within the IBC framework is the need of the hour.

4.   Awareness Campaigns: Conduct awareness programs to promote the benefits of Mediation among stakeholders.

5.   Cross-Border Integration: Develop guidelines for Mediation in cross-border insolvency cases, leveraging India's ratification of the Singapore Convention on Mediation.

Conclusion

Mediation can transform insolvency proceedings in India by promoting consensus-driven resolutions and reducing litigation burdens. While challenges remain, legislative and institutional reforms could pave the way for its effective integration into the IBC framework. By embracing Mediation, India can create a more efficient and harmonious insolvency regime that benefits all stakeholders and fosters economic stability.