Mediation under IBC

[Simranjeet Mirani]

Introduction

The introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) has revolutionized India’s approach to resolving stressed assets and corporate insolvencies. The Code aimed to create a streamlined, risk-friendly, and time-bound resolution process, strengthening the confidence of lenders, investors, and suppliers in supporting businesses. However, despite its intended efficiencies, the process has been marred by delays, particularly due to disputes among stakeholders, often leading to prolonged litigation before the National Company Law Tribunal (NCLT).

While the IBC prescribes a 180-day timeline for the Corporate Insolvency Resolution Process (CIRP), extendable by 90 days, these timelines are not always followed strictly. This delay is often due to protracted litigation and disputes brought before the NCLT by various stakeholders, as seen in cases where the resolution process has taken over 600 days. One potential solution to mitigate these delays is the use of mediation as a dispute resolution mechanism. This article explores the evolution of mediation in India, its integration into the IBC framework, and its future in the insolvency process.

The Evolution of Mediation in India

Mediation, as a conflict-resolution tool, has deep roots in India, dating back to pre-British India when commercial disputes were often resolved through the efforts of local mediators called Mahajans. This tradition of dispute resolution by respected members of the community continued even during British colonial rule, laying the groundwork for modern mediation practices.

Mediation gained formal legislative recognition in India through the Industrial Disputes Act of 1947, which provided a framework for mediating industrial disputes. The Arbitration and Conciliation Act of 1996 further bolstered alternative dispute resolution (ADR) mechanisms, though it initially excluded mediation. The Code of Civil Procedure (CPC) Amendment Act of 1999 introduced Section 89, allowing cases to be referred to ADR, including mediation. Additionally, the Commercial Courts Act of 2015 mandated pre-litigation mediation in commercial disputes, with a few exceptions for urgent interim reliefs.

In 2023, the Mediation Act was passed, solidifying mediation’s role as a preferred method of resolving disputes outside the judicial system. The Act introduced the concept of Mediated Settlement Agreements (MSAs), providing a legal framework to enforce settlements reached through mediation.

Mediation and the IBC: The Expert Committee’s Report

Recognizing the potential of mediation in resolving insolvency disputes efficiently, the Expert Committee set up under the IBC has suggested incorporating mediation as an ADR tool within the insolvency framework. The Committee’s report advocates a phased approach to voluntary mediation among the parties involved in insolvency cases.

Key recommendations in the report include:

1. Regulatory Framework: The Insolvency and Bankruptcy Board of India (IBBI) would oversee the implementation of mediation under the IBC, in contrast to the Mediation Act, which places this responsibility with the Mediation Council of India.

2. Mediation Settlement Agreements (MSAs): The report aligns with the Mediation Act’s concept of MSAs but recommends that such agreements be enforced through the NCLT, akin to a court order, particularly at the post-admission stage of the insolvency process.

3. Time-bound Mediation: The Committee highlighted that insolvency mediation should proceed in parallel with the statutory timelines of the IBC. For example, mediation during the pre-admission phase should be completed within 30 days, ensuring that the overall timeline of the insolvency process is not delayed.

4. Exclusion of Mediation Costs from CIRP: The Committee proposed that costs incurred for mediation be excluded from the CIRP expenses, thus ensuring that mediation does not increase the financial burden on the corporate debtor or its creditors.

5. Online Mediation: Recognizing technological advancements, the report supports the adoption of online mediation as a practical and efficient solution for insolvency disputes.

Challenges of Integrating Mediation with the IBC

Despite the potential advantages, integrating mediation into the IBC framework faces several challenges. One of the primary concerns is ensuring that mediation does not delay the resolution process. The Committee has emphasized that mediation should complement, not hinder, the time-bound objectives of the IBC.

Moreover, the Expert Committee has been cautious about fully aligning insolvency mediation with the Mediation Act, 2023. The Committee’s report stresses the need for an independent framework for insolvency mediation, citing the unique nature of insolvency proceedings and the need to safeguard the in rem (against the world) rights of stakeholders. To this end, the Committee has suggested that the Mediation Act’s provisions be exempted from insolvency mediation, maintaining a tailored approach under the IBC.

The Need for a Standalone Insolvency Mediation Framework

The Expert Committee’s recommendations propose that insolvency mediation be distinct from the broader framework of the Mediation Act, 2023. The IBC’s unique objectives—maximizing value for creditors and resolving distressed corporate entities efficiently—necessitate a specialized mediation process.

The Committee advocates for an independent, self-contained mediation framework under the IBC, focusing on resolving specific insolvency-related disputes, such as inter-creditor issues, claims collation, and third-party disputes. This approach aims to streamline the insolvency process without being constrained by the broader provisions of the Mediation Act.

Conclusion

Mediation is increasingly recognized as a vital tool for resolving conflicts efficiently and amicably. The Mediation Act, 2023 has institutionalized mediation in India, providing a functional model for dispute resolution. However, when it comes to insolvency, the Expert Committee has recommended a specialized, independent framework under the IBC, emphasizing that mediation in insolvency matters must not be governed by the broader Mediation Act, 2023.

It will be crucial to see whether this tailored framework can achieve the desired outcomes in terms of reducing delays and increasing the efficiency of the insolvency process. Only time will tell whether a bespoke approach to insolvency mediation or reliance on the existing Mediation Act will prove to be the more effective solution for resolving corporate disputes within the framework of the IBC.