MEDIATION IN CORPORATE INSOLVENCY RESOLUTION PROCESS

[Mr. M. GOVINDARAJAN]

According to the Encyclopedia of the Laws of England, the mediation is the technical term in international law which signifies the interposition by a neutral and friendly state between two states at war or on the eve of war with each other, of its good offices to restore or to preserve peace.   As per BLACK’s law dictionary, mediation is a method of non binding dispute resolution involving a neutral third party who tries to help the disputing parties to reach a mutually agreeable solution.

The mediation is the act of mediating; deep thought; serious contemplation.  The role of the mediator is to listen to parties, ascertain the facts, circumstances and nature of dispute, identify the cause for the grievance, suggest a proposal for settlement and facilitate the parties to reach the settlement.  The mediation is merely assisted negotiations.  The mediation process allows the third party to suggest terms on which the dispute might be resolved.

In the initial period in the corporate insolvency resolution process settlement of dispute is rarely allowed.  The Adjudicating Authority or the Appellate Tribunal may allow settlement between the parties by virtue of their inherent powers.  But settlement through a mediator is a new to this corporate insolvency resolution process.

In  ‘Parvinder Singh v. Intec Capital Limited and another’ – 2020 (1) TMI 150 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI, Intec Capital Limited initiated corporate insolvency resolution process under section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) against Jagtar Singh & Sons Hydraulic  Private Limited (‘corporate debtor’ for short). 

Vide agreement dated 28.03.2013 a sum of ₹ 3.18 crores was given by the financial creditor to the corporate debtor bearing interest @ 13.75%.   The said loan was to be paid back by the corporate debtor to the financial creditor in 60 monthly installments of ₹ 7.27 lakhs each for which post dated cheques were given by the corporate debtor to the financial creditor.  The corporate debtor paid 14 monthly installments without delay and therefore he paid the same with delay along with interest up to 38 installments.  The account was seized by the bank since it became NPA.  In order to regulate the said account the financial creditor granted ₹ 41.32 lakhs as second loan carrying interest @ 13% on 31.05.2016 to be repayable in 36 installments of ₹ 1.57 lakhs each.

There is also a default in repayment of second loan also.  22 installments of first loan and 2 installments of second loan have not been paid to the financial creditor.  Since the corporate debtor is in default in repayment of the said two loans, the financial creditor approached the Adjudicating Authority under Section 7 of the Code.  The Adjudicating Authority, New Delhi – III Bench admitted the application vide its order dated 03.09.2019.

The appellant, authorized representative of the promoters of the corporate debtor filed the present appeal against the order of Adjudicating Authority admitting the application for initiation of corporate insolvency resolution process against the corporate debtor.  The appellant submitted before the Appellate Tribunal that they are ready to settle the claims of the financial creditor.  The appellant also submitted that they are ready to move before a ‘mediator’ as appointed by the Appellate Tribunal, if necessary to settle the dues.   Till date the Committee of Creditors has not been constituted.

The Appellate Tribunal directed the interim insolvency resolution professional to ensure that the corporate debtor remains a going concern.  The interim resolution professional was also directed not to constitute the Committee of Creditors so as to enable the parties to reach an amicable settlement.

Since the parties to the case, including Intec Capital Limited, agreed to mediation the Appellate Tribunal appointed a retired Judge to undergo mediation between the parties to the appeal.  The mediation proceedings were held on 19.11.2019 and 23.11.2019.  The parties to the appeal attended the proceedings before the mediator.  On 23.11.2019 the settlement agreement was reached.  The mediator submitted his report before the Appellate Tribunal on 02.12.2019. 

In respect of the first loan-

• the corporate debtor shall pay a sum of ₹ 1.20 crore which shall be paid in six installments of ₹ 20 lakhs each starting from March 2020;
• the installments shall be paid on or before 20^th of each month;
• the corporate debtor shall not pay the interest amount on the first loan till December 2019;
• simple interest at 12% on reducing balance shall be calculated and paid with effect from 01.01.2020;
• the interest shall be paid on 15^th of the next month;
• the interest for 20 days of August 2019 will be paid at the time of the last installment  of August 2020;
• the corporate debtor has to issue post dated cheques for all installments to the financial creditor.

In respect of the second loan ₹ 5 lakhs is to be paid on or before 25.02.2020.   The corporate debtor shall give the post dated to cheques to the mediator who submitted the same before the Appellate Authority.  The cheques will be handed over to the financial creditor at the time of order passed by the Appellate Authority.

It is also agreed that the expenses of interim resolution professional and the legal fees  shall be paid by the financial creditor up to the limit of ₹ 10 lakhs.   If the expenses exceed ₹ 10 lakhs the corporate debtor shall pay the said amount in excess of ₹ 10 lakhs.  It is also agreed, by means of an affidavit,  that-

• the corporate debtor shall honor the cheque on presentation by the financial creditor;
• to given an undertaking to the Appellate Tribunal that in case of breach of agreement they would be personally liable for the consequences including contempt of court;
• to give their personal guarantee for fulfillment of the obligations under the agreement;
• on payment of all the dues by the corporate debtor the financial creditor shall withdraw all the cases including criminal cases filed under Negotiable Instruments Act;

The mediator, along with his report submitted the copies of post dated cheques issued by the corporate debtor in terms of the settlement agreement.

The Appellate Tribunal after receiving the affidavit from the corporate debtor as to the payment of loan amount as per the settlement agreement terms set aside the order of the Adjudicating Authority subject to the compliance of the terms of settlement by 20.08.2020. It also handed over the post dated cheques to the financial creditor.

The Appellate Tribunal held that the terms of settlement recorded by the Mediator should be treated as the order and directions of the Appellate Tribunal to be complied by all the parties.  The corporate insolvency process can be revived by the petitioner in case of breach of the terms of settlement agreement.  The Appellate Tribunal directed the interim resolution professional to allow to run the corporate debtor through its Board of Directors.  However the Corporate Debtor and its board and officers shall not alienate or sell or transfer or create third party encumbrance on any of the movable or immovable property of the corporate debtor during the period of terms of settlement are complied.

The Appellate Tribunal fixed the next hearing on 07.09.2020 for reporting compliance.