The Scope and Potential of Mediation in India's Insolvency and Bankruptcy Code

Introduction

The Insolvency and Bankruptcy Code (IBC) offers a comprehensive framework for resolving insolvency cases efficiently and transparently. However, one of the challenges it faces is the resolution of disputes among stakeholders, particularly creditors. Mediation—a voluntary and non-adversarial process—can serve as an effective tool for resolving such disputes. While the IBC does not explicitly mandate mediation, recent efforts by the Insolvency and Bankruptcy Board of India (IBBI) have paved the way for integrating mediation into the insolvency framework. A structured approach to mediation can help expedite the resolution process and preserve the value of the corporate debtor (CD).

Scope of Mediation under IBC

The introduction of the IBC in 2016 revolutionized India’s approach to handling stressed assets by creating a time-bound and efficient resolution process. This framework has fostered confidence among lenders, suppliers, and investors, thereby promoting an entrepreneurial ecosystem. However, key principles of the IBC, such as maximizing the value of the CD’s assets and ensuring prompt resolution, remain hampered by protracted litigation and inter-stakeholder conflicts.

Timelines under the IBC

Section 12 of the IBC, read with Regulation 40 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, mandates a 180-day period for completing the Corporate Insolvency Resolution Process (CIRP), extendable by 90 days. Despite these deadlines, delays are common, largely due to litigation. Mediation can provide an alternative avenue to resolve disputes and reduce these delays while complementing the IBC’s objectives.

Mediation as an Effective ADR Tool in India

India has made significant strides in adopting alternative dispute resolution (ADR) mechanisms, including mediation. Several legislative frameworks already promote mediation as a preferred method of dispute resolution:

• Companies Act, 2013: Section 442 empowers the National Company Law Tribunal (NCLT) and Appellate Tribunal to refer disputes to mediation under the Companies (Mediation and Conciliation) Rules, 2016.

• Commercial Courts Act, 2015: Section 12A mandates pre-institution mediation for commercial disputes.

• Real Estate (Regulation and Development) Act, 2016 (RERA): Section 32(g) promotes amicable resolution through dispute resolution forums.

• Consumer Protection Act, 2019: Sections 37, 74, and 81 provide for the establishment of Consumer Mediation Cells at various levels.

• MSME Development Act, 2006: Section 18 requires mandatory conciliation for payment-related disputes involving Micro, Small, and Medium Enterprises.

• Industrial Disputes Act, 1947: Sections 4 and 12 outline the appointment and responsibilities of conciliation officers to resolve labor disputes.

Despite these precedents, insolvency disputes have yet to see widespread use of mediation. The IBC currently governs such disputes without a unified mediation framework, creating an opportunity for reform.

IBBI Committee Report on Mediation Framework under IBC

The IBBI released its report, "Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016," on January 31, 2024. Prepared by an expert committee led by Shri T.K. Viswanathan, the report advocates integrating mediation as an additional method to resolve IBC-related disputes.

Key Recommendations

1. Standalone Mediation Framework:

   • The proposed framework should function independently within the IBC structure to ensure its objectives are met without undermining the Code’s fundamentals.

   • It should accelerate the resolution process without compromising statutory deadlines.

2. Integration with CIRP Timelines:

   • Mediation must be completed within the CIRP’s statutory timeframe of 180 days (extendable to 270 days, with an outer limit of 330 days).

   • Delays in mediation could affect the CD’s financial health and revival prospects.

3. Scope of Mediation:

   • The framework should address specific disputes, such as inter-creditor issues, claims collation, and conflicts under Section 60(5) of the IBC.

   • Pre-institution mediation in financial creditor-initiated cases could be explored in later phases.

4. Implementation in Phases:

   • Mediation should be adopted gradually within a regulatory sandbox to address implementation challenges and refine processes.

5. Statutory Sanctity for Mediated Settlements:

   • Mediated Settlement Agreements (MSAs) must have enforceable legal status to ensure compliance and build stakeholder confidence.

Key Areas for Mediation in IBC

Mediation can be applied at various stages of the insolvency process, including:

1. Pre-Insolvency Disputes:

   • Negotiation of debt restructuring or repayment plans between creditors and debtors.

2. Inter-Creditor Disputes:

   • Resolution of conflicts among creditors over asset distribution or resolution plan terms.

3. Third-Party Disputes:

   • Settlement of disputes between the CD and external parties, such as suppliers or landlords.

Challenges and Considerations

While mediation holds significant potential, its successful implementation within the IBC framework requires addressing several challenges:

1. Awareness and Acceptance:

   • Stakeholders need to recognize the benefits of mediation as a viable alternative to litigation.

2. Qualified Mediators:

   • A pool of trained mediators is essential to manage the diverse range of disputes arising under the IBC.

3. Integration with IBC Procedures:

   • Clear guidelines are necessary to ensure seamless integration of mediation with existing IBC processes.

4. Incentives for Mediation:

   • Reduced fees or expedited timelines could encourage parties to opt for mediation.

Conclusion

The Mediation Act, 2023, provides a robust framework for ADR mechanisms, addressing the inefficiencies of traditional litigation. Integrating mediation within the IBC framework, as proposed by the IBBI, offers a promising path to resolving insolvency disputes efficiently. Whether through a standalone mediation architecture or leveraging the existing Mediation Act, adopting mediation in the IBC process has the potential to streamline resolutions, reduce litigation, and preserve the value of stressed assets. The success of this initiative will depend on stakeholder awareness, the availability of skilled mediators, and effective implementation strategies. With these measures, mediation can become a cornerstone of India’s insolvency resolution process.

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