The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced to do away with the patchwork of legislation governing insolvency procedures in India.
Previously, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), a rescue and rehabilitation legislation for industrial companies, was primarily referred to in matters of industrial insolvency or bankruptcy. However, it was riddled with legislative obstacles, which caused considerable delays and inefficiencies. As a result, India was ranked 137 in the world for resolving insolvency. An insolvency resolution process took an average of 4.3 years with a paltry recovery rate of 25.7 cents on the US dollar.
These hurdles called for an overhaul of the insolvency resolution process in India, which was spearheaded by the Bankruptcy Law Reforms Committee (BLRC). The BLRC observed the legislative problems born out of a fragmented insolvency framework and sought to create a unified framework under the IBC. The IBC was intended to be more than a simplistic recovery legislation for creditors and was supposed to rescue the company in distress by maximising the value of its assets. The IBC envisioned an inclusive insolvency resolution process which balances the interests of all stakeholders and enables a swift and efficient system of resolution.
While the IBC is an improvement over its predecessors, it has not succeeded in actualising its objectives. Ironically, the framework under the IBC is court-heavy, with incessant delays due to litigation between different parties in the resolution process. At the time of inception of the IBC, under Section 12 of the Code, the Corporate Insolvency Resolution Process (CIRP) was required to be completed within a period of 180 days, which could be extended to a maximum of 270 days. However, as of September 2020, from the 1,942 cases that were undergoing resolution, more than 1,440 cases have been in the pipeline for over 270 days.
In light of these concerning figures and distressed companies undergoing CIRP, the IBC was amended in 2019 to extend the overall time limit for a CIRP to 330 days by adding a proviso to Section 12 of the Code. While this amendment increased the time limit for a CIRP, it failed to deal with the institutional challenges at the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), which were at the root of their case backlog.
Considering this timeline was too ambitious for the tribunals to achieve in their present condition, the apex court struck down the word ‘mandatorily’ for completion of CIRP in 330 days while adjudicating the case of Essar Steel v. SK Gupta. This showcases the very reason that the IBC has been unable to achieve its objective of creating a fast and efficient insolvency resolution process. The preamble of the IBC is defeated, as its very essence is insolvency resolution in a time-bound manner.
Mediation: A constructive tool for the insolvency process
This article suggests a different approach to tackling case pendency in India's insolvency resolution process. It proposes mediation as a panacea for the obstacles faced under the legislative system governing CIRPs. Mediation marries the goals of efficiency and inclusion in a mutually beneficial way under the insolvency resolution process.
Considering the time-consuming nature of CIRP proceedings before the tribunals, the concerned assets continue to lose their value and hostility between stakeholders only increases. This is especially concerning, as maintaining business relations is essential for a company to survive after the resolution of insolvency. Mediation enables an inclusive dialogue between all stakeholders where a resolution can be reached without souring corporate relations. It is also a cost, time-effective and constructive alternative considering the complexity of litigation under the IBC.
In light of the heavy workload of the tribunals, litigation delays are inevitable. Attempting to solve the problem of case pendency only by increasing the number of tribunals is akin to trying to empty the sea with a thimble. It is of utmost importance and urgency that we explore alternative dispute resolution mechanisms to challenge the perennial issue of case pendency.
While the IBC does not provide for mediation under its procedures, other countries increasingly rely on mediation for insolvency resolution processes. When Lehman Brothers declared bankruptcy during the economic crisis of 2008, mediation proved to be the most effective method of insolvency resolution with all their creditors. Lehman Brothers were faced with 75 simultaneous legal proceedings across 40 countries. This was a significant challenge considering the different jurisdictions and legal systems of all the countries and the company's dire situation. The company managed to initiate mediation in 77 proceedings, with only 4 terminating without any settlement. This allowed for a time and cost-efficient resolution process with the creditors being able to derive maximum value from the concerned assets. That mediation has been effective in the resolution of one of the world's most significant insolvency filings of the century is testament to the efficacy of the process.
Owing to the hurdles faced in this regard, the introduction of the recent Draft Mediation Bill, 2021 can prove to be a move in the right direction for insolvency resolution. The Bill effectively mandates pre-litigation mediation in civil or commercial matters, stating that parties must try to settle their disputes through mediation before approaching any court or tribunal. Furthermore, it states that the mediation process must be completed within 180 days, which can further be extended by another 180 days. While mediation is made the preferred mode of dispute resolution, the parties are allowed to approach a court of tribunal after two mediation sessions if they have failed to reach a consensus. While this Bill is yet to be passed by the Parliament, it can be a much-awaited solution for the chronic case pendency problem of CIRPs.
This is not the first time that mediation has been touted as a route to reduce the workload of tribunals. It has been observed that mediation can produce more stakeholder-friendly and innovative resolution plans in comparison to a conventional plan created under a CIRP. Furthermore, the ability to incorporate future dealings between parties goes a long way toward maintaining cordial relations between business partners. It was found that agreements born out of mediation generally result in voluntary compliance and preserve an amicable relationship between parties.
Section 89 of the Civil Procedure Code, 1908 encourages the use of relevant alternative dispute resolution mechanisms along with the Companies Act, 2013, which provides for setting up mediation for cases flagged by the NCLT and NCLAT. In light of the legal infrastructure already in place, tribunals could strongly recommend mediation, especially in cases where stakeholder relations are in the balance. Once institutions like the NCLT and NCLAT start encouraging parties to initiate mediation, litigants may proactively opt for mediation to resolve their disputes.
With the Draft Mediation Bill, 2021 in the legislative pipeline, it is evident that we are moving towards an India where mediation will become a prerequisite to litigation. This proposed system is targeting the root of case pendency in India by drastically reducing the number of cases that devolve into litigation. It is now imperative to develop the institutional capacity in terms of qualified mediators for future insolvency disputes. As mediation prioritises timeliness and efficiency - the cornerstones of the IBC - it promises to be the silver bullet which could once and for all deal with the unending challenge of case pendency in India.
Mohit Kapoor is Founder & Senior Partner and Ruchita Krishnan is an Associate at Universal Legal.