Importance of mediation in the insolvency regime: The evolving interplay

The object of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is to provide a time-bound framework within which financially/operationally indisposed companies may opt to resolve their dues and maintain a semblance of their going concern. The aim of IBC is to revive companies, with winding up being the last resort. IBC was seen as a lifeline for the struggling businesses to survive. However, fast forward today, the National Company Law Tribunal (“NCLT”) is overburdened and the mandated timeline of 270 days is being exceeded in more than 67 per cent of Corporate Insolvency Resolution Processes (“CIRPs”).

Struggling companies are finding it difficult to sustain and are gradually being weighed down with procedural delays and the drawn-out litigation, is making the creditor recovery tough, which diminishes the asset value. These delays, prolonged litigation and delay in resolving the disputes has opened the debate on incorporating a time-efficient, alternative method of resolution, which can go hand in hand with the traditional insolvency proceedings.

Mediation, as one of the tried and tested methods for minimising conflict, speeding up settlement, and preserving the business relationships, has emerged as an efficient yet underutilised alternative in this context and would indubitably help in alleviating the long-drawn out delays which invariably arise due to complex insolvency procedures.

IBC was enacted based on a creditor in control model, with an aim to replace the disorganized and fragmented recovery processes with a simplified and time-bound procedure. However, in reality, IBC has not been able to replicate the same and the efficiency in achieving the progress largely remains aspirational and a far-fetched goal for now. The procedural delays, judicial constraints, interpretational contradictions and legal lacunae often make the process slower and inefficient, which has hindered the Code from achieving the true progress it desired to achieve. Though Section 12A of IBC permits the insolvency procedures to be withdrawn, upon settlement with 90% Committee of Creditors (“CoC") approval, the complicated structure of the process limits the speed of the resolution significantly. Further, proceedings initiated under Sections 7 and 9 of IBC have become more of a civil court proceeding, as NCLTs are travelling beyond statutory limits by getting into fact-finding and appreciation of evidence, which is turning the adjudication of the applications into a full civil trial, thereby hampering and causing delay in the adjudication of the matter.

Seeing the growing trend. where IBC is being used as a tool to enforce Corporate Debtors into exploring mediation, which in some cases has resulted in amicable settlement, the Hon’ble Courts have also recognized the importance of a consensual and systematic way of settling IBC beforehand. That in Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd (2022) 2 SCC 401 (paragraphs 106 to 132), the Supreme Court emphasized the need for a pre–approval; settlement by extending the potential role of mediation. In VK Parvinder Singh v. Intec Capital Ltd. (2019 SCC OnLine NCLAT 1365) (paragraphs 11 to 12), the matter was settled before a mediator, and the NCLAT made the terms agreed before the mediator binding on both the parties, which further strengthen the position that mediation can be an important tool and an efficient way to settle the disputes between the parties.

One of the consistent challenges with alternate dispute resolution (“ADR”) methods like mediation is the uncertainty around its legal enforceability, and the challenges it may bring if any dispute arises qua the mediation. The exact dispute under the realm of IBC came in the case of Sunil Kumar Dahiya v. Union of India, W.P.(C) 11706/2019 decided on 08.11.2019, wherein a mediated settlement, which was agreed by more than 80 per cent of the creditors, was disputed by a single creditor who initiated the CIRP proceedings. The corporate debtors faced difficulties and encountered hurdles as the mediated settlement did not carry legal enforceability. The Hon’ble Delhi High Court, however, in the related case of Col. PK Uberoi (Retd.) & Anr. v. Vigneshwara Developwell Pvt. Ltd. & Ors. (2020 SCC OnLine Del 399 (paragraph 32), approved a scheme which was agreed between the parties through mediation. It is important to note that these cases were part of company proceedings before the High Court and not linked to the procedures outlined in IBC. However, this gave hope that a mediated settlement arising out of the IBC will have a greater legal enforceability, which can significantly open the doors for integrating mediation in the IBC.

Integrating mediation as a mandatory requirement into the insolvency procedure can be seen as a long-term solution for procedural delays and ineffectiveness in CIRP. Mediation, which is based on the principles of autonomy and confidentiality, becomes an integral tool for resolving challenges such as claim categorisation, creditor disagreements, valuation concerns, and plan enforcement, which could potentially hinder the entire process.

Based on judicial precedents, it can be seen that the Courts have shown a willingness to accept mediation outcomes in company law contexts. However, the current IBC framework lacks clear statutory backing for mediated settlements within IBC proceedings. Though the Court's affirmative approach in the case of Col. PK Uberoi (Retd)(Supra) shows the benefits of mediation, it also points to a need for a legislative or regulatory reform which can be integrated within the framework of the IBC. Establishing such clarity would not only foster greater confidence among stakeholders but could also pave the way for more flexible, streamlined, and efficient way by which insolvency proceedings can be conducted.

Though mediation in commercial disputes is becoming prevalent and has been working well in the past few years, there is a glaring gap between the judicial support and the reality, which is evident from the fact that IBC does not provide any statutory framework for the integration of an ADR structure. Mediation in insolvency cases has been promoted by judicial interpretations. The Supreme Court underlined the finality of negotiated resolution plans in the case of Ebix Singapore Pvt Ltd. (Supra).

The recent introduction and enactment of the Mediation Act, 2023, (“Mediation Act”) combined with the IBBI Expert Committee Report published in January 2024 (“IBBI Report, 2024”), has reignited the debate as to whether mediation should be made mandatory prior to commencement of CIRP and should be encouraged during CIRP.

The Mediation Act has ten schedules, out of which Schedule I specifies the statutes to which the Mediation Act will not apply, and Schedule II outlines various Acts that have an overriding effect. This Schedule includes legislation such as the Industrial Disputes Act, 1947, the Family Courts Act, 1984, and the Legal Services Authorities Act, 1987. These Acts are prioritized in legal proceedings in relation to the mediation, ensuring that the provisions take precedence wherever they are applicable. The rest of the Schedules (III to X) proposed changes in various statutes. Section 55 of the Mediation Act empowers the government of India to amend the Schedules as deemed fit. It is important to see that the Mediation Act does not make any reference to the IBC.

Today, given the growing emphasis on ADR in commercial matters, the exclusion of IBC from the scope of the Mediation Act may merit legislative and policy consideration in the near future.

Given the growing emphasis on ADR mechanisms in commercial matters, the exclusion of the IBC from the scope of the Mediation Act may merit closer legislative and policy consideration in the near future.

The IBBI Report 2024 has suggested systemically incorporating mediation into the insolvency framework. Among the noteworthy suggestions, a few are: 

• Establishing mediation cells within the NCLT premises; 

• Integrating voluntary mediation into the IBC procedure without interfering with statutory time limits; and 

• Giving mediation priority for disputes that arise from operational claims, intercreditor disputes, and plan implementation contingencies.

IBC’s primary objective at the time of the enactment was to provide a time-bound mechanism for the revival and resolution of companies that were in distress, and also to provide a uniform and structured framework to an earlier legislation that was totally fragmented in nature. Though IBC had preserved the value and protected the interests of the stakeholders, the integration of mediation in IBC can be seen as a game-changer, which could further strengthen the IBC to be effective and to curb issues that were faced by the parties who were approaching the Court under this Code. Mediation as an ADR tool would not only preserve the interests of the stakeholders but also provide an efficient tool for corporate debtors to settle the dispute in an efficient way. By incorporating mediation under the IBC, companies could be provided with an additional opportunity to resolve disputes amicably and also provide a speedy mechanism that would be in consonance with the overarching goal of saving viable businesses and reducing the burden on judicial forums.

The IBC’s overarching objective of maximising asset value by using cooperation and a way of trying to reach an amicable solution rather than a litigious battle is in line with the objective of the mediation principles. IBC’s commercial justification is also bolstered by its emphasis on confidentiality, stakeholder participation, and expedited timelines, which can be achieved through mediation. Mediation not only accelerates resolution but also enhances stakeholder confidence, thereby stabilising and predictable the insolvency or bankruptcy process. Ultimately, mediation not only reduces the burden on the NCLT/NCLAT but also promotes efficiency, stability, confidence, and time-bound resolutions in the insolvency proceedings. By integrating mediation into the IBC framework, the IBC can achieve the goal, making it sustainable and business friendly which would bring the insolvency regime one step closer to finality and balance.

About the authors: Amit Meharia is the Managing Partner of MCO Legals (Meharia & Company). Shashwat Roy is an Associate at the Firm.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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