A. A NEW TURN IN CIRP: MEDIATION BEFORE INSOLVENCY
The Corporate Insolvency Resolution Process ("CIRP") in India, a cornerstone of the Insolvency and Bankruptcy Code, 2016 ("Code"), provides operational creditors ("OC") with a right to initiate insolvency proceedings against a corporate debtor ("CD") in cases of default. As per Section 9 of the Code, an OC may file an application before the Adjudicating Authority ("AA") after the expiry of a ten-day period from the delivery of a demand notice, provided the CD fails to make payment or issue a notice of dispute.1 This insolvency resolution mechanism, however, has often been criticized for exacerbating strained business relationships and imposing an undue burden on the insolvency procedure. On 31 January 2024, the Insolvency and Bankruptcy Board of India ("IBBI"), through its expert committee ("Committee"), introduced a novel concept of pre-insolvency mediation through its report titled "Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016" ("the Report"). The pre-insolvency mediation is introduced for OCs before filing an application under Section 9 of the Code.
The Report envisions mediation as a non-adversarial, pre-insolvency mechanism aimed at fostering amicable settlements between OCs and CDs. By encouraging reconciliation at an early stage, this initiative seeks to preserve the goodwill in business relationships while shielding the CD from the reputational damage, loss of business and other operational losses associated with insolvency proceedings. The authors believe that this proposed mechanism aligns with global best practices and demonstrates a pragmatic approach in preserving the value of distressed assets while simultaneously easing judicial congestion.
B. BRIDGING THE GAP: REVOLUTIONIZING INSOLVENCY RESOLUTION THROUGH MEDIATION IN INDIA
The Committee's recommendations represent a transformative shift from the traditional mechanisms under the Code by advocating for the inclusion of mediation as a voluntary and prior to CIRP initiated by an OC against a CD. By proposing mediation as an alternative dispute resolution mechanism, the Committee aims to strike a balance between the statutory limitations and strict timelines of the Code while preserving the necessary flexibility for stakeholder-driven negotiations.
Mediation is envisioned not as a replacement for the CIRP but as a complementary mechanism that enhances the resolution process by providing OCs and CDs with the freedom to resolve disputes consensually and expeditiously. By reconciling the Code's objectives of timely restructuring and maximization of asset value with the advantages of voluntary "out-of-court" mediation, the proposal seeks to improve the efficiency of insolvency proceedings while safeguarding stakeholder interests. The framework also entails a significant delegation of powers to the Central Government and the IBBI to operationalize insolvency mediation. The Central Government may prescribe rules governing the fundamental structure of the mediation framework, including the establishment of mediation cells within the National Company Law Tribunal ("NCLT"), qualifications for mediators, and other essential notifications.
To ensure seamless implementation, the Committee suggested for the establishment of an internal mediation secretariat within the NCLT. The secretariat would oversee, administer, and enforce the insolvency mediation process while managing the appointment of specialized mediators. Recognizing the unique complexities of the insolvency process, the Committee recommends sourcing mediators from a diverse pool, including retired members of the NCLT/NCLAT, senior officials from the finance sector, insolvency professionals with over a decade of experience, and advocates.
Cost efficiency remains a central concern of the proposal, with the Committee recommending a designated fee schedule to ensure that mediation remains accessible and does not become prohibitively expensive. Embracing technological advancements, the framework also proposes paperless mediation by enabling e-filing and adopting hybrid or fully online modes of mediation wherever feasible. Such measures are expected to enhance operational efficiency at the NCLT and facilitate greater participation from stakeholders.
Under the proposed framework, mediation would be seamlessly integrated into the Code, allowing parties to initiate proceedings at any stage of the insolvency process, ranging from pre-insolvency negotiations to resolution and even liquidation stages.
C. APPLICABILITY OF THE MEDIATION ACT, 2023 TO THE CODE: A MISFIT OR AN OPPORTUNITY?
Framework and Limitations in the Context of Insolvency
The Mediation Act, 2023 ("Mediation Act")2 establishes a robust framework for voluntary and institutional mediation across various dispute categories, including commercial conflicts. While Mediation Act marks a significant advancement in promoting mediation in India, its application to insolvency proceedings under the Code necessitates careful examination. The Code's strict resolution timelines and the collective nature of creditor-debtor disputes contrast sharply with the Act's flexible, party-centric approach. These differences highlight the need for tailored mediation provisions that cater specifically to the dynamics of insolvency cases.
The Mediation Act does not uniformly apply to all Indian laws, its scope is limited to disputes classified as "commercial or otherwise." Notably, insolvency proceedings under the Code are not included in the Mediation Act's definition of "commercial disputes," creating a legislative gap regarding the integration of mediation into the insolvency framework. Section 55(1) of the Mediation Act3 grants it an overriding effect over other mediation laws, but since the Code lacks mediation provisions, the Mediation Act does not conflict with it. This opens the possibility for future amendments to incorporate mediation into insolvency proceedings.
Towards a Tailored Mediation Framework for Insolvency Proceedings
The Mediation Act's flexibility allows the central government to designate specific tribunals, such as the NCLT, for pre-institution mediation under Section 5 of the Mediation Act.4 However, implementing mediation within the Code requires necessary legislative changes. This separation emphasizes the necessity for a self-contained mediation mechanism tailored to the unique objectives and timelines of the Code.
The Mediation Act's incompatibility with the Code's strict timelines further complicates its applicability. Sections 2 and 6 of the Mediation Act5 limit its provisions to disputes adjudicated by notified tribunals, but the flexible timelines under the Mediation Act conflict with the Code's rigid deadlines, which are crucial for preserving distressed asset value and ensuring timely resolutions. The exclusion of the Code from the Mediation Act's first schedule reinforces the need for a distinct approach to insolvency disputes.
Recognizing these challenges, the Committee has suggested that mediation under the Code should function as a self-contained framework, separate from the Act. This tailored mechanism would align with the Code's time-sensitive objectives while protecting the collective rights of creditors and debtors. A bespoke mediation process within the Code could enhance its structure, facilitating resolutions within the statutory timeline and without compromising efficiency and fairness.
D. INSOLVENCY MEDIATION REGIMES IN OTHER JURISDICTIONS
Voluntary mediation has emerged as a valuable tool in insolvency and bankruptcy cases across various jurisdictions. For instance, Singapore has established pre-institutional mediation practices, particularly for civil and commercial disputes, through the Singapore Mediation Centre, which facilitates mediation for debt and insolvency issues.6 This approach promotes out-of-court settlements and alleviates the burden on the judicial system, demonstrating the potential benefits of integrating mediation into insolvency processes.
In the United States, mediation is a well-established component of the bankruptcy process, especially in complex cases where bankruptcy courts often encourage mediation to facilitate settlements between debtors and creditors. An example is the ongoing mediation of Purdue Pharma,7 which aims to resolve extensive litigation related to the opioid crisis, wherein the manufacturer of OxyContin Company, faced extensive litigation due to its role in the opioid crisis. In October 2024, a court-appointed mediator reported significant progress toward a new bankruptcy settlement between Purdue Pharma, the Sackler family (owners of Purdue), and state and local governments. The court-appointed mediator reported significant progress toward a new bankruptcy settlement, highlighting the role of mediation in efficiently resolving disputes and reducing litigation costs.
In the United Kingdom, while mediation is not mandatory, it is encouraged through initiatives like the Pre-Action Conduct and Protocols, guiding parties to consider alternative dispute resolution methods before filing claims.8 The World Bank's Guideline on the "Principles for Effective Insolvency and Creditor/Debtor Regimes",9 released in April 2021, further emphasize the importance of mediation in insolvency processes, advocating for its integration at various stages of the insolvency process. This global trend towards using the alternative dispute resolution mechanism in the insolvency cases aligns with India's exploration of mediation as a means to address financial distress effectively, suggesting that a tailored mediation framework could enhance the efficiency and effectiveness of the Indian insolvency regime.
E. MEDIATION IN INSOLVENCY: A BESPOKE SOLUTION FOR INDIA'S UNIQUE CHALLENGES
Despite various countries following the concept of pre-insolvency mediation, the Committee found a surprising lack of effective data to assess the overall success rates of mediation in insolvency, with practices varying significantly across countries. This inconsistency highlights the need for a more structured approach to mediation, particularly in jurisdictions like India, where the unique characteristics of the insolvency framework necessitate a bespoke solution that aligns with the Code's objectives.
The Committee's overall focus is on the distinct features of the Code, which operates on a 'creditor-in-control' model, contrasting with the 'debtor-in-possession' model prevalent in many other jurisdictions. This power dynamic influences the willingness of debtors to engage in out-of- court mediation, as they may lack trust in a consensual process that favors creditors. The Committee also acknowledged the public interest aspects inherent in Indian insolvency cases, particularly involving public banks, which introduce nuanced issues that mediation alone may not adequately address. Therefore, the development of a tailored mediation framework under the Code is essential to ensure that it effectively reconciles the interests of all parties while maintaining procedural certainty.
F. FROM RELUCTANCE TO RECOGNITION: THE EVOLVING ROLE OF MEDIATION IN INDIAN INSOLVENCY LAW
The NCLT has exhibited a cautious approach towards mediation as a mechanism for resolving insolvency disputes. Often reluctant to refer cases for mediation, the NCLT's stance is exemplified in the case of Bank of India v. Jyoti Power Corp. (P.) Ltd. (2020), where the NCLT Ahmedabad rejected a plea for mediation, citing a lack of consent from the petitioner's advocate and the Tribunal didn't even gave a thought about recommending mediation to the parties before dragging the parties to the complex procedure of insolvency. This reluctance underscores the pressing need for a clearer legal framework to promote mediation under the Code. The NCLT's resistance reflects concerns regarding the power dynamics inherent in the 'creditor-in-control' model of the Code, which may deter debtors from engaging in mediation.
In contrast, the NCLAT has increasingly recognizing the value of mediation in resolving insolvency disputes, leveraging its inherent powers to facilitate justice. In notable cases such as Parvinder Singh v. Intec Capital Ltd. (2019),10 the NCLAT permitted mediation at the request of the Corporate Debtor. The case was filed by Intec Capital as FC under Section 7 and the mediation was permitted before formation of COC. The NCLAT held that on completion of compliance of terms and conditions of the mediation report, the application for CIRP will be deemed to have been withdrawn by 'Intec Capital Ltd. This initiative led to an amicable settlement through post-dated cheques, allowing the case to be withdrawn upon compliance. Similarly, in Andal Bonumalla v. Tomato Trading LLP (2020),11 the NCLAT directed the parties to engage in discussions and consider appointing a mediator, thereby underscoring the Tribunal's support for mediation as a constructive tool in dispute resolution. These instances reflect a growing acknowledgment within the NCLAT of mediation's potential to foster collaborative solutions and alleviate the burden on the insolvency framework.
The contrasting approaches of the NCLT and NCLAT highlight the need for a tailored mediation framework that addresses the unique challenges of the Indian insolvency landscape. The rationale for establishing such a framework is compelling. The Code is a specialized legislation aimed at maximizing value, balancing stakeholder interests, and resolving distressed corporate entities. Furthermore, insolvency proceedings under the IBC impact rights against the world at large (in rem) and involve multiple stakeholders, raising concerns that the stringent confidentiality requirements of the Mediation Act could conflict with the transparency necessary in insolvency cases, potentially jeopardizing stakeholder rights. Therefore, the proposal of mandatory pre- insolvency mediation recommended by IBBI should be welcomed with open hands and must be followed by all the tribunals in India. If this proposal is implemented in accordance with its letter and spirit, then it could serve as a pivotal step towards resolving the dispute between an OC and CD. Hence, a tailored mediation framework that addresses these unique challenges is essential for enhancing the efficacy of the Code and ensuring that mediation serves as a constructive avenue for dispute resolution in the Indian insolvency landscape.
Footnotes
1. The Insolvency and Bankruptcy Code, 2016, § 9, No. 31, Acts of Parliament, 1996 (India).
2. The Mediation Act, 2023, No. 32, Acts of Parliament, 2023 (India).
3. The Mediation Act, 2023, § 55 (1), No. 32, Acts of Parliament, 2023 (India).
4. The Mediation Act, 2023, § 5, No. 32, Acts of Parliament, 2023 (India).
5. The Mediation Act, 2023, § 2 and 6, No. 32, Acts of Parliament, 2023 (India)
6. Giovanni Matteucci, "Enforceability of international commercial mediation agreement, the Singapore Convention" in Asia Pacific Mediation Journal Vol. 2, No. 1, March 2020.
7. Dietrich Knauth, "Purdue Pharma nears new bankruptcy deal with Sacklers, mediator says", https://www.reuters.com/legal/purdue-pharma-nears-new-bankruptcy-deal-with-sacklers-mediator-says-2024-10-31/? , accessed on 20th December 2024.
8. Scott Atkins, "Mediation as a bankruptcy and insolvency game changer, https://www.nortonrosefulbright.com/en-in/knowledge/publications/50ba6f9d/mediation-as-a-bankruptcy-and-insolvency-game-changer, accessed on 20th December 2024.
9. World Bank, "Principles and Guidelines for effective Insolvency and Creditor Rights Systems", Introduction and executive summary, page 2, April 2001
10. Parvinder Singh v. Intec Capital Ltd., (2019) SCC Online NCLAT 1365.
11. Andal Bonumalla v. Tomato Trading LLP, (2020) SCC Online NCLAT 624.
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