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The Interplay between Mediation, Insolvency and Bankruptcy

Occurrence of the events of disability or default to fulfill financial obligation among debtors is an inevitable predicament in the commercial world; it is however imperative, to evolve a resilient mechanism, to overcome the adverse impacts arising out of such eventualities, to the maximum extent possible.

The Insolvency and Bankruptcy Code, 2016 (IBC)1 indisputably has gone a long way to work as formidable machinery for resolution of Insolvency and Bankruptcy cases. It has been able to remove the drawbacks and inefficiencies of the Companies Act, 20132 regarding liquidation proceedings, as well as Insolvency proceedings under the erstwhile Insolvency Laws; and provided support to the commercial world with a consolidated, effective and time bound remedial platform, for achieving resolution, recovery etc., thus encouraging investors and entrepreneurs for new ventures, investments and even risks.

The previous year the National Company Law Tribunal (NCLT) approved the maximum number of resolution plans, 180 and the recovery was 36 per cent, four per cent more than the average recovery for the last 6-7 years, 32 per cent3.

Despite positive results, a comprehensive evaluation of the ground realities, regarding the existing Insolvency Resolution process under IBC would be useful to advance its potentiality as efficacious machinery. Though enacted in 2016 there have been six amendments4 to IBC within seven years which suggests that efforts for shaping a more determined structure are still being made to meet the objectives of the statute.

Presently Insolvency Resolution processes are exposed to some crucial challenges; litigations by and against different stakeholders resulting in long delay, unbearable cost burden and backlogs in NCLT Benches are the common causes of concern. Enlarging the timeline of Corporate Insolvency Resolution Process (CIRP) to the maximum period of 330 days5 by IBC (Amendment) Act, 20196 could not also yield satisfactory results in general7. Besides that high percentage haircuts8 in the takeaway figures and conflicts between operational and financial creditors are not only adding up to the discontent among the creditors, it is also straining business relationships among various entrepreneurs.

In this context it is worth referring to CIRP case of Essar Steel9 which took about 850 days, as numerous litigations, among stakeholders, including touching eligibility of bidders at different stages, even up to the Apex Court took unexpected time for conclusion of CIRP, as finally the original Resolution Plan of ArcelorMittal10 was restored. The CIRP of Binani Cement11 took about 482 days, after a spate of litigations and conflicts between stakeholders and different sections of creditors.

Only some time before Hyderabad based Ind-Barath Energy12 walked out of IBC proceedings with a new buyer JSW Steel after about four years, and the banks could recover Rs. 1,047 Crores against dues of about Rs. 5,500 crores; which is a disappointing precedence. The average recovery value stands at 34 per cent since the inception of this game changing law and in the case of Videocon Industries13, the recovery was just around 5 per cent.

All these taken together could have unfavorable socio-economic impacts, such as, loss of confidence and motivation of the business world, investors etc. coupled with depletion of resources of financial institutions, loss of employment, loss of business for suppliers and service providers, etc., as well as loss of government revenue from taxes.

To address these shortcomings, and prevent its impact on the commercial world and economy at large, we need to conceptualize a more prudent mechanism for the Insolvency Resolution process. Globally the perception of the Insolvency Resolution process has undergone various changes over the last several decades14. Insolvency disputes are not only left to be adjudicated by Courts or Judicial Forums, Alternative Dispute Resolution (ADR) mechanisms, especially Mediation, have come into play across many leading economies in the world. ADR (Mediation) in insolvency case was first introduced in the United States of America in 1986, when the Bankruptcy Court of Southern District of California established the Mediation programme, followed by the Mediation used in the bankruptcy case of Greyhound Lines Inc.15 whereby about half of the thousands of multi-party claims were settled through pre-organization Mediation plan.

This huge success of Mediation in bankruptcy resolution brought about a major legislative step towards adoption of the Alternative Dispute Resolution Act, 199816 which required all federal district courts to authorize ADR in all civil cases including adversary proceedings in bankruptcy. Several European Union17 Member States, France, Germany, Italy and others, have made legislations, for introducing Mediation in different spheres, including pre-insolvency dispute resolution and has been. The results achieved from Mediation are most encouraging in those economic systems.

Keeping in mind that Indian economy is the fifth18 largest economy in the world and even poised to overtake the economies of some of the developed countries in future we need to focus on a realistic approach for insolvency resolution process, with the principal objective of revival, rehabilitation and sustenance of corporate debtors, rather than the burdensome process, haunted with delay, litigations, conflicts and enormous expenses.

The Hon'ble Supreme Court in the case of M/s Invent Asset Securitisation and Reconstruction Pvt. Ltd Vs. M/s Girnar Fibres Ltd.19 was pleased to reiterate its earlier observation that IBC is essentially intended to bring the corporate debtors to their feet and are not money recovery proceedings.

The same philosophy has been recently echoed by the Chairman of The Insolvency and Bankruptcy Board of India (IBBI) while addressing the Assocham's 8th National Summit on 'Insolvency and Bankruptcy Code and Valuation'20, when he has urged stakeholders for suggestions that can be incorporated in the policy to help reduce delays. The Chairman has also gone on record saying that major objectives of IBC are not only recovery but revival and rehabilitation as well. It was also thought of as a resolution mechanism and not a recovery mechanism.

Thus Mediation can play the role of an important keystone in Insolvency Resolution. It promotes and facilitates meaningful settlement protecting interests of different sections of stakeholders without unnecessary loss of time, in a more economic way and amiable atmosphere. The provisions for Mediation are already existing in various statutes in our country. Section 12A of the Commercial Courts Act, 201521 provides for compulsory pre-institution Mediation excepting for some urgency as specified, before institution of a commercial suit. Section 442 of the Companies Act, 201322 provides for machinery for Mediation and Conciliation of a pending proceeding before a Tribunal or Central Government and Section 89 of the Code of Civil Procedure, 190823 also provides for scope of mediation and conciliation of a civil case.

The Apex Court in the case of M.R. Krishnamurthy vs The New India Assurance Co. Ltd. 24recommended to the Government to examine the feasibility of setting up a Motor Accidents Mediation Authority (MAMA) by making necessary amendments Motor Vehicles Act and elaborately dealt with the scope of Mediation in Motor Accidents Claim Cases Also very importantly Chapter IIIA has been incorporated in the Insolvency and Bankruptcy Code, 2016 [54A to 54P of the Code] by amendment in 2021 providing for pre-packaged insolvency resolution process for corporate debtors classified as Micro, Small and Medium Enterprises (MSME) with debt value not exceeding Rupees One Crore.

This is intended to help MSME sector in resolving the insolvency issues before commencement of CIRP. The National Company Law Appellate Tribunal in the case of Parvinder Singh vs Intec Capital Ltd.25 reached a decision on the subject matter through mediation, and came to the conclusion that the settlement ought to be considered as its directives and orders.

Finally the Mediation Act, 2023, which has received the assent of the President of India on 15th September 202326 is a significant legislative move to encourage settlement before commencing litigations. The Act is a comprehensive law for facilitating and encouraging voluntary pre-litigation settlement of disputes, and applies to all proceedings, excepting those, specified in the First Schedule thereunder, mostly prosecutions under criminal law and proceedings under some special legislation. Significantly Mediation agreements between parties can be enforced as per the provisions of the Act.

Given the fact that Mediation has been recognized as a potential resource by the Legislature and the Hon'ble Apex Court, to avoid prolonged and burdensome litigations, it should be most expedient to introduce Mediation in definite terms, especially in the present demanding circumstances, to play a pivotal role in insolvency resolution.

Thus inclusion of a time bound process of pre-insolvency Mediation, before commencing CIRP, in IBC could most possibly help in mitigating much of the current adversities and achieving the objective of IBC of resolving insolvency issues of corporate debtors, rather than perishing in cobwebs of conflicts and litigations. If legal systems in other countries have benefitted there is no reason to take a skeptical approach at our end. On the top of all the Judicial Wisdom of our Hon'ble Apex Court has time and again opined in favor of promotion of Mediation, which should be taken forward in a pragmatic way.

  1. Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India).
  2. Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
  3. Anand Adhikari, India's Insolvency and Bankruptcy Code is not working; here's what's going on, BUSINESS TODAY,
  5. Insolvency and Bankruptcy Code, 2016, � 12, No. 31, Acts of Parliament, 2016 (India).
  6. Insolvency and Bankruptcy Code, 2019, No. 26, Acts of Parliament, 2019 (India).
  8. Dinesh Unnikrishnan, Banking Central | How costly are the 'haircuts' for bankers in IBC? MONEYCONTROL,
  9. Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478.
  10. Prachi Trivedi "et al." Amaan Sheikh, ESSAR STEEL INSOLVENCY CASE, 2 IJLMH 1, 1 (2019).
  11. Binani Industries Ltd. v. Bank of Baroda, 2018 SCC OnLine NCLAT 521.
  12. Axis Bank Ltd. v. Ind-Barath Power Gencom Ltd., 2021 SCC OnLine NCLT 371.
  13. Bank of Maharashtra v. Videocon Industries Ltd. 2022, SCC OnLine NCLAT 6.
  14. Vaishnavi Sharma "et al." Devashish Bhattacharrya, Mediation Bill 2021: Empowering Dispute Resolution In India's Insolvency Framework, IBC LAWS,
  15. Thompson vs Greyhound Lines Inc. 2012 WL 6213792 (S.D. Ala. 2012).
  16. Alternative Dispute Resolution Act, 28 U.S.C. Ch 44 �651-658 (1998).
  19. M/S Invent Assets Securitisation vs M/S Girnar Fibres Ltd., 2022, LiveLaw, SC 423.
  20. Press Trust of India, IBBI open to innovative suggestions that can reduce delays, help in better recovery, MONEYCONTROL,
  21. Commercial Courts Act, 2015, � 12A, No. 4, Acts of Parliament, 2015 (India).
  22. Companies Act, 2013,� 442, No. 18, Acts of Parliament, 2013 (India).
  23. The Code of Civil Procedure, 1908, � 89, No. 5, Acts of Parliament, 1908 (India).
  24. MR Krishna Murthi v. New India Assurance Co. Ltd., 2019 SCC OnLine SC 315.
  25. Parvinder Singh v. Intec Capital Ltd. and Another., 2019 SCC OnLine NCLAT 1365.
  26. Satyendra Wankhade, Mediation Act, 2023 receives assent of President of India, BAR AND BENCH.

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