The present Insolvency law regime in India has proved to be pathbreaking legislation for the resolution of corporate distress. The Insolvency and Bankruptcy Code (IBC) is the only economic legislation providing a one-stop remedy for the initiation of insolvency proceedings against a corporate debtor. The Reserve Bank of India in its report highly acclaims IBC as one of the most widely adopted procedures for recovery of corporate distress. With the enactment of IBC, the issue of rising Non-performing Assets started to decline. But the total Non-performing Assets of the private sector bank remained a concern. Before the enactment of IBC, many legislations had overlapping jurisdictions causing a delay in adjudication. With the enactment of IBC, the issue of multiplicity of proceedings was resolved as the judicial forum under the Code was NCLT which was empowered to adjudicate matters under the Companies Act as well as IBC. Since IBC, the NCLT’s are the authorities entrusted with the responsibility to decide on matters concerning insolvency and liquidation. But the NCLT’s were overburdened since its inception as all the matters of the Company Law Board was transferred to NCLT on its enactment. The NCLT’s have played a dual role in discharging duties under both the Companies Act and IBC. Due to pendency of work and upcoming fresh mattes the NCLT’s efficiency in resolving insolvency proceeding declined to result in denial of the objectives of the Code.
The issue which arises from the present scenario is; how to reduce the burden of the NCLT’s in order to achieve the objectives of the Code? Comparing the Insolvency regime of India with that of other jurisdictions, bankruptcy/insolvency mediations as an alternative dispute redressal is a suitable mechanism to resolve insolvency disputes. Ever since insolvency laws were enacted worldwide in respective jurisdictions, Courts were only given power to adjudicate the matter as it involved huge sum of corporate money which had to be distributed fairly and a prompt liquidation proceeding for insolvent entities. However, this arrangement has taken a back seat since insolvency disputes were amicably resolved with alternative dispute resolution mechanism such as mediation.[1]
Rehabilitation and revival of a debt ridden company is the paramount objective of all insolvency regimes globally irrespective of whether insolvency occurred due to change in market dynamics or operational mismanagement of the corporate debtor. Jurisdiction worldwide have faced the issue of delay in adjudication of insolvency proceedings because the judicial forums have been overburdened with pending cases. Therefore countries like USA, Singapore, Hong Kong and member states of the European Union have resorted to dispose off the matter with the aid of mediation.
USA has been of the countries which have been resolving insolvency disputes effectively. Insolvency mediation is widely used in the state as an out-of-court dispute resolution and have been successful in cases of Lehman brothers and Enron. Insolvency mediation was first adopted in USA in the case of Greyhound Lines Inc. where the corporate debtor went bankrupt with claims from multiple creditors. The court ordered for a pre-insolvency mediation to balance the interest of all stakeholders of the debtor. The arrangement proved to be successful for both the creditors and debtor as it resolved the dispute amicably with low cost. After the triumph in Greyhound case, the legislators decided to adopt Alternative dispute redressal mechanisms for bankruptcy proceedings. In 2004, the Courts in America while adjudicating matters on insolvency held that the parties should attempt to resolve the dispute through mediation before commencing any adverse proceedings. Presently, more than half of the cases filed for insolvency/reorganization are resolved by mediation or other modes of alternative dispute resolution.[2]
Mediation in insolvency matters became prevalent in European countries after legislations were enacted to resolve insolvency proceedings through an out-of-court mechanism. European Union states have a well-built concept of pre-pack insolvency which enables the creditor and the debtor to make a restructuring plan before commencing any legal proceedings and the same is negotiated upon and then finally submitted to the court for approval. Countries like France, Germany and Italy provide for adopting one of the ADR methods to reorganize and restructure the distressed corporate debtor.
Even though mediation in insolvency proceedings have been successful across many countries India still has not chosen to adapt to ADR methods to settle a corporate resolution process. Mediation has been an alternative to court proceedings in matters concerning family disputes and property disputes. ADR mechanisms is a voluntary process to settle a legal dispute with the help of a neutral third party without any interference by the court by going into merits of the case. The most lucrative aspect of resolving a dispute through any of the ADR mechanisms is that both the parties are at a win-win situation. Especially in Mediation the parties themselves bring settlement options to the table and the mediator only facilitates the process. It compels the parties to bargain each settlement option and form amicable terms of settlement. For long there was a dilemma as to how mediations can be applied to insolvency proceedings as there are multiple parties involved each wanting to secure its payment. Generally mediation in insolvency cases is resolved between debtors and creditors who had initiated insolvency proceeding. The debtor then resolves disputes on claims individually(similar in case of Greyhound) with each stakeholder or with a class of stakeholder.
The Indian Insolvency regime does not prescribe for dispute to be resolved through mediation. India is among many countries who is facing delay in adjudication of insolvency proceedings. But unlike other countries has not adapted to transform its regime to promote resolution of corporate insolvency disputes through mediation. Supreme Court recently in the Ayodhya dispute recommended parties to mediate first. Similarly when homebuyers association filed insolvency proceedings against Jaypee group the Court could have ordered for a pre-insolvency mediation as there were lot of homebuyers who not only aimed to recover their money but to get possession of their flats. But due to lack of any provision stipulating insolvency mediation the creditors ultimately resort to formal court proceedings.[3] Insolvency mediation can be a gamechanger in India with large population as a cost effective process to resolve a dispute. As mediation is a voluntary process, the parties can negotiate to bring their own settlement clauses. Inspite of such advantages litigation is still a preferred choice for insolvency cases. However, in USA insolvency mediation is a preferred choice over court proceedings as there have been many successful cases of settlement of insolvency dispute through mediation. It is now time for India to adopt to mediation in insolvency cases as a viable out-of-court restructuring mechanism. As NCLT’s, High Courts and Supreme Courts are burdened with IBC cases, the legislative wing of the government might consider enacting draft legislation for resolving disputes arising under the IBC through mediation. In order to revive life of a debt ridden company when NCLT’s are so burdened with backlog of cases, mediation can be a cost effective and efficient method to resolve the problem of debt-overhang. [4]
END-NOTE
[1] Rajiv Mani, ‘Mediation in Insolvency Matters, Insolvency and Bankruptcy Regime in India A Narrative (2020) Insolvency and Bankruptcy Board of India articles 6/2020 <https://ibbi.gov.in/uploads/resources/1acc8439aab101c013221a481fe108a6.pdf> accessed 5 December 2020.
[2] Ibid.
[3] Justice A.K. Sikri, Anuroop Omkar, ‘Mediation In Corporate Insolvency: A Game Changer’ Business World, (Delhi, 14 June 2019) <http://www.businessworld.in/article/Mediation-In-Corporate-Insolvency-A-Game-Changer/14-06-2019-171872/> .
[4] Supra.
Author: Moulshri Shrivastava, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at moulshri@samistilegal.in
