Scope of mediation in insolvency proceedings

Mediation and insolvency not being one of the most common combinations we need to understand each of them in its own light. Mediation is yet another means through which a third person called the mediator tries to resolve the dispute between the involved parties. Under the mediation, the mediator, which is not a part of the dispute, not only offers its services to settle the dispute but also plays an active role in the talks carried on for resolving the differences and disputes. According to Article 4 of the Hague Convention for the pacific settlement of the disputes of the year 1899, the function of the mediator is to bring coordination in the mutually opposed claims and solve the problems of the parties by pacifying the feeling of anger and opposition prevailing amongst them.

 Mediation although maybe used interchangeably with arbitration and other resolution methods it differs in many ways. Firstly unlike arbitration, the mediation process does not put the mediator in the position where it can give orders to the parties and secondly it is comparatively less formal than traditional court systems and arbitration. To introduce the idea of mediation in legal avenues is not a new concept as mediation has already been part of various statutory provisions. In these places, mediation is termed as a vital prerequisite to the filing of a suit in court. Such as Section 32(g) of Real Estate (Regulation and Development) Act 2016, Section (4) of the Companies Act 2013, Section 4 of the Industrial Dispute Act 1947 etc.

Insolvency Proceedings

On the other hand, Insolvency proceedings in India are administered by the Insolvency and Bankruptcy Code 2016. Since its introduction, it has shown successful results in recovering money. Though its recovery rate is high, it has created a constant fear of persecution among the corporate, especially the small and medium enterprises (SMEs). Under normal circumstances, the time corporate insolvency should take from start to finish is 270 days. However, in most cases, the pendency exceeds more than a year due to the huge backlog of cases that overburdens the National Company Law Tribunal and also the time-consuming process of deciding whether to liquidate the company or to adopt a resolution plan. As of 2020, the time for completion of a process under IBC has hovered around 375 days for resolved cases and 309 days for liquidation cases. These timelines can be reduced further. And while the code was still struggling with its backlogs there struck the COVID-19 pandemic. It posed a new variety of challenges before the code altogether concerning demand and supply chain disruptions and receding sales and revenue caused by the unprecedented lockdown. Further, the Apex court has time and again tried to expand the horizons of bankruptcy code besides debt recovery procedures. All these aspects together call for a way where we can not only suffice the purpose of the code but also settle disputes in a time-effective manner. The suspension of the code for six months extending to another same period gave a tender opportunity to explore new ways of resolution and paved the way for mediation.

Mediation has already made it to history when recently the Supreme court referred the Ayodhya Dispute to mediation. Besides even in 2017 Singapore Government suggested mediation in insolvency cases. The responsible committee suggested the use of Mediation centres and strengthened the panels of these centres to constitute mediators with a background in cross-border restructuring. The 2008’s Lehman Brothers case is another classic example whereby at the end of 2009 eighty five cases were moved to the mediation process out of which 85% of cases touched full settlements. In countries like USA Mediation came into the picture for insolvency matters in 1986 when the Bankruptcy court introduced the mediation program in California. Considering the successful examples of ADR, the ever increasing number of bankruptcy cases, and hefty litigation costs, a legal regulation for Alternate dispute resolution came to be established. A major legislative leap towards the use of ADR in insolvency cases was the adoption of the Alternative Dispute Resolution Act in 1998, which required that each federal district court authorise ADR in ‘all civil actions, including adversary proceedings in bankruptcy. [i]Not so far, even in India the National Company Law Appellate Tribunal ordered both the parties in V.K. Parvinder Singh v. Intec Capital Ltd. & Anr.[ii] on the request of the learned counsel for the Respondent to appear before the Mediator Hon’ble Mr Justice (Retd.) A.K. Sikri, Former Judge of the Hon’ble Supreme Court.

A large number of pending insolvency cases direct us to adopt a mediation friendly jurisdiction as it will be an instrumental move in reducing the arrears of the party. Mediation must be inculcated as an intrinsic element of the prevailing legal culture so that it is perceived by a party that may be involved in a possible dispute as to the first or the most preferred option. Mediation in that sense must evolve in the long run under the aegis of a regulatory framework that is not necessarily dependent upon Courts or judicial institutions. However, at the present stage, there can be no gainsaying the fact that the Bench and the Bar have to fulfil important responsibilities towards achieving the goal of creating a viable mediation strategy. [iii]

Mediation in Insolvency

Mediation is a wholesome process where both parties can put forward their views without facing the pressure of winning or losing the battle. It allows them to not only resolve their disputes but boosts the alliance between the parties for future business models as well. Decisions reached during the mediation are acceptable since they are not imposed but come out as an agreement which is a consensus with the parties. Mediation holds the capability of providing an economical and expeditious solution to the problem that takes place between the parties. Another characteristic to take into consideration when we discuss mediation in insolvency cases is that, unlike formal proceedings, not all the creditors have to be part of the resolution. This means the meditation requires minimal participants i.e. the debtor and the principal creditors who initiate the proceedings. Taking the example of the USA, where ADR is utilised in three contexts for insolvency disputes. Firstly to resolve disputes and achieve a consensus concerning reorganisation plans. Secondly for single creditor disputes and lastly for multiple-creditor claims of the same nature. This also brings us to a new concept called “cramdown”. However, it must be noted that a cramdown takes place only in court-supervised ADR. It is the judicial power to confirm or go against the choices of certain creditors. Thus, when a debtor agrees with some creditors, the other creditors cannot challenge the agreement and must comply with it. In other words, if the peaceful settlement ending the dispute is not confirmed by the court, it does not have an effect over the creditors who are not parties to the agreement.[iv]

Despite such benefits, the reality of switching disputes towards such resolution methods is a foreign idea in India but now is the time when we should focus on relying on mediation since we cannot afford any more company deadlocks leading to a cripling economy. At the outset of COVID-19 online mediation should be the choice for the purposes of the corporate insolvency resolution process. E-Mediation is being resorted to in many cases. It may be noted that CJI Hon'ble Mr Justice S. A. Bodbe, in an interview with Economic Times in November 2019 has emphasised the importance of Mediation as an ADR mechanism and observed that all (commercial) matters could be made to first go through pre-litigation Mediation[v].

Conclusion

The objectives of The Insolvency and Bankruptcy Code 2016 have been cleared since its inception and for full attainment of these objectives, it shall be very important to adopt a mediation process. Mediation can be no doubt a budding field in a country like India which stands second in the line of massive population and has been facing economical threats due to its uneven wealth distribution. Mediation along with its various online facets will not only prove effective during the pandemic but also in the long run as we face new financial challenges every day. With technology developing at a fast pace, e-Mediation has the potential to pick up shortly. The total product of Mediation and formal insolvency procedure has the potential of ensuring justice in a time bound manner while enabling dispute resolution across borders and jurisdiction.

[i] (Section 654 of the Alternative Dispute Resolution Act of 1998 (28 U.S.C.A).

[ii] Company Appeal (AT) (Insolvency) No. 968 of 2019

[iii] M E D I A T I O N – realizing the potential and designing implementation strategies.- Dr. Justice Dhananjaya Y. Chandrachud Judge High Court at Bombay

[iv] Mediation in Insolvency matters- Rajiv Mani

[v] Ajmer Singh (2019), " Commercial Disputes should go through Mediation first: Bobde", Economic Times, 14 November.