Insolvency claims: Pre-NCLT mediation needs a mindset shift in its favour

This proposal has come in the light of a record increase in the number of insolvency applications filed by operational creditors, which are often based on disagreements regarding the quality of goods and services provided, contractual disputes based on non-compliance of contractual terms, and claims of non-payment/underpayment of contractual dues.

Insolvency applications by operational creditors are often filed to exert pressure on the corporate debtor to settle outstanding dues, and most do not even reach the stage of admission—since operational creditors do not have a genuine interest in the resolution of the corporate debtor.

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By adding a stage for voluntary mediation, the IBBI hopes to bring about a significant reduction in the existing burden on the principal and regional benches of the National Company Law Tribunal (NCLT), which is the designated adjudicating authority for all claims under India’s Insolvency and Bankruptcy Code (IBC).

According to existing data, of the 21,466 applications filed before NCLTs by operational creditors, only 3,818 cases were admitted for corporate resolution under the IBC, while most of such applications came to be settled at the pre-admission stage itself.

The addition of the stage for voluntary mediation, under the provisions of the Mediation Act, will help parties reach a mediated settlement—and reduce the existing burden on NCLTs of insolvency applications.

The IBBI’s proposal has been received positively by industry stakeholders, who believe that mediation presents a sustainable—and party-centric—solution to the reduction of pendency before the NCLTs.

However, while the proposal might appear promising and appealing on paper, its actual success will depend on the robustness of the mediation ecosystem in India—and on parties approaching mediation proceedings with a view to secure an amicable settlement.

With the advent of the Mediation Act in 2023, mediation has emerged as a viable mechanism for parties to resolve their disputes out of court before a neutral third-party mediator. But mediation in India still remains at a nascent stage, with few qualified mediators who are trained to resolve a range of complex civil, commercial and personal disputes.

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Moreover, parties are reluctant to resort to out-of-court settlement mechanisms like mediation, and often prefer litigation in order to exert pressure on the other side—which raises credible doubts about how effective a proposal for voluntary mediation can be in reducing pendency before NCLTs.

In fact, similar proposals to reduce pendency in cases of bounced cheques and commercial disputes through mediation have yielded unsatisfactory outcomes—simply because the parties did not trust the mediation process and failed to even attend the proceedings.

For instance, under the Commercial Courts Act, where Section 12-A provides for a mandatory mediation stage before the institution of a fresh commercial suit, most settlement attempts fail to even take off from the ground—and the mediation proceedings are brought to a premature close through a non-starter report.

A 2023 study of two district-level commercial courts in Mumbai found that over 96% of mediation cases under the Commercial Courts Act were non-starters; i.e., where one or both parties did not even appear before the mediator to attempt an amicable settlement.

Similarly, more than 80% of the cases referred for mediation before the Karnataka Mediation Centre between July 2018 to March 2021 produced a non-starter report, without any attempt by the parties to find a solution. More concerningly, the parties only achieved a successful settlement in less than 2% of all cases.

The IBBI’s proposal to introduce voluntary mediation, while novel and well-intentioned, may not have its desired effect without a radical mindset shift in favour of mediation.

For mediation to have a meaningful impact in reducing pendency, parties must be counselled to approach mediation proceedings earnestly.

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If parties are advised to attend these proceedings in good faith, and make sincere efforts towards reaching a mutually beneficial settlement (instead of focusing on their own commercial interests), they could truly harness the potential offered by mediation in providing parties with an effective alternative to court-based litigation.

The author is a lawyer at the Karnataka high court