Let’s promote mediation as a way to resolve IBC delays

India’s Insolvency and Bankruptcy Code (IBC), 2016, was designed to focus on addressing stress in chronically sick companies through either resolution or liquidation, as warranted back then by mounting non-performing assets (NPAs) in our banking sector that the prevalent system could not adequately fix. Globally, a mechanism like the IBC’s corporate insolvency resolution process (CIRP) has been a last-resort measure; i.e., once all other alternatives like mediation, settlement and arbitration are exhausted. The IBC law and practice in India over the past 5 years has, however, matured to focus on entire value chains in addressing enterprise sickness and on the resolution of disputes through means other than litigation.

While IBC critics may not be justified in blaming it for delays in resolution and the big haircuts that creditors inevitably suffer, given the chronic sickness of corporate debtors and absence of a market for stressed assets, it is imperative that measures are taken to reduce IBC delays. Longer delays result in larger haircuts, as the value of sick companies tends to diminish at an increasing pace over time. Resolution, and in some cases liquidation, has even taken as long as 450 days under the IBC, as against the mandated period of 180 days (extendible to 270), going by the record of cases till March 2022. As per a study undertaken by the Indian Institute of Insolvency Professionals of ICAI, every CIRP on average takes three litigation suits, involving 113 days and costing about ₹18 lakh. This is an eye-opener. The IBC’s timelines are directory and not mandatory. National Company Law Tribunal (NCLT) benches are bound to adjudicate on every application filed by any stakeholder, even if later found frivolous in nature. Such an adjudication process, coupled with litigation, counter-litigation and multiple appeals, renders IBC timelines meaningless.

The Standing Committee on Finance, in a recent report, noted that our insolvency process has been stymied by long delays far beyond the statutory limits. It recommended that the misuse or abuse of well-intended provisions and processes should be prevented by ensuring an element of finality within the statutorily stipulated period, without protracted litigation.

An increase in NCLT benches by and in itself cannot be a lasting solution, unless the volume of litigation is reduced. The solution thus lies in promoting mediation for out-of-court proceedings, with legislative recognition for speedier dispute resolution. Mediation as an alternative mechanism for this could prove to be a cost-effective option. It being non-adversarial in approach would help in maintaining cordiality in business relationships and save honest entrepreneurs from the stigma of insolvency.

In India, there are no specific provisions for mediation under the IBC. Further, we lack uniform rules of procedure to govern mediation; thus, proceedings take place as per the rules prescribed by each high court. The Companies Act of 2013 and MSME Development Act, 2006, provide for mediation as a means of dispute resolution mechanism. However, these processes are unregulated at the pre-litigation stage, while post-litigation, these cases are governed by the Civil Procedure Code.

The US has been at the forefront of applying mediation at various stages of bankruptcy proceedings—like claims, creditors’ disputes, resolution plans, avoidance transactions and cross-border and group insolvency. Over half the US bankruptcy courts explicitly authorize mediation; it gained momentum in 1998 with the enactment of America’s Alternative Dispute Resolution Act.

International experience suggests that mediation could be used under the IBC, too, to address disputes before and after the CIRP’s commencement, and also covering those related to the verification of claims, assets, third parties, resolution plans, avoidance action and the like.

The Mediation Bill of 2021 is a step in the right direction, as it requires disputants to try and settle civil or commercial disputes through mediation before approaching any court, within a mandated period. Agreements resulting from mediation would be binding and enforceable in the same manner as court judgements. The effectiveness of the proposed framework might, however, be diluted by the fact that unwilling parties are allowed to withdraw from mediation proceedings after communicating as much to the relevant mediator.

For mediation to be effective in cases of insolvency and bankruptcy, moratorium provisions under the country’s IBC that mandate the stalling of ongoing civil legal proceedings until the CIRP’s conclusion need to be modified appropriately. Suitable steps should also be taken to lay down mediation-related provisions that cover the enforceability of mediated settlements and the roles, rights and responsibilities of insolvency professionals, other stakeholders, etc, as such an exercise would grant out-of-court mediation the requisite legal back to ensure discipline and proper enforcement.

Mediation under a formal insolvency resolution process may prove more helpful than a protracted resolution plan aimed at business restructuring (or liquidation). It is now well appreciated that the interests of home-buyers in cases of insolvent housing construction companies would have been better served through mediation. Insolvency is a serious matter, as seen in the case of Lehman Brothers’ collapse that triggered the financial crisis of 2008. Give mediation a fair chance.

Ashok Haldia is former secretary of the Institute of Chartered Accountants of India