Mediation in insolvency cases for a better resolution

By Gautam Khurana, India Law Offices and Sanjeev Ahuja
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The Insolvency and Bankruptcy Code has changed the legal as well as the economic topography of India. This law has changed the way promoters, lenders, debtors, government organizations and other stakeholders look at debt and their responsibility towards managing it. Mindsets have moved from debtors in possession to creditors in control bringing an end to the previous abuse of the system.

Mediation
Gautam Khurana
Managing partner
India Law Offices

Users have tried to hinder the new system but the government’s resolve to make the code a law with teeth has seen amendments such as section 29A quickly enacted.

Assessing IBC’s achievements: The code is doing well but is still far from the solution that it was intended to be. The National Company Law Tribunal is still choked and confusion results from the inconsistency of application of various laws governing companies in the code. An example is the overriding section 238 of the code against the requirement to adhere to all laws under section 30(2)(e).

Mediation as a solution: Mediation techniques are applied consistently during the corporate insolvency resolution process (CIRP). Stakeholders work against the insolvency professional (IP) and the resolution process and resort to time-consuming arguments over the new law and its interpretation. The options available for the IP are to apply to the adjudicating authority at the slightest problem, or to use techniques of mediation and to find solutions that fit the problem.

Mediation
Sanjeev Ahuja
Resolution
professional and mediator

Mediation is a process that should be available to all parties in a resolution process. The code is a new law and will continue to evolve for some time before it matures and the required level of clarity is available. This is an ideal situation for the code to be amended to allow cases to be referred to mediation. Indeed, in the case of Lokhandwala Kataria Construction v Nisus Finance & Investment Managers, the Supreme Court conveyed a message highlighting the need and suitability of appropriate settlements even where CIRP was in progress. The court used its powers under section 142 to approve a settlement between the parties reached after CIRP had started. The advantages of an agreed settlement are obvious, with the parties controlling the process and the mediator facilitating it.

The following are possible stages for mediation:

  • Pre CIRP between the parties in dispute
  • During CIRP where members of the committee of creditors (CoC) may be involved
  • Post CIRP when the plan is being implemented. A mediator may be a member of the monitoring and implementation committee to facilitate the process.

Insolvency resolution processes involve getting in monies owed to the debtor. Mediation can be used in negotiating settlements with debtors. This is quicker and less costly than pursuing debts through the courts. Mediated settlements are more effective in terms of compliance, as resolution is consensual. Mediation also overcomes the problems found in negotiation, where the parties are reluctant to share information and strategy for fear of being exploited.

Insolvency resolution laws in other jurisdictions have incorporated alternative dispute resolution processes. Mediation is being used in Chapter XI bankruptcy resolution processes in the US, while Japan has adopted a special conciliation law for bankruptcy resolution.

Mediation should be a time bound process following the strict timelines for insolvency resolution under the code. Its specific advantage lies in democratising the insolvency resolution process, and in its acknowledgement that it is in the common interests of all stakeholders to work together to rehabilitate the company and work towards the larger aims of resolution.

The code gives extensive powers to the CoC and the government has restated its full confidence in the CoC in the latest amendments giving it a veto over the resolution plans and the amount in distribution. The CoC should take the initiative to use mediation. The IP could also use mediation in dealings with the resolution applicant. In this way the problems in cases like Liberty House v Amtek Auto could be avoided.

Many areas of law already provide for the use of mediation. These include references in statutes such as section 89 of the Code of Civil Procedure, section 12A of the Commercial Courts Act, 2015, section 442 of the Company Act, 2013 and section 32(g)(2) of The Real Estate (Regulation & Development) Act, 2016. Even the Consumer Protection Bill, 2018 provides for mediation cells attached to the District, State and National Commissions.

The future of dispute resolution clearly centres on mediation and arbitration and litigation should be considered only after it has been explored.

Gautam Khurana is the managing partner of India Law Offices and Sanjeev Ahuja is a resolution professional and mediator.

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