Promoter-investor disputes may be solved by mediation

By Ekta Bahl, Samvad Partners
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Startups, early-stage and even growth-stage companies seek investors with capital, experience and connections to help fuel their business, while investors hope for an exit with fabulous returns. Private equity funds have a finite life so time is of the essence for their exit, and problems or delays can result in conflicts. The past couple of years have seen a rise in the number of disputes between investors and promoters that are finding their way to arbitration and to courts.

Ekta Bahl
Partner
Samvad Partners

Although most transaction documents specify arbitration as the preferred mode of dispute resolution, disputing parties sometimes approach the National Company Law Tribunal (NCLT) or courts. The dispute resolution process can take years and often results in erosion of value. Negotiation to facilitate a speedy settlement is not effective when there is a breakdown in communication between disputing parties or when they mistrust each other. Mediation can be considered in such situations, since it involves a neutral third party who could help facilitate a settlement.

Worldwide statistics show that most matters that have been referred for mediation are settled. The Centre for Effective Dispute Resolution has reported a settlement rate of 70-80% and the Singapore Mediation Centre also has a settlement rate of about 75%. The Financial Industry Regulatory Authority, a self-regulatory body in the US, has reported settlement rates of 73-85% and turnaround of 109-135 days over the past three years. In India, the Bangalore Mediation Centre has reported a success rate of about 65% with 146 minutes of time spent per case.

Mediation is promoted by legislation in several countries and is mandatory in some, such as Italy and Singapore. In India section 442 of the Companies Act, 2013, enabled resolution of disputes pending before the NCLT and the National Company Law Appellate Tribunal by way of mediation, and eligible mediators were empanelled under the Companies (Mediation and Conciliation) Rules, 2016. A recent amendment to the Commercial Courts Act, 2015, made it mandatory for parties engaged in a commercial dispute to seek mediation and settlement before instituting a suit, unless urgent interim relief is sought.

While time and cost are obvious advantages of mediation, other advantages are:

Confidentiality: A mediator cannot be called to testify in court and parties cannot use what they learn in mediation in court.

Voluntary: A party can quit the mediation process at will. Settlements require the free consent of all the disputing parties and are on terms that are acceptable to all.

Control: The parties choose the mediator, venue, duration, amount of information to share or to withhold, and whether to have joint sessions or only individual sessions. Mediation can proceed parallel to an adjudicatory form of dispute resolution, such as arbitration.

Flexibility of outcomes: The parties are free to explore creative solutions to their disputes, including exit strategies that have not been documented in the transaction documents.

Identification of issues: The mediation process requires each of the parties to assess the strength of their case as well as the best, worst and most likely alternative to a negotiated agreement. This helps in identifying possible grounds for settlement and streamlining dispute resolution strategy in the event no settlement takes place.

Finality: Since mediation is a voluntary and consensual process, the risk of appeal of a settlement is negligible. Further, if the settlement is through court-annexed mediation or by way of a conciliation order under the Arbitration and Conciliation Act, 1996, the settlement is enforceable as a judgment or award. Most court-annexed mediation centres provide a refund of all or part of the court fees in the event of a settlement.

Mediation, also has disadvantages:

Not fit for all disputes: While some matters cannot be mediated by law, mediation may also not be appropriate if the parties are looking for a specific solution or interim relief and there is no room for negotiation.

Outcome not assured: A settlement is not guaranteed.

Time and cost: If there is no settlement, the parties incur additional cost and spend more time spent on the dispute.

Enforceability: If the mediation settlement is not recorded through a court or an arbitrator or conciliator, any breach of its terms could reopen the entire dispute.

While the quick resolution of any dispute is desirable, a dispute resolution strategy needs to factor in all the facts, circumstances, risks and consequences that have a bearing on the dispute and the possible outcome. The advantages and the disadvantages of mediation need to be carefully considered before parties make the choice.

Ekta Bahl is a partner at the Hyderabad office of Samvad Partners.

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