Home India An overview of mediation and its future in insolvency proceedings

An overview of mediation and its future in insolvency proceedings

October 9, 2021

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This article is written by Aditi Aggarwal, from Symbiosis Law School, Noida. This article gives an overview of mediation as an ADR mechanism. Further, the future of mediation in insolvency proceedings has been discussed along with some pertinent case laws.

Table of Contents

Introduction

India is witnessing a new trend, where parties are resorting to Alternative Dispute Resolution methods and trying to make out-of-court settlements. This method of resolution not only saves time but is economically viable too. One of such methods is ‘Mediation’.

When it comes to Insolvency proceedings in India, the Insolvency and Bankruptcy Code of 2016 governs them. Since the Code’s inception, it has been effective in recovering money. The fundamental goal of the Code was to reorganize and rehabilitate businesses while also balancing creditors’ rights, however, it has not been accomplished in its true spirit, as the Code is still being exploited as a debt recovery tool. To solve this problem, a proposed solution can be solving such disputes through mediation.

What is mediation and which laws mention it

Mediation is a non-binding dispute resolution method (as the decision-making power remains with the parties) through which a third neutral party (known as ‘mediator’) tries to resolve the dispute between the parties and attempts to reach a mutually acceptable and amicable agreement. The mediator tries to do so through negotiation and communication with each party individually.

In India, this method has not just gained statutory place under many laws but has also been recognized in various judgments by the Indian judiciary. The laws under which it is mentioned are as follows:

The Code of Civil Procedure, 1908

With an Amendment in the year 2002, Section 89 was brought under the Code of Civil Procedure, 1908.

According to this subsection(1) of this Section, the court can formulate and give settlement terms to the parties for observation, if according to the court, there are existing elements of a settlement that may be accepted by the parties. After the parties have given their observations to the Court, the Court may then formulate the possible settlement terms again and further, refer the terms to for mediation or any other ADR method.
According to subsection 2(d), the Court has to give effect to the compromise that the parties reached by following the prescribed procedure.

The Micro, Small and Medium Enterprises (MSME) Development Act, 2006

The Micro, Small, and Medium Enterprises (MSME) Development Act (2006) came into force intending to address policy issues that affect MSMEs along with investment and coverage ceilings under the sector.

Section 18 of the Act provides an introduction to the interplay between the Arbitration and Conciliation Act, 1940 the MSMED Act.

As per section 18(1) of the MSMED Act, In the event of payment default, any party may submit the matter to the Micro and Small Enterprise Facilitation Council.
Section 18(2) of the Act establishes a conciliation process that the Council may undertake itself or refer to any institution that provides alternative dispute resolution. The Act does not allow for a distinct way of conducting conciliation, and the requirements of Sections 65 to 81 of the Arbitration Act are to apply to the dispute under this subsection.
As per subsection(3) of section 18, when a dispute cannot be resolved by conciliation, the Council shall either arbitrate the issue directly or submit it to an institution for arbitration.

Among the corporate world and especially among the SMEs (small and medium enterprises), the Insolvency and Bankruptcy Code has created a fear of prosecution even though the recovery rate of insolvency proceedings is high.

Real Estate (Regulation and Development) Act, 2016

This Act aims to promote the real estate sector and ensure the sale of an apartment, plot, or building or of a project relating to real estate transparently and efficiently by establishing a Regulatory Authority. Section 32(g) of the Act allows for the peaceful resolution of issues between promoters and allottees via the use of a dispute resolution forum established by organizations.

The Industrial Disputes Act, 1947

This Act came into force to investigate and settle industrial disputes along with some other purposes. The Act appoints conciliators to arbitrate the settlement of industrial disputes according to established procedures under Section 4. Further, Section 12 provides the duties of conciliation officers.

The Companies Act, 2013

Read with Companies (Mediation and Conciliation) Rules, 2016, the Companies Act, 2013 under Section 442 gives the authority to the Central Government for setting up an expert panel to solve the dispute of the parties through mediation.

The goal of the section is to reduce the burden of the National Company Law Tribunal and National Company Law Appellate Tribunal by providing the parties to dispute with an alternative to address their issues while their dispute is pending.

Recent Amendments

The Commercial Courts, Commercial Division and Commercial Appellate Division of High Court (Amendment) Ordinance, 2018

Through this Amendment, a new provision relating to mediation was inserted through Section 12-A. According to this Section, a suit relating to any commercial dispute cannot be filed under the Act (unless it is any urgent interim relief) before first utilizing the remedy of pre-institution mediation, following procedure and manner prescribed by the rules of the Central Government.

Consumer Protection Act

The recent Amendment in the Consumer Protection Act 2019 provides for the initial reference of disputes to the consumer mediation cell for mediation. The State government has been given authority under Section 74 of the Act to create a consumer mediation cell to be connected to each district and state commission in that state. According to Section 37(2) of the Act, if the parties agree to settle by mediation and give their approval in writing, the District Commission will submit the issue to mediation within five days of obtaining consent, and the provisions of Chapter V, which deal with mediation, shall apply.

United Nations Convention on Mediation

India is a signatory to the Singapore Convention (United Nations Convention on Mediation), as far as international conflicts are concerned. The convention encourages the settlement of disputes through mediation under various Indian laws.

Singapore’s government proposed mediation in 2017, especially in insolvency situations. The responsible committee recommended that mediation centres be used and that the panels of these centres be enhanced to include mediators with experience in cross-border restructuring.

The SIMC COVID-19 Protocol, which offers companies an efficient option through accelerated mediation for conflict resolution, was recently established by the Singapore International Mediation Centre, keeping in mind the importance of mediation in the coming time.

In similar lines to the Singapore project, the Georgian International Arbitration Centre launched a project with the assistance of the European Union and United Nations Development Programme. The project allows the parties to either refer to their mediation or facilitation for the resolution of a dispute.

How mediation differs from other ADR methods

There are many modes of Alternative Disputes Resolution (ADR): mediation, arbitration, negotiation, etc. Mediation is different from other ADR methods in the following ways:

A mediator cannot give orders to the parties

The mediator, who is not a party to the dispute, provides his or her services to settle the dispute and participates actively in the ongoing discussions to resolve the differences and conflicts.

The purpose of the mediator, according to Article 4 of the Hague Convention for the Peaceful Settlement of Disputes of 1899, is to bring coordination to mutually opposed claims and solve the parties’ issues by pacifying the parties’ feelings of wrath and resistance.

But it is to be noted that a mediator cannot force the solution upon the parties or order them to reach a settlement. That choice is up to the parties and a mediator can only help in reaching a settlement. The moment he does so, his role ends there.

Mediation is a less formal method

This method is quite informal and flexible as it is not officially organized and recognized. No counsels are needed and the parties do not have to follow any formal rules relating to evidence or formalities like presenting witnesses.

Some laws mandate resolution through mediation before filing a suit

As discussed above, meditation has been a part of many statutory provisions, which shows that it is not a new concept. In fact, some statutes provide for mediation as a prerequisite to filing a suit in a Court of law.

Importance of mediation as an ADR mechanism, especially in view of insolvency proceedings

Mediation offers the flexibility to parties to come up with fresh solutions

Mediation encourages “party-driven solutions” by allowing the parties to reach an agreement via persuasion. The procedural and substantive norms of conflict settlement are left to the parties to decide. It can then assist the parties in reaching an arrangement that benefits both of them in some way, rather than pursuing the traditional route of dismantling assets and reorganizing business interests.

No party loses or wins

During mediation, both parties try to reduce their short-term expectations to a certain extent. Further, negotiations supervised by a mediator help the parties to reach a mutual decision without any legal foundation. Thus, it can be said that mediation increases the chances of a win-win situation, where no party wins or loses individually.

Boosts the alliance between the parties for future business models

Since the process of mediation requires only a mediator and the two concerned parties, the procedure remains a private affair. It helps in avoiding any unnecessary publicity regarding the dispute. In addition to this, it also helps in keeping commercial secrets of business secure along with other important information.

Lowering the burden of NCLT

Under normal conditions, an entire process of corporate insolvency should take not more than two hundred and 270 days in total. The difficulty is always faced in the timely completion of the CIRP (Corporate Insolvency Resolution Process) deadline. Due to the massive backlog of cases that the National Company Law Tribunal is overburdened with, the pendency in most instances surpasses a year. Determining whether to implement a resolution plan to liquidate the firm takes time as well.

In the event of insolvency, the initial attempt should always be undertaken to make recovery, especially if the insolvency occurred owing to current market circumstances. Even if the insolvency was caused by poor management, an attempt at recovery should be undertaken by making management changes.

The Supreme Court has, in many judgments, reminded businesses of the actual purpose of the Insolvency & Bankruptcy Code (IBC), which is not intended to be used only for debt recovery. The only approach to achieve the stated goal and reduce NCLT’s burden is to include ‘mediation’ in the settlement process.

Economically viable method for both the parties at dispute

During court proceedings, the professionals who are appointed under the statute must be paid more as the proceedings progress, causing the entire process to become costly.

Mediation, on the other hand, as a means of conflict resolution, has the potential to have a substantial influence on the entire economic system. In a socio-economic sense, preventing a company from going bankrupt when it is experiencing financial difficulties would allow employees to remain employed, all available resources to be efficiently utilised, and relationships, such as those with small suppliers of goods and buyers/customers of products and services, to be preserved.

In larger insolvency cases, mediation may speed up the process along with cost-effectiveness, because of which more money may be saved which can be utilised in satisfying the creditors. Thus, mediation is the best-suited option in a country like India which has a high population and where wealth is unequally distributed.

The Jaypee Infratech case (2020) led to the real estate market’s collapse in India. If it was resolved through mediation, many issues could have been settled between the homeowners and the financial creditors.

Brings Uniformity in Cross Border Disputes

Different jurisdictions may handle legal matters differently as a result of cross-border conflicts. It is feasible for parties to discuss and use a uniform settlement process through mediation.

For example, Jet Airways, one of the country’s largest airlines, ceased operations in 2019 due to a lack of further cash/loan funding. A consortium of lenders led by the State Bank of India (SBI) attempted to revive the airlines by implementing a resolution plan. None of these strategies worked, therefore the lenders, led by SBI, filed insolvency proceedings against Jet Airways by approaching the National Company Law Tribunal (NCLT).

While SBI began the proceedings in India, the Dutch Insolvency Court Administrator initiated a parallel proceeding for the sale of one of SBI’s confiscated planes. NCLT was approached by the aforementioned administrator. It committed not to sell the asset that has been seized.

It is possible that had the matter been mediated, Jet Airways would not have had to face such a situation.

Many companies, partnership firms, and corporations realize the benefits of mediation. Due to this realization, many of them have started to include ‘compulsory mediation’ clauses in case of any disagreement or dispute between parties. However, mediation is still not a popular choice.

How can mediation reconcile the interests of all the creditors in insolvency proceedings?

A very unique feature of mediation is that it requires minimal participation, which further means that not all the creditors need to be a part of the dispute resolution. Only the principal creditors and the debtor can be a part of the resolution.

When a debtor and certain creditors reach an agreement, the other creditors are unable to contest the arrangement and must abide by it. If the court does not confirm the peaceful settlement that ends the issue, it does not affect creditors who are not participants in the agreement. This situation is known as ‘cramdown’.

Case laws

V.K. Parvinder Singh v. Intec Capital Ltd. & Anr (2019)

In the case of V.K. Parvinder Singh v. Intec Capital Ltd. (2019), an authorized representative of the promoters filed an Appeal against the admission order passed by the Adjudicating Authority. Before the formation of the Committee of Creditors, they also indicated their readiness to settle the claims of the Financial Creditors.

The Appellate Tribunal chose a retired Judge to begin the mediation procedures between the parties since the parties, in this case, consented to it. Finally, the case was concluded through mediation, and the Appellate Tribunal was presented with the report. The order of the adjudicating authority was set aside by the Hon’ble Appellate Tribunal and held that the settlement terms should be treated as the Appellate Tribunal’s directions and order.

The 2008’s Lehman Brothers case

Lehman Brothers Holdings Inc., a firm dealing in financial services globally, was founded in 1847 and filed for bankruptcy in the year 2008. One of the arms of Lehman Brothers dealt in derivatives. The arm was a counterparty to at least 1.2 million derivative transactions with over 6,500 different parties.

Concerning the insolvency proceedings, an order mandating mediation for the disputes relating to the derivative contract was ordered by the court. After which, from about $9 billion outstanding claims, $333 million have been brought by 110 mediations brought for the estate of Lehman Brothers.

Thompson v. Greyhound Lines, Inc. (2013)

A company, Greyhound Lines Inc. in the USA faced insolvency in 2013. Because of this, property damage and personal injury claims were brought by thousands of claimants who suffered due to traffic accidents involving the vehicles of Greyhound. For resolution, the company set up a pre-reorganization Mediation plan and dealt with each of the creditors individually.

The process comprised of three stages, wherein the first stage was able to resolve half of the claims, The three stages are discussed as follows:

Stage 1 (the ‘offer and exchange stage’): The creditor had to fill out a claim form for lost earnings, medical costs, and other losses.
Stage 2: Negotiation of damages was done by the parties in this stage. The parties engaged in mediation for 60 days, if the parties could not reach a decision or if the participation in this stage was declined by the creditor.
Stage 3: This stage was the final stage; if the final agreement was not reached by the parties in this stage, they would have had to go for arbitration.

This case is an excellent example of how mediation could result in a win-win scenario by reducing litigation expenses and balancing the parties’ interests by resolving the dispute peacefully.

Position of other countries concerning the use of mediation in insolvency proceedings

Many countries like the USA, Netherlands, Hong Kong, Singapore, etc. have tried to inculcate dispute resolution through mediation in some bankruptcy cases. Out of these countries, one of the first countries to adopt it is the Netherlands.

USA

The USA uses mediation frequently and court-ordered mediation has proved to be very successful in cases like Lehman Brothers, Enron, etc. The concept was introduced in the country in 1986.

The country saw increased use of ADR (mediation) in cases of insolvency in the year 1998 when the Alternative Dispute Resolution Act was adopted. According to the Act, civil actions (including bankruptcy disputes) need to be authorized by all the federal district courts.

The Bankruptcy Court for the District of Delaware ruled in 2004 that parties must seek to achieve an agreement through mediation before engaging in certain adversary actions. As a result, from 2000 to 2011, ADR was utilized in 60% of reorganization cases in the country.

European Union

ADR in the European Union (EU) took time to be accepted and emerged from the legislation. Many member states of the EU have brought in methods aiming at the pre-insolvency resolution of disputes. The methods’ main aim is to rescue the debtor.

For instance:

Under the French insolvency law, two procedures, conciliation and the ad hoc mandate are provided.
The procedure provided under the German insolvency law allows creditors and the debtor to negotiate an insolvency plan.
In Italy, the insolvency system provides several options for businesses in financial distress to restructure their debt, all of which are handled outside of court (partially or entirely).

Report of the working group on individual insolvency

In August 2017, a report on individual insolvency was published by the Insolvency and Bankruptcy Board of India (IBBI) and gave certain observations and recommendations with respect to the Insolvency and Bankruptcy Code, 2016, specifically part III, some of which are discussed as follows:

India currently lacks extensive expertise in dealing with individual insolvency and bankruptcy systematically. In this regard, the RWG (Report of Working Group) anticipated challenges in implementing efficient individual insolvency resolution and observed that mediation and counselling would be appropriate additional tools to the structure of individual insolvency in the Code.
Some legal modifications are necessary to include a mediation and counselling mechanism in the Code. However, it is first necessary to research to determine all necessary amendments to the Code to operationalize mediation and counselling within the present legal framework. For a better understanding, mediation and counselling mechanisms in other developed jurisdictions such as the United Kingdom, the United States, Singapore, Hong Kong, Australia, South Korea, and the Philippines can be researched.
Recommended establishing a complete framework for individual insolvency and bankruptcy mediation and counselling, as well as making necessary amendments to the Code to assist individual insolvency and bankruptcy after proper research.

Suggestions and the way ahead

Responsibility of the Bar and Bench

For mediation to emerge as a mechanism resolution, particularly in insolvency proceedings, it is the responsibility of the Bar and Bench to create a strategy for it. Such a strategy can include following a formal insolvency process along with mediation which would help enable resolution across borders, cultures, and jurisdictions feasibly. More awareness can be brought about this form of the mechanism by talking about it in corporate judgments and opinions of the judges.

E-mediation

At a time when the whole world is facing the COVID-19 pandemic, e-mediation can be the way to resolve corporate disputes. This way would help in having a quick resolution of disputes and might save a company’s life.

Even in the post-COVID-19 pandemic scenario, this approach might be beneficial in addressing the problem of debt overhang, particularly individual financial suffering brought on by the crisis. Seeking the rapid advancement of technology and present-day problems, E-Mediation has the potential to grow rapidly in the near future.

In many courts, some type of mediation of business disputes is offered for parties to consider while they await trial, and it’s long been used by those who grew impatient. As cases have dragged on during the pandemic, it’s become a lot more popular. As the hearing of many business disputes remained pending during COVID-19 and even the IBC in India was suspended for some time, it has become a popular mechanism in itself.

Conclusion

In November 2019, while giving an interview to Economic Times, the Former CJI Hon’ble Mr Justice S. A. Bobde rightly highlighted how mediation is one of the important ADR mechanisms. He also observed that pre-litigation mediation could be mandated as far as commercial matters are concerned. Mediation can indeed become the future of resolving insolvency proceedings, provided people become more aware of it and its advantages over other dispute resolution methods like litigation or arbitration, and required frameworks are brought into place.

Of course, mediation is not the one-stop solution for resolving all the insolvency disputes, but through it, a company’s value can be preserved if both parties involved in the process try adopting a settlement-oriented approach.

References

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