New Delhi: India’s bankruptcy regulator and the central government will consider making mediation mandatory between defaulting companies and their creditors before moving proceedings into bankruptcy courts, two persons informed about the development said.
The move is being mulled as policy makers seek to leverage the bankruptcy ecosystem in an optimal way, the two persons said on condition of anonymity. “If mediation is made a compulsory step, admission of bankruptcy cases to tribunals will come down a lot,” one of the two persons cited above said.
Currently, work is underway to offer mediation as a voluntary option for operational creditors like vendors and service providers under bankruptcy rule maker Insolvency and Bankruptcy Board of India’s (IBBI’s) regulations. The IBBI has just completed public consultation on offering the voluntary mediation option to operational creditors before they approach the National Company Law Tribunal (NCLT) against a corporate defaulter.
To be sure, the public consultation was done only to offer mediation to operational creditors, who have historically outnumbered financial creditors in initiating bankruptcy proceedings, even though their numbers have moderated in recent quarters after the government raised the payment default threshold for invoking IBC to ₹1 crore.
Of course, nothing prevents financial creditors, whose dues are typically much bigger than those of operational creditors, from going for mediation. A decision on making mediation mandatory for financial creditors will be made based on the experience gained in the case of operational creditors, the two people cited above said.
As per data from IBBI, 21,466 cases have been filed since 2016 under Section 9 of the Insolvency and Bankruptcy Code (IBC) dealing with bankruptcy filings by operational creditors as of 30 April 2024. Of these, only 17% or 3,818 cases have been admitted in tribunals.
While data is not immediately available on bankruptcy petitions filed by financial creditors, the NCLT has admitted 3,706 cases filed by financial creditors till September-end.
Several such applications are rejected by NCLT benches on grounds such as pre-existing dispute or the default amount being less than ₹1 crore.
Queries emailed to IBBI and to the ministry of corporate affairs on Sunday seeking comment remained unanswered at the time of publishing.
Some experts said that mandatory pre-bankruptcy mediation will be a win-win for both creditors and the companies in distress.
“Mandatory mediation before filing the Section 9 application will significantly increase the number of cases settled before approaching the adjudicating authority, and will have a positive impact on the expeditious disposal of cases that have already been admitted,” said Yogendra Aldak, partner at law firm Lakshmikumaran and Sridharan. The move will also support time-bound resolution of insolvencies and balance the interests of stakeholders, he said.
As insolvency proceedings go to the root of the existence of a debtor company, mandatory mediation will safeguard it from the adverse impact on its status and goodwill, he said. Effective implementation of the Mediation Act of 2023 will also assist in the successful settlement of the dispute before filing a Section 9 application, Aldak added. The Mediation Act was enacted to regulate and promote mediation as an alternative to litigation.
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Some other experts are of the view that compulsory mediation before initiation of insolvency may not be a viable solution, unless the parties involved show genuine willingness to mediate towards a solution.
“Mediation is a step in the right direction to reduce the load of the already overburdened NCLT,” said Prateek Kumar, partner at law firm Khaitan & Co. “However, for it to be successful, there must be a buy in by concerned stakeholders, especially in cases of operational creditor insolvencies, where underling dispute can be the deciding factor for admission or rejection of insolvency.”
Kumar added that conducting a mini trial is often time-consuming and leads to delays. “Mediation can address this issue with the consent of the parties and would be cost effective. An opt-in approach is preferable,” said Kumar. A ‘mini trial’ here refers to the time-consuming process of detailed examination of the existence of debt, its default, as well as the terms of contracts, before a case is admitted by an NCLT bench.
Kumar said there is a vast gap between the population and the available judicial infrastructure in our country. To reduce the number of cases, mediation has been strategically introduced as a part of various statutes.
Compulsory mediation under the Commercial Courts Act, 2015 restricts the filing of suits, where no urgent relief is sought without resorting to pre-litigation mediation.
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For perspective, the Commercial Courts Act deals with commercial disputes and is an example of legislative intent to promote mediation as an alternative to litigation. Creditors, however, tend to invoke IBC given that existing management of the defaulting company could lose control if bankruptcy is admitted.
“While the aim of mediation is to cut down the burden of NCLTs, it will have to be kept in mind that hopefully, this does not lead to opening another stream of litigation involving enforcement of mediated settlement agreements before NCLTs,” said Kumar.
As per public NCLT data, at the end of FY23, 21,205 cases were pending with its benches, including 12,963 IBC cases, 1,181 cases of mergers and amalgamations, and 7,061 other cases.
