The Insolvency and Bankruptcy Board of India (‘IBBI’) has recently come up with a proposal for the parties involved in an operational creditor application to explore mediation under the provisions of the Mediation Act, 2023. This is aimed as a precursor to the filing of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘Code’).
This is indeed a welcome move aligned with the scheme that governs commercial disputes, i.e., pre-suit mediation with just the difference being, mediation proposed under the Code is voluntary, whereas it is mandatory under Commercial Courts Act, 2015.
The proposal to mediate over operational debts was suggested by the Expert Committee on the ‘Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016’ in the background of statistical data as of 30 April 2024 which demonstrated that out of 21,466 cases filed under Section 9 of the Code only 3818 cases were admitted. As per the draft regulations, the proposal to mediate is restricted to disputes of commercial nature. Therefore, any operational debts that are not of commercial vintage are not to be considered for such pre-institutional mediation.
One key consideration that moved the suggestion was that the operational creditor(s) were more interested to receive payments. Of course, a question arises as to whether this proposal goes contrary to the settled view that the Code cannot be used as a tool of recovery, rather, it contemplates a revival mechanism that resuscitates a corporate debtor. It is also proposed by the IBBI that in case of failure of mediation, the mediator will prepare a non-settlement report which shall be annexed with the application for initiation of insolvency resolution process under the Code. This proposal aims to reduce the burden on the Adjudicating Authority and thereby expediting admissions since the non-settlement report would also capture any admission or dispute of debts as claimed by the operational creditor.
The mediation process under the Mediation Act, 2023 offers strategic advantages as a mediated settlement agreement is binding on the parties and has the effect of a court decree and can be enforced. It is also necessary to be mindful of the fact that the mediation process under the Mediation Act, 2023 is to be completed within a period of 120 days.
The ground reality remains that de hors the proposed amendment, efforts to settle disputes are explored even after the filing of operational creditor applications. Hence, making pre-institutional mediation a mandate could add to the overall costs.
However, considering that the proposed regulation as released intends for the process to be voluntary, rather than a compulsory pre-condition to the filing of an operational creditor application, taking up mediation is to be weighed on a case-to-case basis. It is expected that a positive outcome of the process could reduce the caseload, and result in an amicable resolution.
[The authors are Executive Partner, Associate Partner and Principal Associate, respectively, in the Commercial Litigation Team at Lakshmikumaran & Sridharan Attorneys, Chennai]
