The Insolvency and Bankruptcy Code, 2016 (IBC), which offers a time-bound and creditor-driven resolution mechanism, has completely changed the bankruptcy process in India. In this procedure, disagreements between the debtor and the creditor are typically settled through mediation. In the voluntary mediation process, a neutral third party helps the disputing parties negotiate a settlement that will satisfy both parties. In the bankruptcy process, mediation is critical in reaching a quick and efficient agreement on resolving conflicts.

The code has performed well over the last eight years, but the outcomes might be enhanced. There has been discussion over how long a (Corporate Insolvency Resolution Process) CIRP takes to finish. Although the legal maximum for the duration of the corporate insolvency resolution procedure is 180 days (plus an extra 60 days if necessary), it is evident that this has frequently been surpassed because of practical difficulties. However, in March 2020, the average time to finish the IBC procedure was around 375 days for settlement cases and 309 days for clearing cases. It's still possible to shorten these timeframes.

An alternative dispute resolution (ADR) process called mediation can assist in settling disputes between the debtor and the creditor before they become more serious and require legal action. In the collaborative mediation process, the mediator helps the parties identify problems, communicate with each other, and create solutions. Instead of compelling a resolution, the mediator assists the parties in coming to a mutually acceptable agreement.
Maintaining ties between the debtor and the creditor is one of the main advantages of mediation in the bankruptcy process. A lengthy court fight may harm a long-standing commercial relationship between the debtor and the creditor. [1]

Mediation also has the advantage of possibly reducing litigation costs. The bankruptcy procedure is not an exception to the rule that legal conflicts may be costly. By allowing the parties to collaborate with an impartial third-party mediator to quickly and affordably address their differences, mediation can offer a more affordable option than going to court.

Mediation can assist in resolving conflicts about claims, asset assessment, and cash distribution in the context of insolvency. Several parties are involved in the bankruptcy resolution process, including the debtor, operational creditors, and financial creditors. Through mediation, these parties may be able to reach a mutually beneficial agreement and expedite the insolvency process.

If the parties agree to mediate the dispute, the IBC provides for the appointment of a mediator in recognition of the role that mediation plays in the bankruptcy process. According to Section 74[2] of the IBC, the Adjudicating Authority may designate a mediator to assist in mediating disagreements between the parties. The mediation process can continue even after the insolvency procedures have begun, and the mediator can be hired at any time throughout the insolvency process.

The guidelines set out in the Insolvency and Bankruptcy Board of India (Mediation Procedure and Mediators) Regulations, 2019, and the IBC regulate the mediation procedure. The guidelines outline the requirements for mediators' training, eligibility, and appointment process. The guidelines also include how the mediation process should be run, including how the mediator will be involved and how deliberative the proceedings should be.
If the parties settle through mediation, the details of the agreement must be submitted for approval to the adjudicating authority. All parties to the mediation process must abide by the conditions of the settlement agreement, and the adjudicating authority may make an order in compliance with them.

The parties' right to take their disputes to court remains unaffected by the mediation process; if the parties are unable to settle their differences through mediation, the Adjudicating Authority may move on with the insolvency procedure.

What is Mediation?

Mediation, as used in law, is a form of alternative dispute resolution (ADR), a way of resolving disputes between two or more persons by a mediator who helps in solving the dispute.

Mediation offers several benefits, including cost-effectiveness, confidentiality, increased control, high compliance, mutuality, and support. Mediation is provided free of charge, taking less time than standard legal channels, and maintaining confidentiality. It increases the parties' control over the resolution, as courts cannot legally provide solutions that emerge in mediation. Compliance with the mediated agreement is usually high, reducing costs and requiring no lawyer intervention. Parties are typically willing to work mutually towards a resolution, preserving their relationship. Mediators are trained to work with difficult situations and act as neutral facilitators, helping parties think outside the box for possible solutions.

As per the Rajasthan State Legal Service Authority, 549 cases out of 6666 were solved by the mediation process, out of court settlement.[3]

What is the Insolvency and Bankruptcy Code?

The Insolvency and Bankruptcy Code (IBC) was introduced by the Central government in 2016 to address insolvent companies' loan problems and has significantly prevented corporate defaults and changed the debtor-creditor relationship.

The Insolvency and Bankruptcy Law bill was introduced to address the ineffective implementation of previous laws, such as the Securitization and Reconstruction of Financial Assets Act, the Recovery of Debts Due to Banks and Financial Institutions Act, and the Companies Act.

The IBC aims to consolidate and amend insolvency laws in India, simplify proceedings, protect creditors' interests, revive companies, promote entrepreneurship, provide relief to creditors, establish an Insolvency and Bankruptcy Board, and maximize corporate assets' value.

The Insolvency and Bankruptcy Code ecosystem includes the National Company Law Tribunal (NCLT) for companies and limited liability entities and the Debt Recovery Tribunal (DRT) for individuals and partnership firms. The Insolvency and Bankruptcy Board of India (IBBI) promotes transparency and governance, accrediting Insolvency Professionals (IPs) and Information Utilities (IUs). Information Utilities store and authenticate borrowers' financial data, while IPs conduct resolution processes and act as liquidators/bankruptcy trustees.

The Insolvency and Bankruptcy Code (IBC) aims to shift from a 'Debtor in possession' to a 'Creditor in control' regime, consolidating existing laws and amending the Companies Act. It requires a 180-day moratorium for companies and 90 days for startups and small companies, with an independent board and Information Utilities as depository.

The Indian Bankruptcy Code (IBC) has been successful in reducing NPAs in PSU banks, with a 27% growth in gross NPAs compared to the 2016 quarter. The IBC has led to many businesses paying upfront before declaring insolvency, with 4452 cases dismissed at the pre-admission stage. In 2017-18, banks recovered Rs 5.28 lakh crore, with 12 big cases expected to be resolved this year.[4]

Amendments in IBC

• The President has assented to the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 on June 6, 2018. The two key amendments would help both the real estate sector and the MSMEs
   
• Homebuyers are Recognized as Financial Creditors- giving them due representation in the Committee of Creditors (CoC). Thus, now home buyers will be an integral part of the decision-making process.
   
• Special Provisions for MSME- now, the promoters of MSMEs are allowed to bid for their companies as long as they are not willful defaulters and don't attract any other related disqualification. This has corrected the anomaly in section 29A of the existing act which had barred promoters of defaulting assets from bidding for their assets.

Relationship between Mediation and the Indian Bankruptcy Code (IBC)

The Indian Bankruptcy Code (IBC) acknowledges the significance of mediation in the insolvency process. It allows for the appointment of a mediator if parties agree to mediate disputes. Mediation facilitates the resolution of disputes between creditors, debtors, and other stakeholders, offering a quicker and cost-effective alternative to traditional court proceedings. It also helps preserve relationships, as bankruptcy proceedings can be contentious and adversarial. Mediation provides a flexible and confidential environment for parties to discuss issues and explore creative solutions.

The IBC supports alternative dispute resolution mechanisms, including mediation, and insolvency professionals appointed under the IBC may recommend mediation for efficient dispute resolution. Mediation is a valuable tool within the IBC framework for resolving disputes efficiently, preserving relationships, and achieving timely and cost-effective outcomes during the insolvency and bankruptcy process.[5]

Other laws that mention about mediation

Mediation is a non-binding dispute resolution process where a third-party impartial mediator resolves conflicts between parties through dialogue and discussion. It is legally recognized in several Indian statutes and has been acknowledged by the Indian judiciary in various rulings.

According to Section 89 [6]of the Civil Procedure Code 1908,
89. Settlement of disputes outside the Court.—(1) Where it appears to the Court that there exist elements of a settlement which may be acceptable to the parties, the Court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the Court may reformulate the terms of a possible settlement and refer the same for:—arbitration, conciliation, judicial settlement, mediation

Sub-section 2(d) of Section 89 deals with Mediation
2(d) for mediation, the Court shall effect a compromise between the parties and shall follow such procedure as may be prescribed

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 to set up an expert panel to solve the dispute of the parties through mediation.

Section 442[7] of the Companies Act 2013 is defined as:
442. Mediation and Conciliation Panel.— (1) The Central Government shall maintain a panel of experts to be called as the Mediation and Conciliation Panel consisting of such number of experts having such qualifications as may be prescribed for mediation between the parties during the pendency of any proceedings before the Central Government or the Tribunal or the Appellate Tribunal under this Act.

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 with an alternative to address their issues while their dispute is pending.

Consumer Protection Act 2019
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 [8]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)[9] 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.

Importance of mediation as an ADR mechanism, especially given insolvency proceedings
Mediation offers the flexibility to parties to come up with fresh solutions
Because mediation allows the parties to agree with persuasion, it promotes "party-driven solutions." The parties choose the substantive and procedural rules of conflict resolution. Instead of taking the conventional path of liquidating assets and restructuring corporate interests, it can then help the parties come to an agreement that is advantageous to them both.

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.

Strengthens the parties' partnership for upcoming business models
Mediation is a private process that only has to be completed by the two parties involved mediators. It helps in preventing unnecessary public attention to the conflict. Additionally, it helps in protecting other crucial information as well as a company's trade secrets.

Lowering the burden of NCLT
A corporate insolvency procedure should take no more than two hundred and 270 days to complete under normal circumstances. Meeting the deadline for the Corporate Insolvency Resolution Process (CIRP) is always a challenge. Most of the time, the National Company Law Tribunal's backlog of cases is over a year-long due to this overwhelming backlog. It also takes time to decide whether to put the corporation into a resolution plan for liquidation.

When facing insolvency, one should always try to recover as much as possible, especially if the situation was brought on by the state of the market at the time. Changing management should be an effort at recovery even if bad management was the cause of the insolvency.

In several decisions, the Supreme Court has reminded companies of the true intent of the Insolvency & Bankruptcy Code (IBC), which goes beyond debt recovery. "Mediation" is the only way to achieve the stated purpose and reduce NCLT's burden during the settlement procedure.

Conclusion
The Insolvency and Bankruptcy Code, 2016 (IBC) in India has significantly impacted the bankruptcy process by introducing a time-bound and creditor-driven resolution mechanism. The code involves mediation, where a neutral third party helps disputing parties negotiate a settlement that will satisfy both parties. The IBC has performed well over the last eight years, but there is room for improvement. The average time to finish the IBC procedure was around 375 days for settlement cases and 309 days for clearing cases in March 2020.

Mediation offers several benefits, including cost-effectiveness, confidentiality, increased control, high compliance, mutuality, and support. It is provided free of charge, takes less time than standard legal channels, and maintains confidentiality. The IBC aims to consolidate and amend insolvency laws in India, simplify proceedings, protect creditors' interests, revive companies, promote entrepreneurship, provide relief to creditors, establish an Insolvency and Bankruptcy Board, and maximize corporate assets' value.

Mediation is legally recognized in several Indian statutes and has been acknowledged by the Indian judiciary in various rulings. The Companies Act 2013 gives the Central Government the authority to set up an expert panel to solve disputes through mediation, reducing the burden of the National Company Law Tribunal and National Company Law Appellate Tribunal.

End Notes:

1. https://www.legalserviceindia.com/legal/article-10590-role-of-mediation-in-insolvency-process.html
2. The Insolvency and Bankruptcy Code, 2016, §74, No.31, Acts of Parliament, 2016 (India)
3. https://rlsa.gov.in/mediation.html#:~:text=Mediation%2C%20as%20used%20in%20law,parties%20to%20negotiate%20a%20settlement. Last visited 3rd July 2024 (5:02 PM)
4. https://www.drishtiias.com/printpdf/in-depth-insolvency-and-bankruptcy-code-act Last visited 3rd July 2024 5:24 PM
5. https://ibbi.gov.in/uploads/resources/1acc8439aab101c013221a481fe108a6.pdf last visited 3rd July 6:00 PM
6. The Code of Civil Procedure, 1908, §89, No.5, Acts of Parliament, 1908 (India)
7. The Companies Act, 2013, §442, No.18, Acts of Parliament, 2013 (India)
8. The Consumer Protection Act, No.35, §74, Acts of Parliament, 2019 (India)
9. The Consumer Protection Act, No.35, §37, Acts of Parliament, 2019 (India)

Written By: Harsh Raj, 2nd Year Law Student at Dr.B.R. Ambedkar National Law University, Sonepat