Mediation in Insolvency Resolution: A Boon or Bane?

Sanya Khera

Introduction

Countries across the globe seek to establish a secure judicial system that can serve impartial and just decisions amidst times of crises amongst individuals. Not just insolvency, but the judicial system that caters to it has evolved over time to efficaciously resolve disputes by adopting modern approaches. The establishment of quasi-judicial forums in countries like India have fast-tracked the dispersion of justice. With ever-increasing globalisation and human interdependence, multiple kinds of dispute resolution processes have emerged, with arbitration at the forefront. India has made major strides in resolving insolvency proceedings by arbitration with the contribution of both the legislature and judiciary, but the process of mediation per se has not found significant emphasis to place a binding regulation.

The contrast highlighted in the consensual nature of mediation proceedings with the rather mandatory notion of formal court proceedings has grown to be gradually accepted in the Indian scenario. It is evident that mediation is a more flexible process than arbitration; however, it remains quite unclear why it has not become a pressing priority of either the judiciary or legislature even when arbitration has itself been read with latest statues like the Insolvency and Bankruptcy Code (“IBC”). The enactment of the Mediation Act in 2023 paved way for mediation as an acceptable and cost-effective form of dispute resolution in “commercial settings and otherwise”, though there are no specific provisions for IBC proceedings therein.

This paper will strive to form the grounds in favour of the use of mediation in insolvency proceedings. The Insolvency and Bankruptcy Board of India (“IBBI”) Report released recently in January 2024 makes a strong case in taking the initial leap towards the recognition of mediation as a preferred form of Alternate Dispute Resolution (“ADR”) beyond merely arbitration. Part II discusses the simple merits of mediation and Part III delves into a comparative analysis with certain procedures followed in the USA and UK. Part IV compares the current regime of arbitration to mediation; two distinct processes that many believe are similar. Lastly, the author presents their view on the way forward with the use of mediation in insolvency resolution and makes concluding remarks.

The Benefits of Mediation in Dispute Resolution

Mediation involves the inclusion of a neutral third party to sit on a matter of proceedings between two disputing parties. The role of the mediator is to guide the parties to resolve their differences by coming to a mutual agreement. Neither does the mediator get to pronounce a judgement, nor is the agreement that the parties come to binding. The prime advantage of mediation is the flexibility of shaping the progress of the dispute that the parties get. The main aim of mediation is to streamline the course of communication between the parties, as a clear understanding of parties’ intentions and potential narratives is considered imperative in any form of dispute resolution. Further, the mediation process maintains even firmer confidentiality as it is not guided by any judicial or legislative agency. There are various other merits to choosing mediation, including time and cost benefits to name two.

It can be seen that mediation offers a plethora of advantages to both, the disputing parties and the courts. While the former gets a platform to gauge their mutual interest in an amicable backdrop, the latter finds the burden of proceedings shared with ADR professionals.

International Comparative Analysis with the US – Learning and Unlearning

Several other nations have relied on mediation as an efficacious framework for their respective insolvency proceedings. At the forefront of the discussion is the US, whose Bankruptcy Courts have successfully incorporated mediation into its bankruptcy regime and it is imperative for India to learn from this rich history. Its inception is grounded in the findings of the National Bankruptcy Review Commission that states that ADR serves as an affordable and effective approach towards aiding litigation which may in fact; end up being unsatisfactory to some. Delving into the system of other countries such as the US helps in understanding the nature of disputes that can be resolved with mediation and how the process per se is moulded, along with fathoming the infrastructural needs in the operation of the process. Mediation has been used in the US in both national and cross-border cases, hinting at a dynamic overall usage and subsequent outcome.

A significant step that the Commission took was to suggest ‘local mediation programs’ that assist local courts in creating separate rules to accommodate regional concerns and priorities. This strikes a chord with the foundation of mediation in India as well, where the mechanisms adhered to in village panchayats are considered to comprise the initial phase of mediation in India. Although the working of local courts and village panchayats indeed may be different, the primary achievement of meeting the needs at grass-root levels is a relevant characteristic in common. The ‘voluntary’ aspect of dispute resolution can no doubt be enriched by inducing a mechanism that pays heed to exclusive and subjective hassles that are innate in dynamic proceedings like that of insolvency. It can not only benefit the courts by reducing their time constraints in resolving complex issues, but also the parties, by making the outcome more satisfactory and consensual.

Why the framework in the US is even more relevant is because the country has made sure to timely integrate the best practices of mediation followed in other countries like the U.K. where the mediators are delegated pre-determined tasks. The Companies Act of 2006 and the Insolvency Act of 1986 streamline the process in the U.K. The lawyers and other legal representatives of clients are mandated to deliberate ADR mechanisms with them. The recent decision of Churchill v. Merthyr confirms that even a court can legally put parties under a “non-court based dispute resolution process”.The Court of Appeal stated how the long-established Halsey principles that consider ADR as ‘unacceptable constraint’ are not “straightjacket that binds judicial discretion”. The Court thereby established such non-court processes as cost-effective and fast, acknowledging litigation more as a recourse. Further, different phases of the ADR process are guided by clearly laid-down measures. For instance, the UK Parliament offers an ADR guide for consumer disputes. Similarly, even the Department of Transport has its own guide for ADR. Thus, the courts and legislature in the UK are at the forefront of advocating for ADR.

Such an integrated approach followed by the US provides it with a deeper understanding of which practices can prove to be not merely fruitful, but also enduring. The US district courts are permitted to order mandatory mediation as highlighted in the Atlantic Pipe Corporation case. The Bankruptcy Court for the District of New Jersey introduced a Mandatory Mediation Programme back in 2013, serving as an example of the various court-annexed ADR programs. Acceptance of mediation as a valuable undertaking has taken its own time; thus, it is only fair that it continues to adapt to socio-legal changes and progresses in a manner that maintains its applicability. On the other hand, this same approach bespeaks a note of caution for India, wherein although learning from other countries can explain what is required for the successful application of mediation in insolvency; it must be kept in mind that the Indian legal sphere has its unique requisites. Beyond the valuable insights from other countries like the US, extensive subjects such as reading it with other statutes, management of timelines with formal proceedings, etc. need to be considered in the Indian panorama. The IBC itself is a highly extensive statute that covers most aspects of bankruptcy and insolvency cases in India, and the basis of mediation read with it ought to be such that the specific provisions of IBC are upheld at all costs.

Similarly, even the feasibility of local rules as discussed above may not fructify, as the local divisions in India are unlike those in the US; with clearly more complexity and multiple tiers. This phenomenon becomes even more explicit, when we consider the importance quasi-judicial bodies like NCLT and NCLAT have been granted, simply to reduce the burden of floodgate litigation on the judiciary. Whereas local courts in the US have been vested with the authority to make their own rules, NCLTs and NCLATs are governed under very specific and uniform set of rules. There are stark differences in the American and Indian legal landscapes and thus we must make sure that apparently successful models of mediation are not blindly harnessed in India.

Shortcomings in the Present Regime of Arbitration

The framework of arbitration has already been incorporated in India in 1996 by the Arbitration and Conciliation Act (“ACA”), and is also applicable on matters of insolvency. Many still continue to view arbitration as similar to or as an alternative to mediation, which indeed it is not, as has been mentioned earlier. This is also partly owed to the emphasis placed on arbitration by our policymakers. Nonetheless, when it comes to bona fide disagreement between parties in the case of a default, a glaring conflict between the arbitration and insolvency regime is seen in the operation of the Corporate Insolvency Resolution Process (“CIRP”). The Courts in India have on multiple occasions failed to reconcile the differences in the two acts though the doctrine of harmonious construction of statutes has been widely cherished in the Indian judicial system. §8 of the ACA vests the judiciary with the authority to refer disputing parties obligated under an arbitration agreement to an arbitration tribunal. The broad vision of the lawmakers by interweaving the two laws was to press economic reforms through the transformation of conflict resolution in the commercial space. However, difficulties arise in harmoniously constructing the two acts since both §7 of IBC (on initiating CIRP) and §8 of ACA (on referring parties to arbitration) are respectively binding.

A three-judge bench of the Hon’ble Supreme Court of India (“SC”) failed to reconcile the two acts together in the case of Indus Biotech v. Kotak India Venture. Deciding on the merits of the case, the Court gave a rather arbitrary decisionby placing overriding importance on IBC over ACA, owing solely to the fact that IBC was enacted later. This view taken by the Court markedly violates the principle of balancing out two apparently conflicting statutory provisions. This doctrine of harmonious construction ensures the purpose of (any provision of) an act is not invalidated merely due to the existence of another seemingly conflicting provision. This judgment beyond violating this basic rule of interpretation of statutes sabotages the already unsteady regime of arbitration in India.

The judgement also misinterprets the term “default” used in the IBC, which is the non-payment of debt that ought to be paid in a timeline. The Court interpreted default to be valid only after the terms of payment are resolved whereas claims of default can be made even during the pendency of the resolution process. This viewpoint is at odds with the statutory provisions that define “default” as the failure to make a payment on a legally –due obligation.

The above precedent paints a picture of confusion with regards to the feasibility of arbitration as the sole ADR mechanism applicable in the country. It becomes quite remarkable to point out how the loopholes in the present system can be exploited and adversely impact its proficiency. Hence, it is safe to say that other viable options must be delved into for an enhanced administration of justice via means of ADR.

Mediation in Insolvency Resolution- The Way Forward

The absence of a legislative recognition of mediation as a tool in insolvency matters in India is largely felt when considering timely redressal of such disputes. On a global scale, however, mediation has affirmed its relevance with international organisations like the UN and World Bank encouraging its utilisation. After the enactment of the mediation rules in 2023, the ambit for the formal acknowledgement of mediation in the delivery of justice has only widened. The use of the phrase “commercial and otherwise” suggests a scope for a lucid identification of insolvency with mediation.

Firstly, mediation is not a binding process and whatever parties mutually agree on cannot be legally enforced. Second, as closely tied to the first concern, parties may try to intentionally elongate the process to delay any sort of judgment. Regardless, a stipulated time period for concluding the negotiation runs in tandem with the main goal of timely resolution or revival of a company under IBC. Hence, one plausible solution could be to modify the prescribed time frames under IBC. Such modifications could be made by the adjudicating courts depending on the kind of dispute and the stage in which it is at. However, it must be gauged whether the time taken up in mediation should be included in the resolution timeline since if the mediation does not fructify, the damage will have to be filled in by the courts by fast-tracking their hearings. This can prove to be advantageous and disadvantageous both; the former in avoiding unnecessary delays and the latter with respect to the quality of the enquiry and subsequent judgment.

Secondly, mediation can be resorted to before a company reaches the brink of insolvency, negating the necessity of indulgence in formal legal procedures altogether. The introduction of pre-pack insolvency resolution processes can strengthen this type of informal restructuring. The pre-pack process allows a distressed company to propound a resolution plan with the creditors before formal legal proceedings are instituted. Recent developments show that this process can be fruitful in the Indian insolvency regime. This in turn will again benefit parties in their cost and time management. This time period can also be excluded from the statutory timeline of CIRP since it materialises before §7 or §9 of IBC is evoked. In this regard, stakeholders must be provided with easy access to this niche method.

Thirdly, revival is in fact; preferred over its liquidation. Multiple times where a creditor-debtor relationship is founded on a personal basis, mediation can provide the parties with an informal setting to shape agreements in a manner that benefits all; a feature that courts do not offer. This echoes that if the mediation rules have to assist insolvency cases, they must complement the core objectives of IBC. The previously discussed case aids this stance too, by making the current timelines optional.

Conclusion

The use of ADR in insolvency matters is witnessing continuous developments and evolutions all across the globe with its ever-increasing active usage though its firm fulfilment is limited to a few jurisdictions. Termed as “democratic decision-making”, mediation offers a broad range of merits like cost-cutting expensive litigation and open communication to name a few. It is also a sort of informal and non-binding process that leaves decision-making completely in the hands of the parties in dispute, providing room for consensus-building.

The framework of mediation in insolvency cases has been relatively substantial in the US and many cases filed in the courts are disposed with the use of ADR at present. Establishing comparative models help in deciphering the best legal practices of other jurisdictions, and drawing upon their legal landscapes to combine foreign methods with local necessities.

The major stride in ADR in conjunction with IBC has been made primarily in arbitration and conciliation, though there is a huge scope for including mediation in such matters. Although the lack of express recognition of mediation in insolvency remains a challenge, there are clear ways in which the legislature can pave the way for such a development. The existent loopholes in ACA vis-à-vis IBC further this case.

The legislature and judiciary together need to find a middle ground between insolvency and the ADR ecosystem, and must strive to harmoniously construct the provisions of applicable statutes. While there is an evident requirement of expressly constructing the two together, there remain graver concerns that demand attention. Ground realities and fact-finding developments should be simultaneously relied on by policymakers. “Pre-insolvency” and “out of the line” niche measures like mediation can thus prove to be a boon for India with timely interference and action.

The author is a third year student at West Bengal National University of Juridical Science, Kolkata (WBNUJS).