Shaping the Future: A Comprehensive Framework for Mediation in Insolvency and Bankruptcy

The Insolvency and Bankruptcy Code of India (IBC), enacted in 2016, has been a game-changer in the country's economic landscape, providing a structured and time-bound framework for resolving insolvency issues. Recognizing the evolving nature of dispute resolution, the Insolvency and Bankruptcy Board of India (IBBI) released a transformative report on January 31, 2024. This report, crafted by an Expert Committee constituted by the IBBI, unveils a groundbreaking "Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016."

Embracing Voluntary Mediation: A Paradigm Shift

The crux of the committee's recommendations lies in the introduction of voluntary mediation as a complementary dispute resolution mechanism within the processes under the IBC. The envisioned mediation framework is designed to operate as a self-contained blueprint within the IBC, boasting independent infrastructure to ensure alignment with the core objectives of the IBC.

Given the inherent involvement of in-rem rights and aspects of public interest at various stages of IBC proceedings, the committee argues for seeking exemption through specific amendments to the Mediation Act of 2023 or a notification under Entry 13 of the First Schedule to the Mediation Act. This nuanced approach emphasizes the unique nature of insolvency disputes and the need for a tailored mediation framework.

Core Recommendations of the Committee

1. Phased Introduction of Voluntary Mediation

The committee recommends a phased introduction of voluntary mediation, ensuring the sanctity of timelines for existing insolvency resolution processes. The essence of the framework lies in its independence and flexibility, providing room for the quick incorporation of implementational learning.

2. Self-contained Framework under IBC and Exclusion from the Mediation Act, 2023

Enabling provisions include the introduction of mediation as an alternative dispute resolution (ADR) method under the IBC within existing statutory timelines and processes. Additionally, powers are delegated to the Central Government and IBBI for rule-making, infrastructure establishment, specifying mediation timelines, and addressing the role of the NCLT as the Adjudicating Authority.

3. Regulatory Framework by IBBI

The IBBI regulations are to be aligned with enabling provisions introduced in the IBC. These regulations will cover the conduct of mediations, mediator appointment and removal processes, secretariat functioning, capacity-building programs for mediators, and the enforcement of Mediated Settlement Agreements (MSAs).

4. Reference to Mediation: Mandatory or Voluntary

Voluntary mediation, based on the consensus of parties, is deemed the most suitable method to settle insolvency disputes. The framework outlines various stages of reference, encompassing post-institution matters, specific disputes during the insolvency resolution process, and the crucial aspect of 'process disputes.'

5. Competent Authority to Refer: NCLT or Parties by Mutual Consent

References can occur at the pre-institution stage, subject to disputes being identified as fit for mediation. Parties may also make post-institution but pre-commencement references, with automatic termination of mediators' mandates upon admission of the CIRP or after 30 days from reference to mediation. The post-commencement reference of 'process disputes' is determined by a 66% majority of the CoC or by the creditor in claims collation processes.

6. Subject Matter for Reference

Identified insolvency resolution processes include CIRP, pre-packs, fast-track CIRP, individual insolvency – PG to CD cases, and individual insolvency (other than PG to CD cases). Process disputes within these processes cover claims collation, inter-creditor issues at the CoC level, and avoidance actions in individual insolvencies (where no allegations of fraud are raised).

7. Timelines for Insolvency Mediation

Timelines are designed to run parallel with statutory timelines under the IBC. For example, mediations during the post-institution but pre-commencement stage of CIRP will automatically terminate within 30 days of reference or upon NCLT's admission of the CIRP, whichever is earlier.

8. Operational Infrastructure

A dedicated and specialized NCLT-annexed insolvency mediation cell is recommended, complete with an independent secretariat overseeing the conduct of insolvency mediations under the Code. Adequate infrastructure, including e-meetings and e-filings, is highlighted to facilitate online or paperless mediation processes.

9. Enforcement of Mediated Settlement Agreements

Parties are directed to approach the Adjudicating Authority for enforcement without instituting separate legal proceedings. MSAs are to be enforced by incorporating them into NCLT (or appellate authority) orders, akin to the existing process under Rule 8 of the AA Rules, 2016. At the post-admission stage, process disputes can be settled as per Section 12A of the Code, providing statutory sanctity to settlements recorded in the NCLT's order.

10. Costs and Mediators

Costs arising from the mediation process are to be borne equally by the parties or as mutually agreed. Costs incurred during CIRP mediation are excluded from the purview of insolvency resolution process costs. Provisions are introduced for reimbursing expenses incurred by parties at the NCLT (or NCLAT or the Supreme Court).

The pool of mediators is diverse, including retired NCLT/NCLAT members, senior advocates, ex-senior officials of financial sector regulators, and insolvency professionals. Additional mediators may include legal practitioners with at least ten years of experience in insolvency disputes, individuals with mediation advocacy experience in commercial disputes, and those with technical expertise in insolvency, accounting, valuation, and industry operations.

Adequate training for mediators is emphasized, and a Code of Ethics for Mediators is proposed to uphold professional standards and ethical conduct.

A Glimpse into the Future

As India strides confidently into the future, the introduction of a comprehensive mediation framework within the ambit of the Insolvency and Bankruptcy Code represents a significant leap forward. The committee's recommendations reflect a nuanced understanding of the intricacies involved in insolvency disputes, providing a tailored approach to dispute resolution.

The voluntary nature of mediation, coupled with the flexibility and independence ingrained in the framework, ensures adaptability to the dynamic landscape of insolvency proceedings. The phased introduction allows stakeholders to acclimate gradually, minimizing disruptions to existing processes while embracing the benefits of an alternative dispute resolution mechanism.

The Central Government's rule-making authority, coupled with IBBI's regulatory framework, provides a robust structure for the implementation of mediation processes. The emphasis on operational infrastructure, enforcement mechanisms, and the diverse pool of qualified mediators underscores a commitment to excellence in the mediation process.

As the legal fraternity eagerly awaits the adoption and implementation of these recommendations, the Indian business ecosystem anticipates a more efficient, swift, and amicable resolution of insolvency disputes. The committee's report marks a pivotal moment in the evolution of India's insolvency framework, setting the stage for a future where mediation plays a central role in shaping a fair and resilient business environment.