Transforming Insolvency Amid Challenges: The Role of Mediation in Empowering Stakeholders

Once considered a "future trend," mediation is now becoming a vital tool in managing all disputes. The Insolvency and Bankruptcy Code, 2016 ("the IBC") lacks specific provisions for mediation in insolvency matters.

The Judicial forums including Hon’ble NCLAT, and Ld. NCLT on request of Parties to proceedings allow deferment of the proceedings for settlement. In the case of Parvinder Singh v. Intec Capital Ltd. & Anr. Company Appeal (AT) (Insolvency) No. 968 of 2019, the Hon’ble NCLAT referred the matter for mediation to Hon’ble Mr. Justice (Retd.) A.K. Sikri. The NCLAT further stated that the settlement terms recorded by the mediator would hold the same authority as an order of the NCLAT. This reflects a progressive and adaptive approach toward incorporating mediation within insolvency proceedings.

B. IBBI Committee Proposes Framework for Voluntary Mediation Under IBC, 2016

In January 2024, the Insolvency and Bankruptcy Board of India ("IBBI") published a report “Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016”, providing its recommendations on voluntary mediation under IBC.

The Mediation Act, 2023 provides for mediation in "commercial or otherwise" matters and offers a framework for voluntary and consensual mediation, giving mediated settlement agreements legal validity.

The IBBI Expert Committee has proposed creating a standalone framework for voluntary mediation under the IBC, separate from the Mediation Act.

This recommendation stems from a key concern: the timeline under Section 18 of the Mediation Act i.e. 120 days, with an optional 60-day extension, clashes with the IBC’s focus on the swift resolution of distressed enterprises. Prolonging mediation could disrupt the IBC’s strict timelines, potentially undermining the efficiency of corporate insolvency proceedings [Paragraph 5.40 (a) at Page No. 65 of Report dated 31.01.2024].

Recently on November 4, 2024, the IBBI, based on recommendations from its Expert Committee and the Indian Institute of Insolvency Professionals of ICAI ("IIIPI"), released a discussion paper advocating for Operational Creditors to consider mediation before initiating any insolvency proceeding under Section 9 of the IBC.

The paper highlights that many Section 9 cases stem from disputes over issues like goods quality, contract terms, or payment discrepancies, most of which are resolved prior to admission. If before filing the Section 9 Application before Ld. Adjudicating Authority (NCLT) if parties proceed with mediation with mediator appointed as per the Mediation Act, it will help in alleviate the caseload of NCLTs and facilitate more effective dispute resolution, as many disputes between the Operational Creditor and Corporate Debtor can be resolved at mediation stage itself.

If we look at the data of filing of applications by Operational Creditor in Ld. NCLTs, we will note that many such Applications are withdrawn pursuant to settlement either before the Ld. NCLT itself or in the initial stage of appeals before the Hon’ble NCLAT. This settlement can very well be achieved if prior to the filing of the Application by adopting mediation.
The distinguishing feature w.r.t proposal is that even if mediation proves unsuccessful, and the Operational Creditor proceeds with filing the Section 9 Application before Ld. NCLT, then such an Application should accompany a non-settlement report prepared by the Mediator. This initiative is intended to streamline the resolution process, reduce judicial delays, and accelerate case admissions.

As whether mediation is there or not, the parties before entering the legal arena try to do everything to settle the disputes or get money however now when the report of the Mediator is made mandatory to be annexed with the Application under Section 9, both sides will take such negotiation seriously with result oriented approach as the report can act as a deterrent for the parties.

C. International Practice of Mediation in Insolvency Cases

The United States has been a global leader in handling insolvency and bankruptcy cases, including complex issues like cross-border insolvency, group insolvency, and resolution plans. The framework for this is supported by the Alternative Dispute Resolution Act of 1998.

According to a paper titled "Alternative Dispute Resolution in U.S. Bankruptcy Practice" published by the University of Massachusetts Law Review, mediation is widely accepted and utilized in most U.S. bankruptcy courts, with many cases involving it at some stage.

In the United Kingdom, courts actively encourage mediation when it fits the nature of the case. The 2016 Chancery Courts Guide emphasizes the importance of alternative dispute resolution, particularly mediation, as a preferred approach.

Although mediation has not been widely applied in restructuring cases in Singapore, Justice Ramesh, in the Singapore High Court case Re IM Skaugen SE [2018] SGHC 259, highlighted its significant potential. He noted the "tremendous utility in deploying the services of a neutral third party skilled in mediation techniques," pointing out that a mediator can “play the invaluable role of building consensus between the debtor and creditors in developing a restructuring plan and fostering trust in the process."

In Spain, the first reform aimed at supporting business internationalization and entrepreneurship came into effect on October 18, 2013, under Act 14/2013, dated September 27, 2013. This reform introduced out-of-court solutions, commonly referred to as "insolvency mediation," for minor restructuring cases.

The process allows debtors to negotiate an agreement with creditors based on proposals put forward by an appointed insolvency mediator.

In Japan, the Turnaround ADR mechanism, introduced in 2007, provides a structured process for distressed debtors and financial creditors to negotiate under the guidance of licensed mediators. The Japanese Association of Turnaround Professionals is the sole organization authorized to mediate such cases, with a panel of three mediators typically appointed to oversee the process.

D. Advantages and Challenges of Mediation in Insolvency Cases

Mediation is key to streamlining insolvency proceedings, resolving creditor conflicts, and helping stakeholders find common ground. By cutting delays and costs, it increases the likelihood of successful restructuring for businesses with potential, while providing creditors with better returns.

This is especially vital in the “pre-insolvency” phase, where struggling yet viable companies seek informal, out-of-court solutions. In India, with many cases stuck in the NCLTs and NCLAT, mediation can offer an effective alternative for insolvency and restructuring.

CIRP under the IBC often faces delays beyond the legal 180-day period (extendable by 90 days and an additional 60 days). In recent published data the average time in resolution ranges between 400 days to 600 days, which results in further deterioration of the stressed assets. Mediation provides a faster route to resolution, avoiding traditional court proceedings and helping parties reach settlements more efficiently, minimizing delays.

Mediation in CIRP brings together multiple stakeholders, encouraging collaboration and preserving relationships. By avoiding adversarial proceedings, parties are more likely to reach mutually beneficial agreements, benefiting everyone involved. Moreso, as it will be a close room discussion the chances of the final negotiation been out in public is less. If the result is favorable it will also give relief to Personal Guarantors, Corporate Guarantors if mediated well as Creditors separately take them to court otherwise.

Successful examples of mediation include the Lehman Brothers case, where mediation resolved disputes with 250 counterparties, recovering over US$2 billion for creditors. Similarly, in the MF Global case, mediation led to a global settlement, securing over $1 billion for creditors.

However, mediation has its limitations. Smaller creditors may feel pressured to accept unfavorable terms due to resource constraints or urgent payment needs. A key challenge is the potential for power imbalances, where creditors often hold more leverage than debtors, leading to settlements that may unfairly favor one side.

Additionally, coordinating mediation with multiple creditors can be complex and time-consuming. If mediation fails, the time spent could delay the overall IBC process, affecting other stakeholder’s interests. Not to forget RBI’s regulations w.r.t resolution of stressed assets is also a kind of pre-litigation method which when fails that one reaches to different judicial forums like DRT, I&B Code, etc. To add one more stage of Mediation prior to ultimately exercising rights as a Creditor under I&B Code, DRT will result in less recovery. It is also worth mentioning that prepackage insolvency is also there as an option.

For example, in the case of Nortel Networks Inc. (No: 09-10138, Bankr. D. Del.), mediation attempts failed after three rounds, as parties became entrenched in their positions and couldn’t agree on how to divide the $7.5 billion from asset sales. The failure to reach a consensual agreement highlights the challenges in achieving equitable asset distribution, even with mediation.

E. Conclusion
Mediation is increasingly recognized as a powerful tool in transforming insolvency and bankruptcy proceedings, offering a more collaborative and efficient way to resolve disputes. In India, despite the absence of specific provisions for mediation under the IBC, recent developments, such as the introduction of Section 12A and the IBBI Expert Committee’s proposal for a dedicated framework for voluntary mediation, have paved the way for its integration into insolvency cases.

Mediation provides a quicker, cost-effective alternative to traditional court processes, helping businesses with the potential to restructure successfully in timely manner while improving returns for creditors.

Globally, countries like the United States, the United Kingdom, and Japan have long recognized the value of mediation in insolvency, utilizing it to streamline processes and preserve relationships between stakeholders. These international practices offer valuable insights that could inform the future development of mediation frameworks in India under the IBC.