INSOLVENCY AND BANKRUPTCY MEDIATION – A REALISTIC MECHANISM
– RB Rishabh & B. Yamuna Saraswati
“Let us hope the coming years would be years of ‘Conciliation, Mediation and Arbitration’ and not of ‘Litigation’
Human beings by nature have the capacity of creating disputes for preposterous issues. From monarchy period, the widespread and well-know authority for solving disputes is the judicial system. To combat with the society and its development, the humans started giving importance to time and money and thus the court proceedings due to its complexity and lengthy procedure are being less resorted now. As the saying “Peace is not absence of conflict, it is the ability to handle conflict by peaceful means” goes, it is also important to resolve disputes in an amicable manner. Hence this paves the way for an alternate and effective mechanism which is the alternative dispute resolution mechanism (ADR). The ADR mechanism provides people an alternate method to judicial system which helps them to negotiate and settle the disputes out of the court proceedings.
Nowadays, the rate of insolvency and bankruptcy (I&B) disputes is relatively high due to the increase in value of money in the society. Man is in need of money in every part of his life which pushes him to be indebted when there is an insufficiency of funds. And when he is unable to pay off such debt, the dispute arises. In India, many legal reforms have been made regarding the regulation of insolvency disputes and resolution processes. Recently, the Indian Parliament enacted a special legislation known as Insolvency and Bankruptcy Code, 2016 (IBC) for regulating I&B and has authorized NCLT and NCLAT to be the jurisdictions for I&B cases. However, these tribunals are not free from drawbacks.
On this wise, the process of mediation can be used to quell these drawbacks. Mediation is a type of ADR which involves appointment of mediators for settling the disputes in an amicable manner out of the court. Many countries around the world have incorporated the concept of mandatory mediation as a pre-insolvency proceeding. The mandatory mediation compels the parties to mediate before entering the court process. Thus in India, the inclusion of concept of mandatory mediation could be seen in the near future by making appropriate amendments in the IBC. This concept helps in faster restructuring of insolvency in a suitable manner for both debtor and creditor without directly entering into the insolvency resolution process which is both time and money consuming.
This article aims to cast light upon the emerging concept of mandatory mediation and its role in insolvency process. It also aims at studying the pre-insolvency mediation process in other countries. Further, it aims at discussing the position of insolvency process in India and the need for inclusion of mandatory mediation in the IBC. This paper gives an insight regarding the impact that will be brought out by such amendment.
The culture of borrowing in India is not of a recent origin and it dates back to the period where social arrangements or family setup had emerged among the people. People tend to borrow for their necessities in order to lead a nominal life. The necessities could be money, land to cultivate, goods or commodities essential to carry on day-to-day activities or to survive in the society. The borrowers (debtors) have to pay regular interest to the person from whom he had borrowed (creditors). Along with the development of mankind, the borrowings of the people also grew in a drastic rate.
At times, the borrowers of the debt come to a situation where he becomes incapable to pay off his debt. Earlier to pre-emergence of formal agreements, there was no proper contract between the debtors and creditors. The creditors at this juncture used to take the situation to their favor and swindle the properties of the debtors (more than the debt) by taking advantage of the debtor’s illiteracy. It may at times lead the debtors to work as a bonded labourer under the creditors. It is not always that the creditors lie in the favorable position, at times the ill-minded or mala fide debtors borrow debts and shows no interest in repaying the debts.
Presently and especially in the developed and developing countries, the manner of borrowing or procuring debt has been institutionalized and are also being regulated by Government/Enacted Authorities. In order to facilitate the parties involved in the disputes relating to debt to come into a settlement, the Parliament of India has enacted the Insolvency and Bankruptcy Code (IBC) in the year 2016. This act can be considered as a consolidated act of laws relating to Insolvency and Bankruptcy (I&B). Thus, at this point, it is necessary to know the meaning of two important words, i.e. insolvency and bankruptcy. Insolvency is a state wherein an individual or company or corporation due to their financial difficulties turns incapable to carry on its business activities. Bankruptcy is a term which denotes the status of a person who is been declared by competent legal authority to be incapable to pay his dues to the creditors.
The ultimate aim of IBC is to make the process of settlement among the parties smooth, clear and certain. Through the introduction of the IBC, the manner of debt restructuring and debtor rehabilitation has been expanded. In order to adjudge I&B cases, the National Company Law tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have been given jurisdiction. The time limit to provide judgments in these cases as per the provisions of the Act is 180 days plus 90 days. But in reality there are several cases which have crossed the deadline provided under the IBC.
Therefore there is a clear necessity in order to settle these disputes in a quicker and in an inexpensive manner. This paves the need for the entry of mediation (Alternative Dispute Resolution Mechanism) in the insolvency matters. Mediation is a type of Alternative Dispute Resolution (ADR) mechanism which involves appointment of mediators for settling the disputes in an amicable manner out of the court. If mediation is being introduced in the framework of insolvency as a legal provision it would satisfy varied purposes.
At prima facie, it shall keep at arm’s length the convolution and cause of taking the issue to the court which is already in a complex scenario. Secondly, mediation need not be always resorted post figuring out the fact of insolvency rather it could operate in pre-insolvency scenario or situations to mediate between the creditors and debtors. Mediation can also be used after initiating the insolvency proceeding in order to come up with refinancing, restructuring or liquidation plans among all the interested parties in the insolvency situation. Mediation is a mechanism which is conducted post receiving the consent of the parties.
INSOLVENCY & BANKRUPTCY MEDIATION: INTERNATIONAL PERSPECTIVE
Recently, there has been a trend wherein people are opting for ADR methods in business restructuring and as well as for providing a chance to the natural persons to resolve their disputes. In furtherance of this trend, many countries have actively incorporated necessary legal reforms to promote these goals. Various authors around the world have spoke about the various benefits attached in conducting insolvency mediation. But in practice the success of mediation depends solely upon the reforms which have been incorporated in countries where it takes place. Therefore, the authors contend that since legal reforms which are brought in to improve the significance of mediation are of a recent origin, they still need time to be firmly built. Countries like Spain, Italy, Greece and Portugal belong to the orbit of mediation directive which they have in common.
These countries have raised a question that whether mediation in insolvency matters fit in the principles set out by their mediation directive. By introducing mediation in pre-insolvency proceeding, it has created doubt among various jurists that whether the voluntary character of mediation is being tarnished by introducing the process of mediation in pre-insolvency matter which makes it completely involuntary and whether it proves to be biased in favor of the debtor completely.
To answer these questions, the experience of United States of America shall be considered. The US has shown that the mandatory feature acts as an integral element in the success of mediation. Many European Union and Non-European Union countries such as Portugal, Italy, Belgium, Greece, Spain and United Kingdom, Australia, Singapore, Japan, respectively, have taken efforts by bringing in necessary reforms or amendments in their insolvency laws to absorb the mechanism of mediation in it.
There has been a staunch dismay regarding this approach of having mediation in insolvency matters. This has led the European Commission to direct a proposal for a directive in restructuring frameworks and by far to improve the procedures of discharge of insolvency proceedings. However the application of mediation in insolvency is rising up by overcoming a number of difficulties especially the mediation in pre-insolvency proceedings has gained the encouragement and support of many international institutions such as of The World Bank, UNCITRAL and the OHADA Uniform Act on Bankruptcy Proceedings.
Relating to the international perspective India has not taken any effective measure in order to incorporate mediation in insolvency process. However there is this newspaper article stating that the Indian Government is planning to make relevant amendment in order to incorporate the provisions of pre-insolvency mediation which would certainly help in reducing the burden of the tribunal and also save cost, time and energy of the parties in a dispute by resorting to mediation .
It is a well-known fact that bankruptcy is different from the term insolvency. Insolvency means suffering from financial distress whereas bankruptcy means entering into adversarial proceedings to solve the insolvency problems. On this wise, it is clear as to when bankruptcy mediation shall be commenced.
When the parties enter into bankruptcy litigation, dispute arises at a frequent rate due to issues in the claims, valuation, resolution plan etc. Such matters of disputes or differences between the parties can always be resolved through bankruptcy mediation. These disputes can be broadly divided into two types namely, early stage and later stage disputes. The early stage disputes include issues such as cash collateral and automatic stay. Parties who find it difficult to afford to such litigation may opt for bankruptcy mediation at an early stage.
The later stage disputes include issues regarding the claim evaluation and resolution plan. It is reasonable to note that once bankruptcy litigation is started it comes to an end only in two ways, either dismissing such case due to no proper resolution plan or confirmation of such plans thereby resolving the dispute. Hence it is obvious that the resolution plan plays an important role in solving the bankruptcy dispute.
So what happens when a dispute arises regarding such resolution plan itself? Normally, resolving those disputes through litigation demands both time and money consumption which is a luxury that cannot be afforded by the parties. Hence it is advisable to go for such mediation, which is also popularly known as Plan Mediation in the western countries.
The largest bankruptcy case ever filed in the history is that of the Lehman Brothers, a mortgage oriented investment business. The case was of complex nature as it involved insolvency at the international stage. It was a highly convoluted case as there were proceedings filed in many countries which resulted in varied and conflicting outcome. Therefore, Lehman applied for mediation proceeding to adequately settle their losses. Of the 77 proceedings which reached the mediation stage, only 4 were terminated without settlement .
This is one of the largely successful mediation in history which saved Lehman from costly and time consuming litigations. From this, it is self evident that mediation in insolvency proceedings helps to resolve the dispute successfully. These types of bankruptcy mediation are famous in many developed countries such as United States of America, Turkey, Belgium and many other European countries. It is significant to note that the bankruptcy mediation is popularly followed in USA, as it is backed by the federal policies. Even in India, the NCLAT has referred many cases for mediation thereby helping to expand the scope of bankruptcy mediation.
MEDIATION IN INDIA
The concept of mediation is not something new in India. Although the ADR mechanism is relatively a new trend in India, mediation has been used since the Vedic times. Nowadays, people have started using these mechanisms, especially mediation mostly in family disputes as it keeps the dispute confidential. The mediator of the dispute cannot be summoned by any court to be as a witness of such case. The mediation helps the parties to settle their cases amicably and find appropriate solution rather than blaming each other as it happens in a court proceeding. And as it is voluntary, the parties have every right to stop the mediation at any phase which is not possible in the litigation format.
Mediation in India was first legally recognized through the Industrial Disputes Act, 1947 . Later an amendment was made to the Code of Civil Procedure, 1908 to include the alternative dispute resolution mechanisms, which helped the court to refer such ADR mechanisms to the parties of the dispute. This paved the way for extensive knowledge of such mechanisms among the people. In most cases, mediation in India is done with the help of courts known as court-annexed or court-referred mediation. This proves to be helpful in two ways, reducing the burden of the court and helping the parties to resolve their disputes confidentially with less time and money consumption.
The other widespread method of using mediation is through including a mediation clause in the contract among such parties, which is known as private or contractual mediation. It is pertinent to note that the apex court of India in the case Salem Bar Association V. Union of India directed the appropriate authorities to frame rules for regulating mediation which resulted in enactment of Alternative Dispute Resolution and Mediation Rules, 2003.
With all that being said, it is crucial to confer about the concept of mandatory mediation. Mandatory mediation is not a new concept altogether, it just mandates the parties to resort to mediation process before entering into the litigation process. There may be much debate as to why such mandatory mediation should not be applied as it takes away the right of voluntary acceptance of the parties. The only answer for such debate is that the mediation processes at the most helps both the parties and the court to reduce its burden, so why cannot such process be made mandatory.
India has taken a colossal step in ADR mechanism by making mediation in commercial disputes mandatory. The Parliament of India has passed The Commercial Courts Act, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Bill in the year 2018 which has made the mediation process mandatory for all the commercial disputes in India. Further, the Commercial Courts (Pre-Institution Mediation and Settlement) Rules 2018 were notified by the Central Government to regulate the process of such mandatory mediation . This new pitch by the Indian Government is likely to boost the mediation process and help the Indian courts free themselves from the claws of case trammel.
IBC AND MEDIATION
It is a common knowledge that India is not free from the clutches of Non-Performing Assets (NPAs). Evidently, we have seen burgeon in the NPAs which have abruptly affected the country’s banking and economical situation. The NPA issue is something which needs to be addressed as quickly as possible so that it does not pull down the country’s economy. The Indian government in order to take measures about the insolvency and bankruptcy problems and to tackle the growing NPAs enacted a special legislation known as the Insolvency and Bankruptcy Code (IBC) in the year 2016.
This enactment was passed to help the companies and individuals who are slipping away due to insolvency and bankruptcy. It also aims at resolving the insolvency issue rather than pushing such businesses into liquidation which in turn will affect the country’s economy. So the main intent and focus of IBC is to protect the country’s economy by settling the insolvency and bankruptcy problems of the entities. It focuses on proper restructuring of insolvency rather than acting as a recovery mechanism.
The code has also gained the trust of the creditors as they can file a case even if there is a default of one lakh rupees by the debtors. It has made the power shift from the hands of debtors to that of the creditors. Normally in India it usually took 4 to 5 years for resolving these I&B problems. But nowadays, with the help of IBC it is easy for both the creditors and debtors or shareholders to resolve this dispute within the time limit prescribed by IBC. Accordingly, a question arises as to whether IBC is really a boon to the country.
This is because even the NCLT and NCLAT are not able to maintain the time limit prescribed in the code for restructuring and resolving the cases. As of December 2018, out of 900 ongoing cases 275 cases have crossed the 270 days time limit . Subsequently, this will end up in piling up of cases before the tribunals eventually. And the current exigency to redress the economical situations of India cannot afford such failure.
In today’s economic climate, it is important to restructure the viable business in a manner that it could retain the value whenever it is possible. Therefore, there is a greater demand for alternatives to liquidation. It is vivid that such restructuring can only be achieved when there is a good negotiation and compromise culture. When there is a problem in the negotiation culture itself, the outcome will most probably be unsuccessful. The country Montenegro is a perfect example for such situation. Before the country started using mediation in the insolvency process, there were major financial lockouts in its business climate due to poor restructuring systems.
Despite the challenges faced with restructuring, Montenegro’s mediation practice since 2001 does have a solid and successful track record. By the end of 2009 over 970 cases were mediated, 630 cases successfully resolved at a 65% success rate and over 24 million US Dollars were released back to business . India being a developing country, it is very crucial to maintain a stable economic climate. This can be achieved only when the businesses across the country are prevented from falling into liquidation due to bankruptcy. Here comes into play the mediation process.
Many IBC cases have been referred for mediation by the NCLAT. But it is not possible for NCLAT to take up all the cases and then to refer them for mediation. This problem can be redressed by making an amendment to the IBC to include mediation with a concrete timeline as a pre-insolvency proceeding for such insolvency cases.
Making mediation mandatory for bankruptcy cases by including it as a legal provision will lessen the case burden of NCLAT as there is possibility for resolving such disputes in the mediation proceeding itself. Inclusion of mandatory mediation can be made effective by incorporating professional mediation forums to deal with such disputes and to train practitioners about the mediation. Therefore, mandatory mediation with a concrete timeline as a legal provision will ultimately help IBC to achieve the very purpose for which it was enacted.
The term mediation had recently hit the headlines owing its thanks to the apex court of the state by referring the highly sensitive Ayodhya dispute to mediation . Thereby the term mediation has been turned into an interesting topic on which the general public has started to research upon to know its pros and cons. By this direction of the apex court to divert the Ayodhya dispute to the mediation and the following result of Ayodhya mediation without any doubt will form a staunch ideology in the minds of the citizens of the state about the process of mediation.
The reason why alternate dispute resolution methods are seldom taken by the citizens is because of the lack of public awareness regarding it which paves the way to the citizens of the state to make them take up for the adversarial process by default. Taking arbitration into consideration by the enactment of The Arbitration and Conciliation Act , 1996, the arbitration culture has grown leaps and bounds owing its major credits to the enactment of the statute of 1996. When an arbitration culture in India has flourished due to an enactment of the statute, a specific mediation statute similarly can be enacted in our country which shall be definitely relied upon for a number of disputes and could be realistically settled in cases of Insolvency and Bankruptcy matters.
In I&B litigation process, the parties are accorded with two choices i.e., either to accept the plan even if it is not favorable to them in their entirety or to fight their way through the trial which will undeniably increase the litigation period. Either way it is clear that the parties will not be perfectly satisfied with the outcome of the litigation proceedings. “Discourage litigation. Persuade your neighbors to compromise whenever you can. As a peacemaker the lawyer has superior opportunity of being a good man. There will still be business enough.” The above quote said by Abraham Lincoln encourages people to resolve their disputes by compromising with each other. This method is exactly followed in mediation which helps the parties achieve a win-win situation. The parties after various sessions of negotiation and after being satisfied will agree to a well-disposed settlement. And so forth it becomes self evident that formulating mediation as a mandatory pre-insolvency proceeding with a timeline will harness benefits to the parties, tribunal and the country. This embodiment of mandatory mediation with concrete timeline as a legal provision in IBC will definitely succor in promoting the scope of mediation in India, thereby mitigating the NPA problem of the country.
So there arises a question where if mediation statute is enacted, will its process be carried on smoothly? In order to smoothly carry out the process of mediation there is a necessity of enactment of a statute. But it is not the only sole element in order to smoothly carry out mediation. The corroborative elements shall be needed or a mediation institution which comprises of trained professionals who are trained to effectuate the process of mediation will be highly of need. Along with this there should be a large public awareness campaign on the meaning and significance of resolving disputes through the mediation mechanism to help the mediation process root its legacy in our country.