Mint Explainer: How mediation can speed up insolvency dispute resolution

The IBC mandates that a corporate insolvency resolution process (CIRP) should be completed within 180 days from the date of admission of the application to initiate the process. A one-time extension of a maximum of 90 days is allowed to complete the process. 

A 2019 amendment set 330 days as the outer limit for completion of CIRP. However, the IBBI data shows that 92% of the 678 cases that were resolved as of 31 March 2023 – since the first application for resolution was filed before the NCLT in January 2017 – took more than 270 days. The average number of days required to finalize a resolution was 614. Data for 2022-23 was more disheartening – it took 831 days on an average to find a resolution for 180 cases, with as many as 172 cases crossing the 270-day statutory timeline.

Mediation as a dispute resolution mechanism makes sense given that over 60% of the applications for initiating CIRP are settled before NCLT admits the plea. Of the cases admitted by the tribunal, about 28% don’t go through the process as they are either reviewed, appealed, settled or withdrawn.

What is the need for a mediation framework when insolvency-related disputes are being settled outside the NCLT?

While several disputes are settled outside the NCLT and its appellate tribunal (NCLAT) through mediation, the expert committee noted that the IBC does not specifically provide for mediation. Further, the Mediation Act of 2023, a standalone law on mediation, does not automatically apply to all legislations in India, and that includes the IBC. Its scope is limited to disputes that are “commercial or otherwise”. 

While the term ‘commercial’ refers to dispute as defined in the Commercial Courts Act, 2015, the committee observed that there was no clarity on the term ‘otherwise’. Moreover, the Commercial Courts Act does not include insolvency matters or proceedings under the IBC.

Also, unlike other legislations such as the Companies Act, 2013 which were amended when the Mediation Act was brought, no such amendment was made to the IBC. Besides, the Companies Act does not confer any power on the NCLT to refer parties to mediation under the IBC. The committee also noted that there was no restriction on introducing mediation under the Code. But it felt that the ‘one-size-fits-all’ mediation process under the Mediation Act would not be suitable for insolvency mediation as the stated objectives of the Code would not be met by it.

How does IBC allow out-of-court settlement when it does not provide for mediation?

The IBC enacted in 2016 allows parties to insolvency proceedings to withdraw CIRP applications before admission by the NCLT. An amendment of the Code in 2018 allowed the withdrawal of applications even after it was admitted, provided the move to withdraw was approved by 90% of the voting share of the committee of creditors (CoC). This amendment led to the withdrawal of 947 cases after admission between August 2018 and September 2023. So clearly, the Code favours settlements outside the court and NCLT has been facilitating them.  

That apart, the CIRP Regulations enable the withdrawal of applications and settlement both before and after the constitution of the CoC. Separately, the Supreme Court of India has also clarified that a party can approach the NCLT directly when the CoC is not yet constituted, and the NCLT may use its inherent powers to allow or disallow an application for withdrawal. 

What has the committee proposed for including mediation in IBC?

The IBC requires resolution processes to be completed within 270 days (180+90) while the Mediation Act requires proceedings to be completed in 120 days. The committee felt that blanket introduction of mediation as envisaged under the 2023 Act would not meet the core elements of IBC – timebound insolvency resolutions. 

It has said that the incorporation of mediation into the insolvency regime will require specific, tailor-made mechanism to suit each insolvency resolution process or its constituents. Therefore, the committee has recommended that the framework for insolvency mediation should be incorporated exclusively within the scheme of the IBC, from the best governance and implementation perspective, and its introduction should be in a phased manner.

How can mediation help insolvency proceedings?

A strong mediation culture supported by a legislative framework can provide respite to parties to a dispute or a prospective one in the form of settlement before initiation or at the early stages of contentious proceedings. Mediation can reduce costs and delays involved in litigation and has the potential to bring cultural changes in how India resolves insolvency.

The enactment and implementation of IBC over the years have led to mindset change among debtors and improvement in debtor-creditor relationships. Similarly, the committee expects the insolvency mediation framework to become a way of introducing debtors and creditors to a new rescue culture, where they have the opportunity to amicably resolve issues at the outset or once the insolvency process commences, at various stages within the timelines of IBC as the insolvency process runs parallelly.