IBBI proposes mediation for operational creditors before filing insolvency

The Insolvency and Bankruptcy Board of India (IBBI) has proposed a voluntary mediation mechanism for operational creditors before filing insolvency applications under the IBC norms.

The proposal aims to reduce the burden on the Adjudicating Authority (AA), thereby expediting admissions.

The recommendation is based on an expert committee report and subsequent suggestions by the Indian Institute of Insolvency Professionals of ICAI (IIIPI).

In a discussion paper released on Monday, the insolvency board proposed to introduce mediation as a preliminary step, providing operational creditors an avenue to settle disputes with corporate debtors over matters like contractual disagreements, quality issues, underpayment claims, and set-off demands.

The insolvency board noted that in most of the operational creditors-initiated insolvency cases, they are more interested in repayment of money claims rather than admission or resolution of the corporate debtor.

According to IBBI, as of April 2024, 21,466 cases were filed under section 9 and only, 3,818 cases were admitted.

Therefore, a large number of Section 9 cases were settled before admission and the settlement rate of CIRP pre-admission for Operational Creditors (OCs) has been larger than at any other stage.

Section 9 of the Insolvency and Bankruptcy Code (IBC) allows operational creditors to initiate a corporate insolvency resolution process (CIRP).

Further, the AA is required to conduct hearings before accepting or rejecting an application, and the process often becomes time-consuming, the IBBI said.

"Thus, in order to resolve disputes between the OC and corporate debtor at the earliest stage, and facilitate faster admission by AA, mediation as an option may be considered as an effective tool," it added.

Under the proposed framework, operational creditors may opt for mediation in line with norms. The mediator will issue a non-settlement report to accompany the creditor's application to the authority.

The proposal will enhance efficiency by resolving disputes early, thus minimising the number of cases reaching formal adjudication.

The IBBI has asked stakeholders to provide feedback on the draft regulations by November 24. After considering the comments, the board proposed to make rules under clause of section 196 of the code.