Expert panel suggests adoption of voluntary mediation in insolvency cases

An expert committee, constituted by the Insolvency and Bankruptcy Board of India (IBBI), has recommended the introduction of voluntary mediation as a dispute resolution mechanism under the Insolvency and Bankruptcy Code (IBC).

The committee suggested a phased introduction of mediation between the parties while maintaining the sanctity of the IBC timelines for various existing insolvency resolution processes, so that there is room for incorporation of implementational learnings. Mediation is the use of a neutral third party to facilitate the negotiated settlement of a dispute and resolve conflicts between two or more parties.

While in the first phase, the process is recommended to be voluntary, the committee said that mediations with a financial creditor as one of the parties be explored in the second phase of implementation.

The committee led by former legal affairs secretary T K Viswanathan submitted its report on Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016 to IBBI on Thursday. 

“The core essence of the framework is its independence and flexibility to provide room for quick incorporation of implementational learning,” IBBI said.

“The mediation process envisaged under the 2023 Act, based on a ‘one-size-fits-all’ approach, may not be made applicable to the insolvency resolution processes under the Code,” the expert committee said.

The panel has suggested the introduction of mediation as an alternative dispute resolution method under the Code within existing statutory timelines and processes. It has said that the Centre and IBBI should be delegated powers for making rules, regulations, and notifications for the same.

“Critically, no settlement between the parties can bypass the waterfall mechanism. Furthermore, third party rights may get affected by such mutual settlements under mediation however appropriate mechanisms have been provided for their redressal,” said Yogendra Aldak, Partner at Lakshmikumaran & Sridharan Attorneys.

The committee also noted that not all scenarios under the IBC are fit for resolution through mediation. For instance, issues such as avoidance transactions are excluded from the scope of mediation under the IBC.

It has also recommended the establishment of a dedicated and specialised National Company Law Tribunal (NCLT)-annexed insolvency mediation cell with an independent secretariat to administer, oversee, and manage the conduct of insolvency mediations under the Code.

The pool of mediators could include retired members of the NCLT/NCLAT, senior advocates, successful insolvency proceedings, ex-senior officials of financial sector regulators among others, the expert committee report said.

“Adequate training to be provided to the mediators for conduct of mediation under the Code. A Code of Ethics for Mediators may be formulated to enable mediators to perform their duties while upholding principles of professional ethics,” the committee report said.

The committee has said that keeping mediation as a parallel process to the corporate insolvency resolution process before the NCLT would ensure that no time is lost and no adverse impact is effected on asset value and public interest. It also said that the resolution of private disputes amongst debtors and creditors at the pre-default stage would be of great help in terms of recovery and resolution without recourse to insolvency.