Mediation under the Insolvency and Bankruptcy Code

Mediation Act 2023, though enacted by the legislators, as on date, only a few procedural provisions (for example those related to Mediation Council of India) have been notified (as discussed in Chapter III above) and the substantive provisions of the 2023 Act are yet to be notified and enforced. The expert committee notes that the 2023 Act makes no mention of the IB Code in as much as it neither expressly excludes nor includes the Code within the ambit.

Being an umbrella legislation aimed at the implementation and promotion of mediation as dispute resolution mechanism, the Committee reviewed its impact on its mandate, i.e., framework for the use of mediation in insolvency regime.

Even though there have been instances of mediation of insolvency matters, the Code does not specifically provide for mediation. The Code is a special legislation for the resolution of insolvency and bankruptcy in India, whose efficiency is deeply rooted in its independent, self-contained, and all-encompassing nature.

Applicability of 2023 Act to insolvency mediation

From a plain reading of the 2023 Act and the consequential amendments made to existing legislations (such as the Companies Act, 2013), the Committee primarily noted the following regarding the applicability of the 2023 Act to IBC.

First, 2023 Act does not automatically apply to all legislations in India. Its scope is limited to disputes that are “commercial or otherwise”. While the term commercial is defined to mean a dispute defined as per Section 2 of the Commercial Courts Act, 2015 (that does not include insolvency matters or proceedings under the IBC), the ambit of the term “otherwise” has not been clarified. It doesn’t appear to include IBC, which is a special law.

Second, Section 55(1) of the 2023 Act makes it clear that the provisions of the 2023 Act have an overriding effect on provisions of mediation or conciliation as they exist in other laws in force or in an instrument having force of law. The exceptions to this overriding effect have been carved out in the Second Schedule and laws such as the Industrial Disputes Act, 1947, the Industrial Relations Code, 2020, etc., or have been included in the First Schedule as matters not fit for mediation under the 2023 Act.

Since no specific provision regarding mediation or conciliation exists in the Code, the 2023 Act cannot possibly override any provision of the Code.113 The Committee noted that this might be a possibility for the absence of the Code’s specific inclusion within exceptions under the 2023 Act. The Committee also noted that Section 55 does not appear to put an embargo on prospective amendments/ introductions of mediation to the Code.

Third, the 2023 Act does not contemplate any restriction on mediation (if any) under the Code or mediation in insolvency matters. As the Code is a special legislation and no specific amendment has been made to enable mediation under the Code as per the 2023 Act, the Code does not appear to be covered by the 2023 Act.

Fourth, suitable amendments to align provisions of specific laws have been made vide Sections 58 to 65 read with the Third to the Tenth Schedules, for example, the Companies Act, 2013. These pre-existing provisions in the Companies Act, 2013 specifically provide for the conduct of mediation and the jurisdiction of NCLT in relation thereto. Given this preexisting jurisprudence and the absence of any specific reference to the Code in the amended provision – Section 442, it may be considered that the Code continues to remain independent.

Fifth and last, Sections 2 and 6 of the 2023 Act provide further clarity on applicability and scope of the 2023 Act. Here, disputes / matters before tribunals (including the NCLT) do not appear to be included. The Central Government is vested with the power to notify tribunals which shall be covered under Section 5, for implementation of pre-institution mediation. The Committee is of the view that it even if NCLT is notified therein, specific inclusion of the Code may be required under the 2023 Act to provide substantive application to insolvency matters therein.

The Committee, therefore, noted that there appears to be no restriction under the 2023 Act on the introduction of a mediation regime under any law such as the Code. To that end, the Committee also examined the possibility of the 2023 Act’s application as is to the Code for insolvency mediation. After a detailed discussion and assessment of approach under the 2023 Act, the Committee is of the considered view that ‘one-sizefits-all’ mediation process under 2023 Act would not be suitable for insolvency mediation, as the stated objectives of the Code would not be met by it. This is especially in view of the statutory timeline for processes under the IBC, which is inherently incompatible with the timelines under the 2023 Act.

The Committee further noted that exclusion of IBC under the 2023 Act’s First Schedule by virtue of Entry 13 may not in itself be sufficient, as in any case, a separate mechanism for insolvency mediations would be required under the IBC. Therefore, the Committee recommends that it would be prudent to keep insolvency mediations under IBC self-contained.

Insolvency Mediation to be Bespoke and Self Contained within the Code :

The IBC is a specialized beneficial legislation with the object of revival of stressed enterprises through time-bound insolvency resolution processes.

Mediation is an alternate mode of conflict/ dispute resolution instead of litigation and aims at amicable settlement of such disputes with the simultaneous reduction in cases (and their pendency) before courts/ tribunals. It is the Committee’s view that to forward and implement the object and purpose of the Code, its various elements must be carefully aligned with any mediation mechanism that applies to the resolution of matters under it.

The non-feasibility of 2023 Act framework’s implementation under the Code is discussed below.

Timeline of Mediation Proceedings vis a vis the timelines under the Code:

a. The Committee observed that the voluntary and consensual mediation procedure with a timeline of 120 days (along with an extension of 60 days)117 as is currently envisaged under the 2023 Act is not aligned with the primary object of IBC, i.e., time bound revival of stressed enterprise. The introduction of a 180 days’ mediation process may severely displace such timelines and impact the efficiency of resolving corporate insolvency that has been achieved under the IBC thus far.

b. Further, mediation is a voluntary process and parties may refuse to settle or accept the mediator’s suggestion during the course of mediation. A recalcitrant party may intentionally render the mediation process futile while also taking advantage of the longer timelines under the 2023 Act.

c. The Committee observed that while these considerations also exist in other disputes, it is the grave impact of the delay in insolvency proceedings that makes the longer mediation timeline unfit.

Nature of Insolvency Proceedings:

IBC being a beneficial legislation is not focused on resolving single contractual breach of loan agreement or agreement to pay by the CD. The nature of the insolvency resolution proceedings is not simply recovery of money or assets unlike other commercial disputes before courts involving similarly placed parties (the creditor and the debtor). Instead, an ‘insolvency resolution process’ starts with filing of an application by the creditor claiming statutory ‘default’.

Dispute resolution mechanism under IBC is separate, independent and specialized to meet the need of revival of the defaulting debtor.

Pre-institutional Mediation falls outside of Insolvency:

The Committee also discussed at length, the possibility of pre-institutional mediation in insolvency matters, and is of the view that it may not fit well within the spirit of the Code. The remedies under the Code come into effect only after the statutory ‘default’ has occurred and an application has been made to initiate insolvency proceedings. Any mediation prior to such application would fall outside the realm of the Code and technically not be ‘insolvency mediation.’

Issue of third party and in rem rights:

IBC involves various stakeholders’ interests and requires time bound management of insolvency resolution process, as mentioned above. The Committee notes that the 2023 Act excludes ‘in rem rights’ as well as thirdparty rights from the ambit of ‘cases fit for mediation’ (First Schedule to the 2023 Act).

Ambit of Mediation Council of India’s role in insolvency mediations under the Code and further implementation:

The 2023 Act also envisages the setting up of a Mediation Council of India (provisions for which have been notified as on 9 October 2023) which will be tasked with registering mediators and recognising mediation service providers and institutes which train and certify mediators. Insolvency mediation requires specific skill set, training, and qualifications for mediators.

Further, members of the Committee observed that it will not be efficient to confer the power to regulate mediators and the insolvency mediation process on an independent regulator, when there is a specialised law for corporate insolvency. It will be problematic as the sharing of authority creates potentially unresolvable problems of priority and the ultimate authority of their decisions.

Skillset of Mediators and their Training:

Insolvency mediation requires specialized and domain specific expertise to understand particular issues between the parties. This specific skill set requires focused training in insolvency issues and understanding of the practical consequences of insolvency proceedings under the Code. For example, the public law aspect is unique for corporate bankruptcy since significant financing to Indian corporate debtors is provided by public sector banks, which are capitalised from public funds and taxpayer monies.

This interplay of issues is seminal to resolution of issues in the insolvency ecosystem. Therefore, it is essential for the mediator to be specifically experienced in domain and trained with nuances of conducting such mediations for an insolvency mediation to succeed. This has neither been provisioned for, nor contemplated under the 2023 Act.

Taking the above in consideration and after detailed discussion, the Committee agrees that blanket introduction of mediation as contemplated under 2023 Act does not meet the core elements or objects of IBC.

Therefore, the Committee recommends that the framework for insolvency mediation in India should be incorporated exclusively within the scheme of the IBC, from best governance and implementation perspective. The Committee thus recommends a ‘stage based’ and a phased introduction approach to apply and implement mediation in IBC to address ‘bottle-necks in current regime’.

- excerpts from the report by the Expert Committee constituted by the Insolvency & Bankruptcy Board of India (IBBI) .