The Insolvency and Bankruptcy Board of India (IBBI) has proposed to include an option of mediation for operational creditors (OCs) under the Insolvency and Bankruptcy Code (IBC), as it aims to cut the load of National Company Law Tribunals (NCLTs).
According to discussion paper floated by the IBBI on Monday, the OCs would exercise the option of mediation before filing insolvency applications under the Section 9 of the IBC. This is the same provision which allows OCs to initiate corporate insolvency resolution process (CIRP) against corporate debtor (CD) over non-payment of dues.
However, if the mediation fails to reach settlement, the mediator will be asked to prepare a non-settlement report which shall be annexed with the application for initiation of CIRP before the Adjudicating Authority (AA). The mediation, as proposed, will take place as per the process prescribed under the Mediation Act, 2023. The IBBI has sought comments on the proposal from stakeholders till November 24.
Under IBC, once an application for initiation of CIRP is filed in the National Company Law Tribunal (NCLT), the latter is mandated to admit the application for starting the proceedings within 14 days. However, in reality, the time taken for the admission is significantly longer, mostly due to the low strength of benches, which delays the process.
Earlier this year, an expert committee under IBBI had recommended a voluntary mediation process for OCs; and the proposed provisions are based on the suggestions of that committee. The committee had suggested that at the admission stage, should mediation be initiated or continued during the said timeline (14 days), the automatic termination of mediation mandate would be either the date of admission under the Code or 30 days, whichever is earlier.
Anoop Rawat, partner, Shardul Amarchand Mangaldas & Co said that the regulations are extended to facilitate a mutual settlement of operational debt and should not be construed as imposing any mandatory condition on an operational creditor who decides to pursue resolution under IBC.
According to the paper, in most of the OC-initiated insolvency cases, they are more interested in repayment of money claims rather than admission or resolution of the corporate debtor. Therefore, a large number of such cases are settled before admission, and the settlement rate of CIRP pre-admission for OCs has been larger than at any other stages. As per official data, up to June 30, as many as 21,466 cases under section 9 were disposed of before admission and only 3,818 cases were admitted.
Further, the AA is required to conduct hearings before accepting or rejecting an application, and the process often becomes time-consuming. “Thus, in order to resolve disputes between the OC and corporate debtor (CD) at the earliest stage, and facilitate faster admission by AA, mediation as an option may be considered as an effective tool,” said the paper.
Experts say that OCs by volume have been the largest set of applicants making applications for commencement of insolvency against CDs. However, unlike in the case of a financial debt, there is a lot of scope for inter-se disputes between operational creditors and corporate debtors on various issues. “In that sense mediation for OCs is a welcome step and can help reduce judicial backlog to create bandwidth for other critical issues to be dealt by NCLTs in CIRP,” said Kumar Saurabh Singh, partner at Khaitan & Co.
Abir Lal Dey, partner, Saraf and Partners, however, said that the mediation process envisioned under the Mediation Act, 2023, with its ‘one-size-fits-all’ approach, may not be fully efficacious for insolvency resolution under IBC. “Therefore, the IBBI may consider adopting a tailored approach to mediation in insolvency disputes for each process under the IBC while preserving the fundamental essence of the Mediation Act,” he said.
From: financialexpress
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