By VMLS

Jan 27, 2025

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The Insolvency and Bankruptcy Board of India (IBBI) has put forward an innovative plan aimed at streamlining the resolution process for operational creditors (OCs). By allowing pre-institutional mediation before submitting insolvency applications under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, the initiative seeks to promote early dispute resolution, lessen the load on adjudicating authorities, and speed up proceedings. While this concept holds great potential, its success will depend on how well it is implemented and the readiness of stakeholders to adapt to these changes.

Mediation is increasingly seen as a quicker and less confrontational way to resolve disputes. It enables operational creditors and corporate debtors to have meaningful discussions with the help of a trained mediator. Rather than getting caught up in lengthy court battles, both parties can work together to tackle issues, which saves time, money, and effort. In addition to these practical advantages, mediation helps maintain important business relationships that could be damaged by litigation. For companies, collaborating to resolve disputes is much more advantageous than turning into opponents. The importance of this approach is highlighted by data showing that by April 2024, more than 21,000 Section 9 cases were settled before formal admission, while only around 3,800 progressed to full insolvency proceedings. This suggests that most disputes are resolved before they escalate into advanced litigation, emphasizing mediation's role as an effective pre-litigation strategy.

Under the proposed framework, operational creditors can opt for mediation before filing their insolvency application. Disputes commonly revolve around payment delays, quality of goods or services, or contractual disagreements. A mediator appointed under the Mediation Act, 2023, will guide the discussions between the parties. If the mediation is successful, the dispute is resolved without involving the National Company Law Tribunal (NCLT). However, in case of failure, the mediator will issue a non-settlement report, which the creditor can annex to the insolvency application when initiating formal proceedings. This approach balances the need for efficiency with the flexibility to pursue formal insolvency resolution if required.

While the benefits of this initiative are apparent, challenges remain. Mediation is voluntary, which means its success depends on the willingness of both parties to participate in good faith. There is also the risk that corporate debtors may exploit mediation as a stalling tactic to delay creditors’ access to formal proceedings. For smaller creditors, the lack of bargaining power could pose additional challenges, particularly when negotiating with larger and more resourceful corporate debtors. Furthermore, the enforcement of mediation outcomes relies on voluntary compliance, and any breach of the agreement could force creditors back into lengthy legal battles, defeating the purpose of the initiative.

Despite these concerns, the potential for pre-institutional mediation to reshape India’s insolvency framework is significant. To ensure its success, several measures must be implemented. These include developing a strong pool of trained mediators, increasing awareness among creditors and debtors about the advantages of mediation, and offering support mechanisms such as legal aid for smaller creditors to create a more equitable environment. Furthermore, establishing transparent monitoring systems to track mediation outcomes can promote accountability and enhance the process over time.

If executed properly, pre-institutional mediation could serve as a fundamental element of India’s insolvency framework. It provides operational creditors with a faster, more cost-effective method to recover their dues while alleviating the burden on an overloaded judiciary. By encouraging a culture of dialogue and cooperation, this initiative has the potential to foster a more efficient and balanced insolvency ecosystem that benefits all parties involved. For operational creditors, it is not just a means of resolving disputes but also a move towards establishing a fairer and more streamlined process for achieving justice.

Reference:

Mediation for Operational Creditors: A New Dawn in India’s Insolvency Framework

Mediation for Operational Creditors: A New Dawn in India's Insolvency Framework

Reference:

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