Insolvency proceeding can be tough due to the imminent financial strain involved.
An inclusive mediation process would help in democratising insolvency proceedings and also create a space that benefits all parties
What is the current case?
Recently, Supreme Court used its special powers under Article 142, to mediate a conciliatory discourse in a creditor-debtor dispute.
The case involved filings by some companies before the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).
The collective nature of the impact of insolvency, which looks to settle debts of all the creditors, was what mainly drove the conciliatory approach.
It is to be noted that only financial creditors are allowed to participation in IBC proceeding and non-financial operating creditors are not allowed.
Operating creditors include workers, employees, buyers and suppliers who’ve their money at stake with the liquidating company.
The only protection for them is the clause that their share of compensation can’t be lesser than what financial creditors have got.
This highlights that despite the IBC’s streamlined processes, there is enough room for a mediation and can be done during the initial stages.
Why mediation matters?
Two things are vital to any insolvency proceedings - the smallest acceptable compensatory amount for the creditor and constrains of the debtor.
The Concept - Mediated discussions with creditors can help put together a resolution plan that is the least resistive for everybody’s interests.
Notably, there are several enactments that safeguard interests of special constituencies of operational creditors that the debtor has to address —
Housing allottees under - Real Estate Act, 2016
Workers and employees under - Employees Provident Fund Act, 1952
Startups, Micro and Small Industries under - MSME Act, 2006
While the formal process of insolvency resolution disregards these special interests, mediation creates the space for discussing these legal obligations.
Another aspect where mediation is important, is in dealing with receipts from debtors of the company (those who’ve borrowed from the insolvent company).
Hence, in the ultimate resolution plan, mediated settlements are also more effective in terms of compliance, since the resolution is consensual.
Structural Advantages - As trained neutral peace brokers are involved, the responsibility of structuring discussions is eased on the contesting parties.
Also, in direct bilateral negotiation, parties are reluctant to share information and their interests, for fear of being exploited.
Hence, those discussions are limited to their demands and expectations on how an issue should be resolved.
Significantly, skilled mediators can potentially take advantage of dissimilar interests and needs amongst groups of creditors to tailor a suitable settlement.
What is the way ahead?
The IBC gives extensive powers to the committee of creditors in the insolvency resolution process, including veto against resolution plans.
Mediation should therefore be under the initiative of the committee of creditors and the insolvency resolution professional.
Notably, mediation can be a time bound process, which fits into the strict timelines for insolvency resolution under the Code.
