In a significant move, insolvency regulator IBBI proposes to allow operational creditors (OC) to explore voluntary mediation before initiating an insolvency application under Section 9 of the Insolvency and Bankruptcy Code (IBC). 

This proposal —part of a new IBBI discussion paper —aims to reduce the burden on the Adjudicating Authority (AA) and thereby expedite admissions.

“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 discussion paper issued on Monday.

Insolvency and Bankruptcy Board of India (IBBI) has now invited public comments on the discussion paper by November 24. 

There are several recurring issues in Section 9 applications, particularly disputes between OC and Corporate Debtor.

Some common areas include disagreements on Goods/Services regarding the quality or performance of goods and services provided; discrepancies over the exact amount owed or alleged underpayment; contractual disputes involving allegations of non-compliance with contractual terms by either party; and claims of the CDs against the OC for damages or set-offs. 

Yogendra Aldak, Partner, Lakshmikumaran and Sridharan, said this step has the potential to significantly reduce the burden imposed upon the NCLTs which will also have a positive impact on timely disposal and efficiency of proceedings before them. 

Furthermore, the litigation cost imposed upon the parties will also be greatly reduced through the consultative and collaborative process of mediation, he said.

Hari Hara Mishra, CEO of the Association of ARCs in India, said that an expert committee constituted by IBBI on use of mediation in IBC had strongly recommended its use in OC-initiated proceedings, as these aim mostly at repayment of money claims. 

“A comprehensive framework  for resolving insolvency like IBC,  need not be burdened  routinely with sole objective of  recovery of small dues. IBC should be the last, and not the  first resort, in such cases.The proposed amendment will declog large number of cases in various benches and help timely resolution,” Mishra said.

Siddharth Srivastava, Partner at Khaitan & Co, said that the proposal has the potential to reduce the adjudicating authority’s  burden of cases since most OC-initiated insolvency cases are aimed at recovery rather than resolution.

He noted that the proposal is a welcome move by the regulator and has been brought forth considering that the settlement rate of the Corporate Insolvency Resolution Process (CIRP) pre-admission for OCs has been larger than at any other stage.

Anoop Rawat, Partner, Shardul Amarchand Mangaldas & Co, said, “According to the data published by IBBI, 21,466 cases have been disposed off prior to admission and only 3,818 cases have been admitted under Section 9 of IBC as on 30.04.2024”.

This indicates that most OCs tend to settle the debts before admission or resolution of the CD, Rawat said.

These trends also suggest the the highest settlement rate in insolvency cases is at the pre-admission stage. Keeping all of this in mind, the IBBI Expert Committee (set up in March 2023) had suggested an amendment to the CIRP Regulations 2016, he said.

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