What would you do when opponents resolve their differences and settle disputes? You would pat them on their backs and wish them well. The Supreme Court exercised its special powers under Article 142 of the Constitution of India to do just that, in two cases involving the settlement of claims between creditors and debtor companies.

This gesture came in cases filed by the creditors against some companies before the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016 (Code). Article 142 gives powers to the SC to pass such orders as are necessary for doing complete justice in any case pending before it.

The need for the SC to draw on its constitutional powers to sanction a settlement between a creditor and the debtor company arose from two factors. The first is the collective nature of the insolvency resolution process. The process looks to settle debts of all the creditors through an insolvency resolution plan. As such, regulations under the Code do not allow closure of the case on the settlement of the creditor.

Secondly, in a bid to streamline the process, the regulations do not permit non-financial creditors to settle their dues with the debtor company. Participation and approval to the insolvency resolution plan is limited to the financial creditors. The only standard for protecting the non-financial or operating creditors, which group includes the workers and employees of the company, is that the repayment to the operational creditors under the resolution plan should not be less than the amount they would have received were the company to proceed to liquidation.

Despite the stiflingly linear process of insolvency resolution under the Code, it is possible to create spaces for participation of these stakeholders. Collective settlement of multiple claims of the creditors on the debtor company can be attempted through multi-party negotiations through mediation. Indeed, it is important that this space for insolvency resolution be inclusive.

Why mediation matters

Mediation has been used in several jurisdictions for insolvency resolution and has some specific advantages. Creditors of a corporate debtor in an insolvency resolution process know the smallest amount of repayment they are willing to receive, and the necessity of conceding to the needs of the debtor. With this beginning, mediated discussions for settlement with creditors can help put together a resolution plan that is arrived at through finding out and understanding the interests and needs of stakeholders.

Mediation allows for parsing the broad classifications of financial and operational creditors. There are several enactments that safeguard interests of special constituencies — e.g. housing allottees under the Real Estate Act, 2016; workers and employees under the Employees Provident Fund and Miscellaneous Provisions, Act, 1952, startups, micro and small industries under the MSME Act, 2006.

These laws provide, for instance, for the ring-fencing of payments by housing allottees, priority in repayment to workers, special dispute resolution processes and statutory interest payments to startups and micro and small industries. The formal process of insolvency resolution disregards these special interests.

Mediation, on the other hand, creates the space to acknowledge and provide differently for these needs. As an example, the same impairment of the debts owed to a startup, and those owed to a larger and well-established vendor of the debtor company, has differing impacts, and this can be acknowledged and addressed.

Keeping relationships

Other advantages accrue in utilising mediation. Insolvency resolution plans are contingent on a continued relationship with creditors. Operational creditors of the corporate debtor, such as trade creditors and workers have no formal participation or decision-making powers in the resolution plan under the regulations.

The only agency to these creditors in this process is to discontinue their business or services to the corporate debtor if there is dissatisfaction with the resolution plan imposed on them. Through discussions facilitated by mediation, and in formulating a plan that accounts for their views and needs, these relationships can be preserved and continued. For new investors, this is an opportunity to build relationships with these stakeholders.

The other limb in the insolvency resolution process is the receipts from debtors of the company. This is important in the ultimate resolution plan, and is another area where mediation can be usefully adopted. Mediation can be used in negotiating settlements on repayment of the dues owed to the company which align with its rehabilitation. This is speedier and less costly. Mediated settlements are also more effective in terms of compliance, since the resolution is consensual.

Mediation has several advantages over bilateral settlement negotiations. First, mediation involves a trained neutral, who takes the responsibility of structuring and facilitating discussions. In a typical negotiation, parties are reluctant to share information and their interests, for fear of being exploited, and limit discussions to their demands and expectations on how an issue should be resolved.

This obstacle to effective discussions is overcome by a mediator, who through the confidentiality built into the process, encourages conversations around needs and interests of the stakeholders and the investor, and the articulation of various options through which these interests could be met. The mediation process also takes advantage of dissimilar interests and varying needs amongst groups of creditors to fashion a settlement that treats such groups differently, but does not impact their interests.

Global best practices

The laws for insolvency resolution in Japan and the US, as examples, incorporate alternative dispute resolution processes. Mediation is used at the instance of a party or on the directions of the bankruptcy judge in Chapter XI bankruptcy resolution processes in the US. Japan has adopted a special conciliation law for bankruptcy resolution.

Settlement of contracts under which Lehman entities were due money, and debts to investors in Lehman Brothers’ linked investments were effectively undertaken through mediation. In India, the 2013 Companies Act already makes provision for resolution of disputes through mediation. The Companies (Mediation and Conciliation) Rules, 2016, facilitates mediation in disputes before the NCLT.

The Code gives extensive powers to the committee of creditors in the insolvency resolution process, including to veto insolvency resolution plans. Mediation should therefore be under the initiative of the committee of creditors and the insolvency resolution professional.

Mediation can be a time bound process, which fits into the strict timelines for insolvency resolution under the Code. Its specific advantage in the insolvency resolution process lies in its democratising the insolvency resolution process, and in its acknowledgement that it is in the common interests of all the stakeholders to work together to rehabilitate the company.

The writer is an advocate and mediator in Chennai

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