Let the vacuum left by suspension of IBC be filled by Mediation

By Sanjeev Ahuja

Mediation is also often described as “assisted and without prejudice negotiation” and rightly so. The process is supposed to be controlled by the mediator (the neutral) but the content is to be controlled /managed by the parties. True that the highlighting features of mediation are its confidentiality, flexibility, being pure voluntary effort, assuring and ensuring ‘party autonomy’ coming with a small dose of assisted negotiation (which is also another name given to ‘give and take’ or finding an acceptable midway). It just is apt to fit in the gap or the vacuum left wide open by the intended suspension of Insolvency and Bankruptcy Code (IBC).

As we await the fine print (through the ordinance), the writing on the wall is made very clear when in last few months or so thrice we have been reminded on the need to rethink and relook at IBC and its relevance in its current avatar, of course, further hit by the Covid uncertainty. In
parallel, raising of the thresholds for defaults and the back and forth on the suspension, also signifies that all had not been well with IBC as far as a various stakeholders are concerned (especially MSMEs) including the government and statutory authorities.

If for a moment, we take a macro view of the impact of IBC in the last four years of its existence, we see a lot of cases going into liquidations, fewer resolutions, extension of minimum timelines prescribed for resolutions, unending litigations at all levels, inconsistent orders on similar /same issues, mixed reviews on the performance of insolvency professionals, delays in admission of petitions, orders reserved for months (be it infrastructure issues or otherwise), etc. Some grey areas continue to be grey, even as the regulator and the government feel the need for regular tweaks and amendments in the Code and the regulations. Some of the Big 12 cases, which were expected to be the torch bearers, are still waiting to see closure. The inability of the legislature to give clarity on the clear supremacy of IBC over all other legislations and hence inability of the tribunals to give a clean slate to the resolution applicants make the insolvency regime inefficient.

All the above can be justified either way depending on which school of thought you would want to endorse.

One school of thought says it’s a new law, encompassing so many other statutes, necessitating tweaks and changes in many others. Hence, there will be challenges. It requires change in mindset of the borrower, and reset in the borrower-lender relationships, hence it had to evolve with time with regular learnings and experiments, so and so forth.

The second school of thought sees this as a total lack of pre-emption, lack of ability to see through and visualize while drafting such a draconian law, the result of which can be death (liquidation / dissolution) of the company. The cost of learning surely cannot equal the cost of death of a person (death of a legal entity also affects the lives of natural persons). The unhidden fact also is, that the kind of collateral damage that IBC has seen during its journey of three years and more has no parallel and has critically touched some totally unintended stakeholders like home buyers, operational creditors, employees and workmen, etc. The primary objective of the IBC as was told was the cleaning of the books of the banks and helping them get rid of their NPA accounts. Did we at all pre-empt the damage on the sides and see who all were really getting cleaned up in the process?

If today a reality check is done and a survey carried on for each affected stakeholder, it might be difficult to find too many satisfied bankers, promoters/CDs, operational creditors, or professionals who have got engaged in the process. May be the success expected seems to have fallen short of the expectations. Where did we go wrong, if at all? The back and forth on 29A, special treatment for MSME, settlements at various levels, allowing withdrawals at every stage showed somewhere that something was amiss.

Either left unattended earlier or if eventually discovered, the patchwork that followed did not yield the desired results. Now, Covid-19 proved to be the last straw to break the camel’s back when current situation coupled with the earlier defaults and strains in the economy would make many other businesses unviable. So, here we are at a situation where the government has got an opportunity to really go back to the drawing board once again, use all its learnings and come up with IBC 2.0.

Till then we cannot leave the vacuum unattended. We need to ensure there is an application of relevant tools and techniques to resolve the disputes in the interim. And may be in the process, explore a mechanism of dispute resolution, which can co-exist with any law of resolution / recovery going forward.

Mediation: A viable alternative

And as the talk for introduction of Pre Packs (under CIRP provisions) catches steam, this surely would require changes on certain critical aspects of the current CIRP provisions including but not limited to 29A dilution, debtors in possession regime, applicability of moratorium, formal role for an insolvency professional, necessary changes in RBI/IBA guidelines, role and relevance of other creditors rights and interests. In the interim, it is high time we introduce and use the noble/effective concept of Mediation, where parties discuss the potential solutions to the issues on their own and come out with an agreed resolution to their dispute, ably guided /assisted by a Neutral (who surely and likely may be an Insolvency Professional if otherwise eligible or can keep an Insolvency Professional (IP) as a part of his team). No better situation where parties make each other privy to their respective constraints and figure out a win-win formula which would be the essence of the pre-pack. All this will get played out in the given framework of the law to remain a legit proposal. Presence of an IP will further ensure that the provisions as are
applicable are adhered to.

The way we are comfortable to let the law evolve with learnings on the way, the author strongly feels and is confident that the cost of this experiment (of using Mediation as a tool to resolve commercial disputes) surely would be worth the effort and would never be a costly affair. But
the results can be amazing, if done right.

Making Mediation mandatory ensures that the parties necessarily need to go through the process before they opt for other available means of recovery/resolution. An effective Mediator essentially creates an amicable and a conducive environment and opens a communication channel which can prove extremely effective where parties (sitting with the right intent) surely can discover a winning formula, knowing each other’s constraints.

After all the model applicable would not be ‘winner takes all’ or ‘all or nothing’ but the model of ‘give and take’, encouraging both sides to look at new and creative /innovative solutions suiting both the sides based on their needs and interests (within framework of law, which would provide the broad contours for the potential settlement agreement which would be based on the consent of both the sides)

Pre-requisites:

• A broad framework for the process to ensure transparency/consistency and legal recognition for such settlements.
• A trained/qualified Mediator with good control on the process.
• Training of existing insolvency professionals.
• Both the parties with the right mindset and an intent to resolve. Any cases of willful defaults, criminal intent, lack of transparency would be not suitable for Mediation.
  
• Pros:

• An agreement which is a consent settlement agreed and decided by the parties themselves
• Quick Timelines
• Low Costs
• Confidential
• Voluntary Exercise, reducing the potential litigations and enforcements.
  
• Cons:

• A detailed /micro law which might stifle the creativity and innovative solutions. Requirement is only for the broad contours and the framework.

After all Mediation would be nothing more than a use of a homeopathic medicine which would either cure the disease and make all the stakeholders happy, and just in case it can’t, would at least ensure that there are no side effects. This would avoid jumping to the antibiotic course at the first instance. So, only on its failure do you go and fight your war, be it arbitration or trial.

No time better than now to work on it and try it out when we have the uncertainty, cannot afford to make costly experiments, and can surely try something which if works can really make a difference in the way the commercial disputes would be resolved in our country going forward.
May be few answers about the genuine apprehensions need to be found out as we move in this direction. The world has embraced Mediation and we cannot afford to be left behind.

We have a chance to lead by example and should not let go this opportunity. After all post Singapore Mediation Convention, (where India was a signatory) there is action all around and high time India does what is the need of the hour. We would need to ratify the convention and bring out a specific law to ally fears and concerns of the legitimacy of this concept and then encourage the use and practice of this concept across. We would need to use both the ‘pull’ and the ‘push’ theories for its better and quick acceptance. We have heard Chief Justice emphasising
the importance of Mediation and we have seen intent of legislature to use Mediation even for Income tax disputes. When all this is being thought and spoken about, let us all contribute at all levels and make this happen.

All the commercial disputes (aligned to the ‘cleansing of the NPA’ story) be given a chance to be resolved through Mediation, as a pre-IBC tool and become a pre-requisite. Let us all get the message in the initiative taken by NCLAT in Parvinder Singh Vs Intec Capital Ltd. & Anr. to allow Mediation (which was successful in settlement) that this is a medium which would find favour with the Judiciary as well. But the moot question remains, was it not an option with the parties all this time. A timely use of this option would have saved much of time, cost, embarrassment, pain and of course, the relationship. The writing is on the wall, high time we
read it.
Let this be the first step. The rest will follow….

The author is a mediator, resolution professional, arbitrator and strategy advisor.