IBBI bats for pre-institution mediation between operational creditors and corporate debtors

The Insolvency and Bankruptcy Board of India (IBBI) has suggested that operational creditors (OCs) and corporate debtors (CDs) be given the option of mediation before the insolvency process is initiated.

According to a paper released by the IBBI on November 4,

"In most of the OC-initiated insolvency cases, they are more interested in repayment of money claims rather than admission or resolution of the corporate debtor."

It further noted that as of April 30 this year, 21,466 cases initiated by OCs were disposed before admission and only 3,818 cases were admitted to the Corporate Insolvency Resolution Process (CIRP). Further, a large number of cases initiated by OCs were settled before admission, and the settlement rate of CIRP pre-admission for OCs has been larger than at any other stages.

The paper said,

"Further, the Adjudicating Authority (National Company Law Tribunal) is required to conduct hearings before accepting or rejecting an application, and the process often becomes time-consuming."

It thus suggested that pre-institution mediation would between the OC and corporate debtor at the earliest stage, and facilitate faster admission by the NCLT.

The paper proposed an amendment to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, by providing OCs an option of mediation before filing insolvency plea under Section 9 of the IBC.

"The operational creditor can undergo mediation with the aid of mediator, as provided under the Mediation Act, 2023 In case of failure of mediation settlement, the mediator will prepare a non-settlement report which shall be annexed with the application for initiation of CIRP before the AA," the paper said.

This proposal aims to reduce the burden on the NCLT and thereby expedite admissions. IBBI has solicited public comments on this suggestion, to be submitted online by November 24.

There are two kinds of creditors under the IBC: OCs and financial creditors (FCs). OCs are those who provide goods and services to a business, but have not been paid. FCs are lenders of the company who are yet to recover their dues.

While the IBC enables both OCs and FCs to initiate the insolvency resolution process upon a minimum default of ₹1 crore, the Committee of Creditors (CoC) formed after the admission of the case comprises only FCs.

The NCLTs have been criticised for their high pendency and time taken to adjudicate insolvency pleas despite the Insolvency and Bankruptcy Code (IBC) providing clear timelines.

The Commercial Courts Act, 2015, provides for pre-institution mediation between parties, similar to what IBBI has suggested.

[Read IBBI proposal]