Mediation Act to yield to IBC on debt resolution matters

The shift will see negotiations between creditors and defaulting businesses being exclusively determined by bespoke provisions of the Insolvency and Bankruptcy Code.
The government plans to transition debt resolution mediation from the Mediation Act of 2023 to the Insolvency and Bankruptcy Code (IBC). This shift aims to streamline negotiations between creditors and defaulting businesses exclusively under the IBC’s provisions. Legislative changes, expected after national polls, will exclude debt resolution talks from the Mediation Act and introduce a 30-day voluntary mediation window within the IBC. Experts suggest this move will clarify processes and promote efficient debt resolution, particularly for operational creditors.

New Delhi: The government is likely to shift the process of mediation for debt resolution to the Insolvency and Bankruptcy Code (IBC) so that negotiations between creditors and defaulting businesses are exclusively determined by bespoke provisions of the IBC, two people informed about the development said.

These matters currently fall under the purview of the Mediation Act of 2023. For the IBC to cover the process, however, it will have to be tweaked.

The ministry of corporate affairs is likely to propose to the law ministry to notify the IBC that the debt mediation process will not to be covered under the purview of the Mediation Act.

That will enable a mediation regime to be built into the IBC ecosystem with a focus on meeting the goals of debt resolution—revival of the distressed businesses in the shortest possible time and salvaging the value of the assets.

The current process can be confusing for stakeholders, with multiple laws dealing with the same subject.

In addition to excluding debt resolution -related talks from the Mediation Act, the government has to tweak the IBC to enable a 30-day mediation window that stakeholders can voluntarily opt for.

“The Central government has to amend the IBC, make the rules and create the facilities for mediation attached to the National Company Law Tribunal. Regulations will be made by the bankruptcy rule maker Insolvency and Bankruptcy Board of India,” said one of the persons cited above, who spoke on condition of anonymity.

The legislative changes are expected after the national polls in April-May, said the second person, who also spoke on condition of not being named.

The Mediation Act of 2023, framed to promote alternative dispute resolution, says that any party before filing any suit or any civil or commercial court proceeding, may voluntarily explore pre-litigation mediation.

An expert panel recommended mediation in a 31 January report as a way of smoothening debt resolution under the IBC. It suggested that for clarity and to reduce the scope for confusion, IBC proceedings may be specifically excluded from the Mediation Act.

This can be done by specifying IBC in the schedule of proceedings excluded from the Act’s purview or by issuing a notification. Proceedings before bodies like the Competition Commission of India, the Appellate Tribunal for Electricity, Petroleum and Natural Gas Regulatory Board and its appellate tribunal and the Securities and Exchange Board of India and its appellate tribunal are excluded from the Mediation Act’s purview.

Experts pointed out that in many cases lenders and borrowers usually make attempts to settle the issue before invoking the IBC, including under the notifications of various RBI circulars dealing with resolution of stressed assets.

Daizy Chawla, senior partner at S&A Law Offices said that even if the parties settle financial debts through mediation, it is still not clear whether the tag of ‘wilful defaulter’ or other consequences due to default which promoters or guarantors face will be cleared.

“With respect to operational debt, mediation can be considered as a good initiative as the operational creditor would like to proceed with mediation — as they are well aware that if the case is admitted under IBC, they will either get very little or nothing,” said Chawla.

Operational creditors like suppliers to businesses tend to settle the case and collect their dues rather than pursuing bankruptcy proceedings.

Queries emailed to the ministry of corporate affairs on Thursday seeking comments for the story remained unanswered at the time of publishing.

(This article was originally published by Mint)