The role of the mediator in ensuring a successful mediation is to (i) separate the people from the issues (ii) remove hurdles to facilitate smooth communication (iii) suggest various creative settlements options (iv) assists the parties in reaching a final settlement agreement.^[3]

 

Basis the type of conflict there are various models of mediation that can be adopted- facilitative, evaluative, court-mandated, and transformative. They employ different processes and envisage a different degree of intervention by the mediator. Facilitative mediation is more traditional in which the role of the mediator is to facilitate negotiations between the parties in conflict without revealing her own views regarding the dispute.^[4] Evaluative mediation, on the other hand, envisages a greater role of the mediator. Mediators in this model have sector-specific expertise and aid the parties by providing an evaluation of the strength and weaknesses of their case basis the legal position.^[5] This model tends to work well in cases where there is an uneven power dynamic between the parties.^[6] In some cases, mediation is mandated by a court in the interest of promoting a speedy and cost-efficient outcome, and these are known as court-mandated mediations.^[7] Finally, transformative mediation focuses on two key interpersonal processes- empowerment and recognition. The mediator aims to empower parties to make their own decisions but also works towards enabling parties to recognise each other’s stance and point of view.^[8]

 

A mediation process involves several stages that can be modified to achieve the desired outcome. A typical mediation, involves the following stages:

• Introductory and opening session: This session allows the mediator and parties to introduce themselves, and for the mediator to lay down the process she intends to follow to conduct the mediation process. The objective of this session is to gain the confidence of the parties and to create an environment instrumental to constructive negotiations.^[9]
• Private sessions or caucuses: The mediator conducts private sessions with each party separately. This encourages parties to share confidential information with the mediator^[10] that can help the mediator make a ‘candid and frank assessment’^[11] of the underlying interests of each party.
• Joint sessions: The mediator then conducts joint sessions to facilitate dialogue between the parties and give them opportunity to explain their own cases. The mediator encourages and promotes communication between the parties^[12] and helps the parties reach a voluntary settlement agreement.^[13]
• Closing session: Where the parties have agreed upon a settlement agreement, the mediator ensures that the agreement is reduced in writing and is signed by all parties in his presence. In the event, the parties are unable to settle the dispute, the dispute is referred to court. Statements made during the mediation are not disclosed or used by party before a court of law.^[14]

 

NEED FOR MEDIATION IN INSOLVENCY PROCEEDINGS

The advantages of mediation in resolving traditional disputes are well-known. However, the use of mediation in insolvency situations is arguably supported by a much wider rationale than in other situations, since it is:

 

Vis-à-vis court proceedings

• Speedy and cost-effective: Pursuing judicial proceedings can be time and resource consuming which may lead to value destruction, particularly where the judicial system is already inundated with matters and delays are rampant. Mediation is more resource conscious as there is limited discovery or formality of procedure, and parties can control the time spent on proceedings.^[15] Moreover, there may be centralisation of dispute resolution as well, which may not be possible when bankruptcy courts have only limited jurisdiction and cannot adjudicate on ‘non-bankruptcy’ aspects of various matters. This makes it a cost-effective option which the parties are keen to explore specially in insolvency proceedings, where the need to preserve time and costs is even greater.
• Confidential: In court-supervised insolvency proceedings, parties are generally hesitant and unwilling to share critical information which leads to information asymmetry and coordination problems. Since confidentiality is procedurally incorporated in a mediation process, parties are more at ease about sharing information about their reservation points which is likely to result in better settlements.^[16] The private and confidential surrounding of a mediation process also helps obviate the social stigma around insolvency for financially troubled companies.^[17]
• Flexible: Since mediation only involves the consent of the parties and is not bound by statutory authority, it can help in creating out-of-the box, creative and potentially, more satisfactory outcomes for parties than court-led proceedings.^[18] Often parties’ interests are not reflected in law, or the law may only allow straitjacketed outcomes. However, as mediation is based only on consent, it allows parties to develop outcomes and explore creative, out-of-the-box solutions that they are more likely to adhere to than formal court-imposed judgements.^[19] Parties can also control the outcome of the dispute and avoid the inherent uncertainty associated with litigation, particularly where legal issues are not settled or divergent legal views are likely, for instance in cross-border cases.
• Preservation of relationships: The use of mediation can help save business relationships. This is particularly crucial in insolvency situations, when attempts are being made to rescue the business as a going concern and negotiations with multiple parties can lead to coordination problems.^[20] Since mediation is not an adversarial process, there is no loser, as is the case in litigation, and it can help preserve relationships.^[21]

 

Vis-à-vis negotiations

• Mediation can help correct power imbalances and engender trust in negotiations: The situation of financial distress significantly influences the debtor-creditor relationship, making interactions between the parties more complicated and difficult.^[22] Unregulated negotiations between the debtor and creditor, or differently placed creditors may be affected by the power imbalance between debtors and creditors. The natural power of one party can be used to influence the settlement to the detriment of the other party, which may lead to resentment and difficulties in enforcement.^[23] This power imbalance may also manifest as lack of trust, which could subvert any negotiations. The appointment of a professional, expert mediator can help correct power imbalances and achieve mutually beneficial settlements.
• Mediation can assist meaningful negotiations: Quite often actors in insolvency situations do not possess the right skills or have the right mindset to conduct successful negotiations.^[24] Mediators may apply their skills to help advance negotiations and assist by engendering a culture of negotiation between parties.

 

INTERNATIONAL PRACTICE AND TRENDS

The adoption of mediation in insolvency proceedings has become an increasingly popular practice across the world. Countries have incorporated mediation both in their pre-insolvency and insolvency proceedings. Mediation can be used pre-commencement of formal proceedings,^[25] to facilitate negotiation and confirmation of plans,^[26] to evaluate claims^[27] and in relation to avoidance actions.^[28] Mediation has worked not only in domestic single debtor cases but has, in fact, gained most traction when employed in complex cross-border insolvency and group insolvency cases such as Lehman Bros. and Enron.^[29]

 

International Practice

The manner in which mediation has been applied in insolvency situations in some key jurisdictions is discussed below:

 

United States

The United States (US) has been at the forefront of applying mediation at various stages of bankruptcy proceedings, including claim settlement and plan settlement. In 1998, the US adopted the Alternative Dispute Resolution Act which requires all federal trial courts to implement alternate dispute resolution (ADR) methods and granting judges the authority to send a case to mandatory ADR procedures, including mediation. This law explicitly requires that each district court provide at least one ADR process, including, ‘early neutral evaluation, mediation, minitrial, and arbitration’.^[30] In addition to this, the Federal Rules of Bankruptcy Procedure^[31] delegate the authority to federal district courts to make and amend local rules governing practice and procedure in bankruptcy cases and proceedings. However, in almost every district, the local bankruptcy rule-making power to has been delegated to bankruptcy judges.^[32] As a result, most federal district courts permit the use of mediation, in some form, by local rule. Moreover, even in districts where local rules do not provide for mediation, it is employed on an on ad-hoc basis in Chapter 11 cases.^[33] Several bankruptcy courts such as those of Eastern District of New York^[34] and Central district of California,^[35] have also established mediation programs to ‘provide litigants with the means to resolve their disputes more quickly, at less cost, and often without the stress and pressure of litigation’. While the participation of parties in mediation programs is generally voluntary, the judge on its own accord or at the request of a party may refer the matter to mediation.^[36] The parties are normally given the option to select a mutually acceptable mediator and an alternate mediator. However, if the parties cannot agree, then the Judge can appoint a mediator and an alternate mediator from the panel.^[37]

 

Mediation has been extensively used in various stages of a Chapter 11 proceedings under the US Bankruptcy Code:

• Claims Mediation: Mediation has been used to settle contingent and unliquidated tort claims including claims relating to personal injury and property damage. NLRC v. Greyhound Lines^[38] was one of the first cases in which ADR methods were used to settle thousands of claims in connection with road accidents. The use of mediation in this case was particularly important as the bankruptcy court did not have jurisdiction to deal with claims relating to wrongful death and personal injury and in the absence of mediation, the debtor would have been forced to resolve these claims in multiple locations with multiple attorneys.^[39] The mediation process adopted in this case involved three distinct stages^[40]– first, the claimants were required to complete a standardized claim form; second, if the debtor denied liability or the claim could not be settled, then the parties engaged in mediation for a period of sixty days; and third, if mediation was not successful, then the claimant had the option of pursuing arbitration. As a result, more than ninety-five percent of the pre-petition tort claims were resolved through this mediation process.^[41] Claims mediation was also successfully applied in the Chapter 11 bankruptcy of Lehman Brothers. In this case, claims relating to 1.2 million derivates transactions with over 6,500 different parties was dealt with through mediation.^[42]
• Single creditor mediation: These involve mediations relating to single creditors. For e.g. in re Kovalchick,^[43] disputes between the debtor and secured creditor were referred to mediation.^[44] Such mediations may be particularly important in debtor-in-possession situations where a single creditor has the power to block plans.
• Plan Mediation: Use of mediation in negotiating a Chapter 11 payment plan is particularly helpful as the parties can efficiently reach an agreement without infringing on the bankruptcy court’s authority to approve the same. This is because the mediator has no binding authority to decide the outcome of the case.^[45] Plan mediation can also be used to mediate impasses in the formulation of a plan or to mediate plan related disputes.^[46] In the case of MF Global Holdings Ltd, separate insolvency proceedings were commenced in the US as well as in the UK, with both estates cross-claiming. Mediation helped in plan settlement in this case.^[47]
• Avoidance Actions: Mediation has also been applied by the bankruptcy courts to settle preference actions, turnover actions, and other adversary proceedings.^[48] In some jurisdictions, mediation is even mandated for such claims.^[49]
• Post confirmation of plans: Some reorganisation plans have terms relating to claims mediation after the plan is confirmed.^[50] For instance, in the case of Johns-Manville^[51] the confirmed reorganisation plan involved the creation of a settlement fund for the purposes of compensating the claimants and provisions for claims mediation to address their claims.^[52] Similarly, in the case of re A.H. Robins^[53] the confirmed plan provided for the establishment of a settlement fund for the benefit of the claimants and also provided claimants with ‘instant settlement offers’ in exchange for releasing their claims against the debtor.^[54]
• Cross-Border insolvency: These primarily tend to focus on the distribution of the estate to creditors from different countries, and the coordination of insolvency proceedings ongoing in different jurisdictions. In Olympia & York Case, where insolvency proceedings had commenced in both the US and Canada, a mediator was appointed to “(i) harmonize the Canadian and US proceedings; and (ii) bring about a consensus among the parties regarding corporate governance issues”.^[55]
• Group Insolvency: These mediations may relate to resolving disputes with intra-group claims, their treatment in plans and the coordination of different proceedings, to allow for more value-maximising resolutions. In Enron, for example, mediation procedures were applied by an examiner appointed to mediate plan disputes relating to a group company. The mediation facilitated the preparation of a joint plan for all group debtors. Mediation was also applied to deal with specific derivatives claims.^[56]

 

Japan

An out of court work out mechanism called Turnaround ADR was established in 2007 vide an amendment to the Act on Special Measures for Industrial Revitalisation and Innovation which is presently known as the Act on Strengthening Industrial Competitiveness. It is a process which is outlined to facilitate negotiations between distressed debtors and its financial creditors under the supervision of licensed mediators. The Japanese Association of Turnaround Professionals (JATP) is the first and only licensed organisation permitted to mediate Turnaround ADR cases.^[57]

 

The JATP only permits the debtor to proceed with Turnaround ADR if there is a reasonable possibility of successfully restructuring the debtor’s business and thus it is crucial that the debtor has a business turnaround plan prepared beforehand.^[58] A panel of three mediators is appointed to oversee the process- one lawyer, one accountant and one consultant or another lawyer, each with a background in business rehabilitation.^[59]

 

Some key features of the process are:^[60]

• After the acceptance of a formal application at the behest of the debtor, the JATP sends a ‘standstill notice’ to the financial creditors whom the debtor wishes to involve in the process. Typically, only banks are involved in the process.
• After the standstill notice is issued, debtors are not required to pay loan principals but are expected to pay the trade creditors in the ordinary course of business required to keep the business as a going concern.
• The process is usually confidential except in some cases involving listed companies.

 

Three types of creditors meetings are held where the business plan is discussed and voted on by the financial creditors.^[61] The mediators assess the economic viability of the plan and submit a report to the participating financial creditors. To validate the plan, a unanimous vote of the creditors approving the plan is required. In the event that one or more creditors reject the proposed plan, the Turnaround ADR is immediately terminated.^[62] In such a case, the debtor two options- (i) to use another mediation process known as special conciliation proceedings which is presided over by a judge and attempts are made to reach a consensus with the dissenting financial creditors^[63] or (ii) to file legal insolvency proceedings which may be civil rehabilitation proceedings under the Civil Rehabilitation Act (Act No. 225 of 1999) or corporate reorganisation proceedings under the Corporate Reorganization Act (Act No. 154 of 2002).^[64]

 

Australia

Both federal and state level courts in Australia are empowered by statutory provisions to refer parties to mediation and other ADR processes. Section 53A of the Federal Court of Australia Act, 1976 allows courts to refer parties to mediation with or without their consent. The same is not true for arbitration, as the parties’ consent is required for such referral.^[65]

 

The Civil Dispute Resolution Act 2011 mandates the filing of a ‘Genuine Steps Statement’ before filing an application in a Commonwealth Court such as the Federal Court or the Federal Magistrate Court.^[66] The Genuine Steps Statement must specify the steps that have been taken to resolve the dispute between the applicant and the respondent^[67] or the reason why no steps were taken which may relate to inter alia the urgency of the proceedings or the safety and security of any person or property.^[68]

 

These genuine steps include (i) intimating the other party of the issues in dispute along with an offer to discuss them (ii) providing relevant information and documents (iii) consideration and/or participation in ADR and (iv) negotiation.^[69]

 

In insolvency related matters, Federal Court proceedings that involve recoveries of unfair preference payments or an insolvency trading claim against a director would require the applicant to file a Genuine Steps Statement.^[70] A delay or failure to agree to mediate or a failure to mediate in good faith can result in imposition of costs on the party and even her legal representative. The filing of Genuine Steps Statements by parties may be considered while awarding such costs.^[71]

 

United Kingdom

In the United Kingdom (UK), the courts have supported the use of mediation in appropriate cases.^[72] The Chancery Courts Guide 2016 (Guide) encourages the use of ADR methods, particularly mediation.

 

The Guide provides for the settlement of disputes by means of alternative dispute resolution.^[73] It imposes an obligation on the legal representatives to consider with their clients along with other parties involved to explore alternative dispute resolution options to resolve disputes or particular issues. It further requires the legal representatives to keep their clients informed of the most cost- effective means of resolving the dispute.^[74]

 

Wherever appropriate, courts will encourage parties to use ADR to settle cases or particular issues.^[75] Usually, courts will not make an order directing the parties to undertake a form of ADR. However, if parties are unreasonably refusing to attempt ADR, the court may direct the parties to take reasonable steps to consider ADR.^[76]

 

Spain

In 2013, Spain established an extra judicial procedure in its Insolvency Act known as ‘out-of-court payment agreement’ (OCPA) also known as ‘insolvency mediation’. The purpose of this procedure is for the debtor to reach an agreement with their creditors based on a proposal made by an ‘insolvency mediator’.

 

This procedure can be availed by (i) consumers and sole proprietor whose liabilities are not more than five million euros and (ii) non-financial corporations who have fewer than 50 creditors and whose assets and liabilities are lesser than five million euros.^[77] It is initiated by the debtor who makes a request for the appointment of an insolvency mediator.^[78] While the debtor negotiates this agreement, creditors cannot institute enforcement proceedings (court or out-of-court) for a period of three months.^[79] Additionally, OCPA can be imposed on dissenting creditors if certain voting majorities are achieved.^[80]

 

The insolvency mediator prepares a settlement plan for credits, together with a feasibility plan and a continuation plan of the professional or business activities of the debtor, including a negotiation proposal of the debtor’s loans and credits. The plan should be approved by the vote of the creditors of at least 60% of the liabilities, and 75% if the plan consists in having the debtor transfer his assets as a payment for his debts.^[81]

 

Singapore

While mediation has not been used extensively in restructuring cases in Singapore so far, Singapore has taken steps to encourage the use of mediation in insolvency proceedings. In the case of Re IM Skaugen SE,^[82] for instance, Justice Kannan Ramesh remarked that deploying the services of a skilled mediator in developing a restructuring plan can help in building trust and consensus between the parties and can ‘iron out many of the wrinkles and creases that frequently erupt in a restructuring and which perhaps are not resolved in the adversarial cauldron of the court’.

 

In 2015, the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (Committee) was appointed with the task of recommending legal reforms to strengthen Singapore as a centre for international debt restructuring. The Committee recommended that:

• Where disputes can be efficiently resolved through ADR methods including mediation, judges should be empowered to encourage parties to take recourse to mediation.^[83]
• Local mediation institutes such as Singapore International Mediation Centre should develop rules and protocols specifically targeting insolvency disputes to attract potential users.^[84]
• Panels of mediation bodies should be strengthened to include expert mediators with experience in cross-border restructuring or insolvency practitioners should be encouraged to undergo the necessary training to mediate such matters.^[85]

 

The Committee also observed that mediation can be used: ^[86]

• to resolve individual creditor disputes with the debtor (in the context of a multi-creditor restructuring);
• to manage multiple creditor disputes of the same nature (similar claims mediation) where a mediator is appointed to resolve multiple claims with a common nexus of law or fact;
• in plan mediation where a mediator is appointed to achieve consensus in a restructuring plan between the debtor and its creditors or where debtors are subject to multiple insolvency proceedings in competing jurisdictions.

 

The Committee also noted that similar to the practice in the US where judges often encourage parties to mediate in bankruptcy cases, the courts in Singapore could follow suit.^[87] Additionally, the Committee recommended that provisions permitting courts to refer parties to mediation should be incorporated in statutes for resolution of disputes in insolvency and restructuring proceedings.^[88]

 

Recently, the United Nations Convention on International Settlement Agreements Resulting from Mediation also known as the Singapore Convention of Mediation was enforced on 12 September 2020. This Convention provides for a framework (consistent with global practices) for cross-border enforcement of mediation settlements involving parties and assets in multiple jurisdictions,^[89] which may provide a fillip to the use of mediation in restructuring/ insolvency proceedings.

 

Key trends and learnings

 

Broadly, the experience of other jurisdictions suggests that:

• Mediation can be incorporated as part of an ‘out-of-court’ workout mechanism: Countries such as Spain and Japan have developed stylised, out-of-court workout mechanisms in which mediation plays a significant role in helping parties come to a ‘resolution’. These out-of-court mechanisms have some features of formal proceedings, such as the extension of a moratorium and cram-down as well.

 

It is important to note that these procedures do not only help in the settlement of individual debts but help in preparing resolutions vis-à-vis all of the company’s creditors. Subject matter experts are appointed as mediators and are expected to help in the creation of or assessment of repayment turnaround plans. The mediator can adopt different techniques to persuade and assist parties in establishing ‘a common ground for cooperation in the exchange of the financial and other information necessary for meaningful plan negotiations’^[90]. The mediator can also aid in other managerial aspects of a plan mediation such as coordination amongst creditors for the purposes of voting on the plans or organising meetings between the debtor and creditors.^[91]

 

• Mediation can be used to address traditional ‘disputes’ e.g. avoidance actions in insolvency situations: Countries such as the US place emphasis on using mediation to resolve avoidance actions. Since these actions often involve heavy factual determinations by courts, and may involve expenditure of significant time and money, mediation is encouraged as an alternative to court-led dispute resolution for avoidance actions.^[92] Similarly, mediation may also be used to resolve disputes with single creditors.^[93]
• Mediation is used successfully in complex cases, where the legal position is not always clear: Experience from large cases such as Lehman^[94] and Maxwell Communications has shown that mediation is very useful in cross-border insolvencies and determination of complex claims where there is a divergence/ uncertainty of legal position. For instance, in the bankruptcy of Maxwell Communications, proceedings were commenced in both the US and the UK, and an ‘examiner’ was appointed to mediate and ‘resolve conflicts among the jurisdictions and, ultimately, to develop a coordinated plan and scheme that harmonized US and UK insolvency law’.^[95] In Lehman Bros. claims mediation was particularly helpful since it involved complex, factual issues, and had it gone to litigation, could have resulted in different outcomes in different national courts, that could have been conflicting.^[96] In such cases, mediation helps in providing a centralized ‘adjudication system’.
• Mediators can play a ‘coordination’ role in insolvency proceedings: Experience from cases such as Enron^[97] and MF Global Holdings Ltd.,^[98] shows that mediation can help in ‘coordinating’ different aspects of insolvency proceedings. For instance, mediation helps in coordinating with creditors for the purposes of voting on the plans or organising meetings between the debtor and creditors, in respect of reorganisation plans.^[99] Similarly, in case of group insolvency situations, mediation can facilitate coordination of meetings between the debtors and other key stakeholders, which can result in coordinated reorganisation plans.^[100]
• Parties are often referred to mediation by courts and/or by law: While mediation is generally a voluntary procedure, experience from jurisdictions such as Australia show that courts can refer parties to mandatory mediation, if they unreasonably refuse to engage in the process. Mandatory mediation encourages parties to make a serious attempt at resolving their disputes at an early stage.^[101] Further mandatory mediation eliminates the parties’ concerns of appearing weak or uncertain of their success at litigation.^[102] Similarly, in case of specific types of cases, e.g. avoidance actions, rules may mandate that parties attempt mediation before approaching the court.^[103]

 

This experience may be instructive while applying mediation to Indian insolvency proceedings.

 

MEDIATION IN INDIAN INSOLVENCY PROCEEDINGS

Presently, mediation is used in India pursuant to parties’ choice to resolve contractual disputes or under section 12A of the Commercial Courts Act, 2015 which mandates pre-institution mediation. In some cases, mediation may have to be resorted to by an order of court under section 89 of the Code of Civil Procedure, 1908, or under other special legislations such as section 37 of the Consumer Protection Act, 2019.

 

Despite mixed response to mediation in India, there is a growing demand that mediation be utilised more prior to or in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (Code).

 

Proponents of mediation argue that it could help alleviate stress on Adjudicating Authorities, whose low capacity has contributed to large-scale delays in insolvency processes under the Code.^[104]

 

Analysis of academic material and foreign practice in sections covered above, also shows that mediation could potentially be employed gainfully in the following stages under the Code. It may be noted, however, that certain provisions in the Code may also need to be revised, in order to create scope for mediation, particularly to resolve avoidance actions, claims disputes, etc.

• Pre-insolvency commencement: Mediation may be attempted prior to the commencement of formal insolvency proceedings both under sections 7 and 9 of the Code which would obviate the need to start court-supervised insolvency proceedings. In practice too, negotiations often take place prior to initiation of formal insolvency proceedings with an aim to reach a settlement or a restructuring agreement with the corporate debtor.^[105]
• For settlement after admission of the corporate insolvency resolution process (CIRP): Mediation may also be applied for successful settlement of debts even after admission of the CIRP both before and after constitution of the committee of creditors (CoC). Prior to constitution of the CoC, mediation has been successfully attempted in the case of V.K. Parvinder Singh v. Intec Capital Ltd. & Anr.^[106] Where a settlement plan was reached before the CoC was formed and as a result CIRP was suspended.

Mediation can also result in a settlement after the formation of the CoC to enable withdrawal of an insolvency application under section 12A of the Code. Use of mediation at this stage may also result in reverse CIRP in cases of real estate companies.

• Use of mediation in pre-packs/ Reserve Bank of India (RBI) June 7 circular: Similar to the position in Japan and Spain where mediators help the debtors in the preparation of a resolution plan in their out-of-court mediation mechanism, mediation may also be adopted to develop a resolution plan pursuant to the RBI’s Prudential Framework for Resolution of Stressed Assets (June 7 circular) or for the preparation of a base resolution plan under the pre-pack resolution framework for micro, small and medium enterprises. Mediators can assist the corporate debtor and creditors in negotiating and developing a mutually agreeable strategy for resolution.
• Claims Mediation: Mediation could help settle disputes relating to claims. This may include:
  • disputes relating to the quantum of claims made by and against the corporate debtor during CIRP or liquidation.
  • disputes relating to classification of creditors. For e.g. a resolution professional (“RP”) admitting a creditor as an unsecured one when the creditor considers itself as secured one, or when the RP has failed to consider a financial creditor’s exclusive charge over an asset while computing liquidation value.
  • There is scope for mediation in resolving such disputes.^[107] However, mediation ought to be applied in a manner that third-party interests not affected without the consent of such third-parties. This is likely to be achieved when litigation is likely to be too time-consuming and third parties are also convinced that certainty of mediation would be preferable to a litigated outcome.
• Disputes relating to assets: Mediation may also be helpful in cases where disputes relating to the ownership of assets arise when the RP takes possession of the debtor’s assets and the liquidator forms the liquidation estate. For e.g. in the insolvency of Lehman Bros., claims’ mediation was conducted to resolve cases where counter-parties claimed that some assets were held in trust for the benefit of third parties, and were not part of the estate.^[108]
• Third party disputes: Disputes may occur with third parties that are not creditors of the corporate debtor. These disputes may threaten the preservation of the debtor as a going concern both during the CIRP and under a resolution plan. For e.g. where a third-party owns land on which the corporate debtor’s premises are situated but refuses to extend the lease of the land in a resolution plan. In these situations, mediation may help resolve disputes and result in a negotiated settlement.
• Inter-creditor disputes: These disputes may manifest themselves most notably in cases relating to distributions under resolution plans, with dissenting creditors wanting different terms from the plan. Where a cram-down is not possible or is likely to lead to litigation, mediation may help creditors find alignment in their interest and settle how their dues should be paid out from a specific kitty allotted by resolution applicants.^[109]
• Post approval of resolution plans: Disputes may arise between the CoC and the successful resolution applicant after a resolution plan has been approved by the Adjudicating Authority. Such disputes may be successfully mediated and are more likely to provide agreeable outcomes, more so, as the assumption here is that both the CoC and the successful resolution applicant have a common objective viz. implementation of the resolution plan. The use of a mediator in such disputes can help facilitate dialogue between the parties but would perhaps be more useful if the NCLT itself is given adjudicatory power over post-approval actions, which it does not currently enjoy.
• Avoidance transactions: Mediation could be used successfully in relation to avoidance actions, particularly as the adjudication of avoidance actions takes time and involves extensive factual determination by the Adjudicating Authority. Attempting mediation in respect of avoidance actions could help in swelling the asset pool of debtor, in a cheaper and more time bound manner than typical avoidance actions that often continue, even after the resolution plan has been approved under the Code. In some jurisdictions, such as Delaware, mediation is mandated for certain types of avoidance actions.^[110] However, mediations may work best in relation to those avoidance actions, which do not require fraud or mala fides to be established or when the Adjudicating Authority itself directs these to be considered.
• Cross-border issues: As experience in cases like Lehman have shown, mediation can prove particularly useful in cross-border insolvency cases. Mediation may be used to settle disputes relating to crossclaims by the estates in different countries or settlement of claims of creditors claiming in both countries. Mediation may assist parties in coming to an agreement on Cross-border Insolvency Agreements to facilitate cooperation and coordination between proceedings in different countries, and once they have entered into such agreements, provisions for dispute resolution through mediation may be incorporated in such agreements. These disputes may relate to the interpretation of the agreement or even to disputes/ conflicts in the insolvency proceedings themselves.^[111]
• Group Insolvency Issues: In case of group insolvency proceedings, mediation may help resolve disputes arising from multiple insolvency proceedings. These typically tend to manifest as disputes regarding claims or plans. The UNCITRAL Model Law on Enterprise Group Insolvency also advocates the use of mediation to resolve disputes between enterprise group members concerning claims, whether arising within or outside the enterprise group.^[112]

 

Basis the nature of dispute, stage of the resolution process and the preference of the stakeholders involved, a mediator may adopt an appropriate model of mediation or alternatively may adopt characteristics of different models to conduct the process. For e.g. in a pre-insolvency mediation, elements of transformative, facilitative and evaluative mediation may assist the parties in reaching an agreeable outcome. In such a mediation, the mediator in addition to facilitating negotiations between the creditor(s) and debtor can encourage them to be empathetic towards the commercial needs of one another and settle the dispute without the intervention of the court by providing them with an evaluation of their strengths and weaknesses and likelihood of success or failure at litigation. Likewise, to resolve plan related disputes which require a meticulous understanding of the Code, an evaluative mediation model with an insolvency expert as a mediator may provide the most satisfactory outcome for the parties.

 

CHALLENGES IN APPLYING MEDIATION IN INSOLVENCY PROCEEDINGS

Despite this potential, and no prohibition on the use of mediation in insolvency proceedings, mediation has not been employed extensively in Indian insolvency proceedings so far. In fact, in the five years since the provisions of the Code came into force, only a handful of cases reportedly employed mediation.^[113] Interestingly, most of these cases have applied mediation to facilitate the settlement of debt of the creditor who made the application to initiate insolvency proceedings, so that the creditor withdraws the application for the insolvency proceeding,^[114] and there have been no reported cases indicating the use of mediation during the insolvency process to formulate resolution plans, etc.

 

Some key factors that could explain the lack of its widespread use in insolvency proceedings are:

• Lack of awareness: Awareness around the use of mediation and the benefits it yields as an effective tool for dispute resolution gravely lacks amongst the public.^[115] Experience from use of mediation in context of civil and commercial disputes, etc. shows that there are various perceptions around the use of mediation. Firstly, that mediation provides ‘lesser form of justice and is only second to litigation’.^[116] Secondly, parties who suggest or attempt mediation are perceived to be weaker.^[117] These perceptions arise from the fact that mediation is still an unfamiliar and misunderstood process for many.^[118] Lack of structured dissemination of data relating to success rates of mediation, cost efficiency and overall benefits of mediation also contributes to low awareness amongst the public.^[119]
• Lack of binding nature of mediated settlements: While mediation has been incorporated in individual legislations as mentioned above, there is no existing comprehensive framework governing mediation. Lenders are hesitant to incorporate mediation as a method of dispute resolution in their contracts as there is lack of clarity around enforceability and breach of mediated settlements.^[120] The lack of clarity on enforceability of a mediated settlement also adds to the perception that mediation is not an alternative to litigation. Moreover, in insolvency proceedings, the outcome of mediated settlements may affect third party rights too, e.g. in case of claims mediation, and as mediation would not be able to bind third parties, litigation may be preferred.
• Lack of statutory provisions/incentives to engage in mediation: Since financial creditors in India are regulated by the RBI, they prefer to adopt formal and statutory mechanisms for debt recovery. There is little incentive for banking institutions to engage in mediation as they have sufficient statutory provisions to resort to for debt recovery. Our interviews with legal practitioners revealed that lenders are hesitant to adopt mediation in the absence of statutory provisions that provide them with the option to resort to mediation for resolution of disputes or alternatively require them to sincerely attempt mediation for particular issues.^[121] Moreover, in cases of financial creditors, especially public sector banks, there is an inherent lack of internal organisational flexibility and such creditors may prefer to obtain an order from a court of law as opposed to engaging in an informal process for insolvency matters.^[122] In fact, our analysis of the Singapore law also shows that in the absence of the legal provisions, parties have rarely resorted to mediation in insolvency matters despite the encouragement from courts.
• Lack of capacity/ specialisation: There is a dearth of specialised institutions for insolvency mediation with experienced empanelled mediators specialising in the field. Presently, mediation is not treated as an independent profession and as a result is not in included in the curriculum at educational institutions.^[123] Challenges relating to capacity are exacerbated due to regional inequities as well.^[124]

 

REFORMS

To alleviate the concerns listed above and ensure that mediation can be employed gainfully in insolvency situations, the following legal and institutional changes may be considered:

• Incorporation of statutory provisions: There is immense scope to use mediation at various stages of the Code, however, as discussed above, stakeholders often lack the necessary incentives to attempt mediation. In this regard, various foreign jurisdictions such as US, UK, France, and Japan have statutorily provided mediation, in some form and manner, as an option for dispute resolution in their respective insolvency proceedings.

In India too, it may be helpful to incorporate provisions in the Code to empower the Adjudicating Authority to encourage and refer parties to mediation in appropriate cases or to resolve particular issues. However, given that mediation may not be useful in all circumstances, Adjudicating Authorities should only do so in where the use of mediation would help reduce time and costs for parties, and there should be no mandatory requirement to mediate.

For out-of-court mechanisms such as the June 7 Circular or for pre-packs, the RBI circular and Code, respectively may expressly recognise that mediators may be appointed by parties to come to a negotiated resolution plan or base resolution plan, as the case may be.

• Create awareness regarding mediation for stakeholders in the insolvency eco-system: Merely referring parties to mediation may not result in positive outcomes if parties themselves are unwilling to mediate. To alleviate this, government agencies such as Insolvency and Bankruptcy Board of India (IBBI) may consider creating awareness about the use of mediation, its benefits, and the possibilities of its success in insolvency proceedings that will motivate stakeholders to resort to mediation.

In this regard, they may also set up an online platform which can serve as a repository of accredited insolvency mediators (including mediators empanelled under the Companies Act, 2013), and mediation institutions. This platform may help connect stakeholders in the insolvency eco-system with relevant mediators and institutions.

• Capacity building initiatives for mediation practitioners and institutions: In addition to creating awareness relating to mediation, it is important to ensure that there is a sufficiently developed mediation eco-system.

Specifically, mediators must understand the goals of insolvency and the insolvency process as well, particularly in cases where parties would prefer evaluative mediation. Mediation centres may consider carrying out insolvency-focussed training for mediators who are interested in mediating insolvency related disputes. They may also accredit mediators who undertake such training^[125].

 

It may also be relevant for institutions that can provide mediation services to come up with protocols and rules that can be applied easily to insolvency mediation. IBBI may help in the development of such institutions and recognise institutions with adequate infrastructure capacities and a sufficient number of accredited insolvency mediators.^[126]

 

As discussed above, mediation has different success in different parts of the country and accordingly capacity building initiatives may need to take into account regional divergence, etc. as well.

 

• Making mediated settlements binding and enforceable: Finally, mediation will emerge as a viable alternative to court-led proceedings if parties are secure that their settlements will be considered binding and will be easily enforceable. One way in which this can be done is by ensuring mediated settlements are incorporated in orders of the Adjudicating Authority. Another may be done by creating a legal framework for use of mediations that addresses the issue of enforceability. Efforts have been made to address this lacuna with India signing the Singapore Convention of Mediation which provides an effective framework for cross-jurisdictional enforcement of mediated settlements and the introduction of the Mediation Bill, 2021 in the Rajya Sabha which provides for inter alia a structured framework for the conduct of mediation and enforceability of mediated settlements.^[127]

 

Together, such initiatives will help develop a preference for mediation in insolvency proceedings and enable the stakeholders of the Indian insolvency eco-system to tap the benefits of mediation.

 

CONCLUSION

There is immense scope of using mediation beneficially both pre-insolvency and also after the commencement of proceedings under the Code. Experience from other jurisdictions indicates that use of mediation to resolve a range of issues, including avoidance action disputes, disputes relating to claims, disputes relating to resolution plans and cross-border issues could reduce judicial burden and also further the objectives of the Code of providing time-bound justice and maximisation value for all stakeholders. However, mediation has not been used extensively insolvency proceedings inter alia due to concerns relating to the enforceability of mediated settlements, lack of sufficient incentives to employ it and concerns relating to capacity. If steps are taken to address these concerns, mediation could be employed usefully in insolvency situations in India.

 

Footnote

[1] Mediation and Conciliation Project Committee, Supreme Court of India, “Mediation Training Manual of India”.

[2] Justice Chandrachud D. Y., “Mediation – realizing the potential and designing implementation strategies”.

[3] Wilk M. (2003), “Mediation of a Bankruptcy Case”, American Bankruptcy Institute Journal, May.

[4] Shonk K. (2021), “Types of Mediation: Choose the Type Best Suited to Your Conflict”, 6 December.

[5] Omkar A. and Krishnamurthy K. “The Art of Negotiation and Mediation”, 2nd Edition.

[6] ADR Times (2021), “Types of Mediation: Evaluative, Facilitative and Transformative”, 24 March.

[7] Ibid.

[8] Models of Mediation, Steve Hindmarsh Ltd. https://www.stevehindmarsh.co.uk/help-and-advice/models-of-mediation/

[9] Supra note 1, pp. 25-27.

[10] Ibid., p.29.

[11] Supra note 2.

[12] Supra note 1.

[13] Ibid.

[14] Ibid, pp.

[15] Menezes A. (2010), “Mediation to the Rescue: How to develop a negotiation culture in business restructurings”, INSOL.

[16] Ibid.

[17] Lucarelli P. and Forestieri I. “The Three Targets of Insolvency Mediation: Dispute Resolution, Agreement Facilitation, Corporate Distress Management”.

[18] Supra note 3.

[19] Supra note 2.

[20] Supra note 17.

[21] Supra note 2.

[22] Supra note 17.

[23] Strutt M. (2014), “Mediation vs. Negotiation”, Europe Knowledge, Driver Trett.

[24] Ibid.

[25] For instance, in Japan, Shibata Y. et al., “Restructuring and Insolvency in Japan: Overview (Practical Law Country Q&A, 2018)”.

[26] For instance, in MF Global Holdings Ltd. where separate insolvency proceedings were commenced in the US as well as UK and both estates cross-claimed, Oon & Bazul LLP (2019), “Alternative dispute resolution in insolvency and restructuring proceedings”, Lexology.

[27] Report of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring, April, 2016, Recommendation 3.54, p.19.

[28] Berkoff. et al. (2016), “Bankruptcy Mediation”, American Bankruptcy Institute.

[29] O’ Donnell (2012), “Transnational Alternatives: Growing Role of Alternative Dispute Resolution in Transnational Insolvency Cases”, presented at Twelfth Annual International Insolvency Conference on “International ADR 2.0: Big Solutions for Big Problems”, International Insolvency Institute.

[30] Article 651 (a) of 28 U.S. Code (Alternative Dispute Resolution Act of 1998) (28 U.S.C.).

[31] Bankruptcy Rule 9029, Federal Rules of Bankruptcy Procedure.

[32] Esher J. (2009), “Alternative Dispute Resolution in U.S. Bankruptcy Practice”.

[33] Peeples R. (2009), “The use of mediation in Chapter 11 Cases”, ABI Law Review, Vol 17.

[34] United States Bankruptcy Court, Eastern District of New York, “Alternative Dispute Resolution – Mediation”.

[35] United States Bankruptcy Court, Central District of California, “Mediation Program”.

[36] United States Bankruptcy Court, Central District of California, Adoption of Mediation Program for Bankruptcy Cases and Adversary Proceedings.

[37] Ibid.

[38] Greyhound Lines, Inc. v. Rogers (In re Eagle Bus Mfg., Inc.), 62 F.3d 730, 733, 734 n.6 (5th Cir. 1995).

[39] Supra note 3.

[40] Mani R. (2020), “Mediation in Insolvency Matters”, Insolvency and Bankruptcy Regime in India: A Narrative, IBBI Annual Publication, p. 298.

[41] Supra note 3.

[42] Justice Sikhri A. et al. (2022), “Mediation in Corporate Insolvency: A Game Changer”, Business World, 4 March.

[43] Re Kovalchick, 175 B.R. 863, 870 (Bankr. E.D. Pa. 1994).

[44] Supra note 29.

[45] Akiba M. et al. (2021), “Chapter 11 Plan Confirmations and Mediation: The Need For Uniformity Under the Bankruptcy Code”, Business Law Section of the Florida Bar.

[46] Supra note 29.

[47] Oon & Bazul LLP (2019), “Alternative dispute resolution in insolvency and restructuring proceedings”, Lexology.

[48] Supra note 3.

[49] United States Bankruptcy Court, District of Delaware, Rule 9019-5 Mediation.

[50] Supra note 29.

[51] Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988).

[52] Supra note 29.

[53] In re A.H. Robins, 88 B.R. 742 (E.D. Va. 1988).

[54] Supra note 29.

[55] Supra note 29.

[56] Ibid.

[57] Ohno N. et al. (2021), “Insolvency law, policy and procedure”, The Insolvency Review: Japan.

[58] Suzuki G. et al. (2009), “Alternative Dispute Resolution Procedures for Turnaround of Business”, Japanese Association of Turnaround Professionals Report.1 March 2022.

[59] Abe S. (2020), “Japan’s Insolvency Regime Under Covid-19”, Kasumigaseki International Law Office (KILO), Lexology.

[60] Supra note 57.

[61] Ibid.

[62] Ibid.

[63] Ibid.

[64] Supra note 58.

[65] Section 53A, The Federal Court of Australia Act, 1976.

[66] Section 6(1), The Civil Dispute Resolution Act, 2011.

[67] Section 6(2)(a), The Civil Dispute Resolution Act, 2011.

[68] Section 6(2)(b), The Civil Dispute Resolution Act, 2011.

[69] Addison M. (2015), “10 reasons why insolvency practitioners should consider ADR”, DibbsBarker Publication.

[70] Ibid.

[71] Commercial mediation in Australia, Linklaters, May, 2022.

[72] Mediation and insolvency, Centre for Effective Dispute Resolution, October, 2020.

[73] HM Courts & Tribunals Service, Chancery Courts Guide, February, 2016, Chapter 18.1-18.6 (Case management for settlement).

[74] Ibid.

[75] Ibid.

[76] Ibid.

[77] Garcia M. et al. (2020), “Analysis of Insolvency Proceedings in Spain against the Backdrop of the Covid-19 Crisis: Insolvency Proceedings, Pre-Insolvency Arrangements and the Insolvency Moratorium, Documentos Ocasionales,” No. 2029 Banco De Espana.

[78] Arts. 231.1. and 232.1, Insolvency Act 22/2003; Albentosa L., “Mediation in pre-insolvency proceedings”.

[79] Supra note 77.

[80] Ibid.

[81] Albentosa L. (2014), “Mediation in pre-insolvency proceedings”, Revista de Mediación, Vol. 7, No. 1.

[82] Re IM Skaugen SE [2019] 3 SLR 979 at [94].

[83] Supra note 27, Recommendation 3.66.

[84] Ibid. Recommendation 3.68.

[85] Ibid. Recommendation 3.69.

[86] Ibid. Recommendation 3.54.

[87] Ibid. Recommendation 3.67.

[88] Ibid. Recommendation 3.66.

[89] Atkins S. (2021), “The use of mediation to improve global restructuring outcomes in a post-pandemic world”, Global Restructuring Review.

[90] Supra note 17.

[91] Ibid.

[92] Fishman R., “What Is Mediation And Why Mediate?”, Mondaq, 16 March.

[93] Supra note 29.

[94] Dasan K. et al. (2015), “Seminar Review: Mediation in International Insolvency”, International Arbitration Asia.

[95] Supra note 29.

[96] Supra note 94.

[97] Supra note 29.

[98] Oon & Bazul LLP (2019), “Alternative dispute resolution in insolvency and restructuring proceedings”, International Law Office, Lexology July.

[99] Supra note 17.

[100] Supra note 29.

[101] Kinhal D. and Apoorva (2021), “Mandatory Mediation in India- Resolving to Resolve”, Indian Public Policy Review, 2(2).

[102] Ibid.

[103] Supra note 49.

[104] Supra note 42.

[105] Interview conducted with Mr. Saurav Panda, Partner (Insolvency & Bankruptcy), Shardul Amarchand Mangaldas & Co.

[106] Company Appeal (AT) (Insolvency) No. 968 of 2019.

[107] Interview conducted with Mr. Parth Gokhale, Principal Associate, Shardul Amarchand Mangaldas & Co.

[108] Altenburger (2010), “Mediation in Insolvency”.

[109] European Law Institute (2017), “Rescue of Business in Insolvency”, Instrument of the European Law Institute.

[110] Supra note 49.

[111] UNCITRAL (2009), UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation.

[112] UNCITRAL (2019), UNCITRAL Model Law on Enterprise Group Insolvency, Article 10.

[113] Tiwari P. and Singhvi (2020), “Mediation New Remedy under IBC”; Parvinder Singh v. Intech Capital, Company Appeal (AT) (Insolvency) No. 968 of 2019.

[114] This withdrawal of the application by a single creditor may take place both prior to its admission by the Adjudicating Authority and even after its admission (but before formation of committee of creditors that is responsible for commercial decision-making). This is a unique feature of Indian insolvency law.

[115] Supra note 101.

[116] Supra note 101.

[117] Ibid.

[118] Ibid.

[119] Kumar A. et al. (2016), Strengthening Mediation in India: A Report on Court Connected Mediations, Vidhi Centre for Legal Policy.

[120] Supra note 105.

[121] Supra note 105.

[122] Supra note 107.

[123] Supra note 101.

[124] Jauhar A. et al. (2016), Strengthening Mediation in India: A report on court-connected mediations, Vidhi Centre for Legal Policy.

[125] Ibid.

[126] Concerns regarding the infrastructural capacity of existing mediation centres, including number of mediators, and pendency/ backlog of cases have been raised; Ibid. pp.28-32. If mediation has to work in insolvency situations, capacity will be a concern, since even more than in ordinary disputes, insolvency proceedings require time and cost saving.

[127] The Mediation Bill, 2021, Ministry of Law and Justice, Government of India.

 

This article was originally published in Aanusandhan (By Insolvency and Bankruptcy Board of India) on 1 May 2022 Written by: Misha, Partner; Shreya Prakash, Senior Associate; Kritika Poddar, Research Fellow.

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