Bottlenecks in the Insolvency and Bankruptcy Code of India –  Exploring mediation to ease some of the pain points

By Akshaya Kamalnath (Australian National University College of Law)

While thinking about the Insolvency and Bankruptcy Code, 2016 for an earlier article, I had identified two main bottlenecks in the system. The first was at the point of initiation which particularly applied to large companies since their creditors were often unwilling to trigger the corporate insolvency resolution process (CIRP); and the second was delays caused due to excessive litigation once the CIRP has commenced.

The initiation problem

My 2019 article dealt with the first problem and argued that a ‘modified Revlon duty’ based on the US case Revlon, Inc. v MacAndrews & Forbes Holdings 506 A.2d 173 (1986) (which held that directors have a duty to sell to the highest bidder when sale of the company was imminent). This modified Revlon duty would apply when a near insolvent company is seeking bids and is thus effectively on sale. At this point, they would have a duty to maximise value for the company by accepting the highest bid. Since there is still a chance that the company will be rescued and revived, shareholders would be incentivised to enforce this specific duty against directors. In contrast, shareholders are not incentivised to take action against directors in an already insolvent company where there is little or no chance of shareholders getting any returns. On the other hand, directors who do not want to fall afoul of this duty will be incentivised to enter the insolvency resolution process if they are not interested in accepting the highest bid. Since the resolution process under the IBC is also meant to revive the company with a chance for other parties to make bids, the fact of commencing the IBC process will not be an entirely negative outcome. This kind of duty would create a pre insolvency phase where directors are incentivised to either make efforts to genuinely restructure/ revive the company or to initiate the IBC process.

Bottlenecks after initiation

In a forthcoming article co-authored with Aparajita Kaul, we explore the bottlenecks after the CIRP has commenced. We find that the bottlenecks were caused by excessive litigation; which was attributable to (i) the conflict between operational creditors (mostly trade creditors and employees) and financial creditors (those who are owed debts arising out of financial contracts) due to their differential treatment in the CIRP; and (ii) litigation required to clarify aspects of the new law. Both of these are recurring problems under the IBC. While we can hope that the latter will eventually abate, we cannot wish away the former.

Using a feminist lens, we assess the problem of excessive litigation due to conflicts between various stakeholders. In essence, we note that preserving relationships is key for reorganization. Even if the company is to be liquidated, it is in the interests of all stakeholders, the over-burdened courts (NCLTs to be more specific) and the economy in general, that this decision is taken quickly without excessive litigation. In the IBC, financial creditors determine the fate of all stakeholders in the CIRP. This prioritisation subverts the feminist values of inclusion and preservation of stakeholder relationships. Further, while this hierarchy was meant to increase efficiency, in reality, it has caused excessive litigation because that is the only opportunity that many stakeholders get to voice their concerns. While India also provides for Alternative Dispute Resolution options, these have mostly been ignored in the corporate insolvency process. Court proceedings in India can last years, while the corporate debtor continues to lose its value and stakeholders harden their positions in opposition to each other. We argue that it is possible to marry the goals of efficiency and inclusion in a mutually beneficial way by introducing mediation into the CIRP.

Introducing mediation within the IBC

We propose that parties should be nudged towards mediation during the CIRP where necessary. In cases where it is apparent that much of the litigation is a result of lack of cooperation between parties, the NCLT should recommend mediation to the parties. India already has the legal infrastructure to achieve this within its civil procedure rules. The Companies Act, 2013 specifically provides for the setting up of a mediation and conciliation panel of experts to which pertinent cases may be referred by the NCLT. Despite stakeholders like operational creditors not having a say on the CoC, they consist of important groups like suppliers and employees and taking their concerns to mediation will allow their voices to be heard. The process itself, focused as it is on compromise and win-win options, can help preserve relationships as against litigation. Even where a mediation does not result in settlement, mediation can improve communication and negotiation between parties to a dispute. While it has been argued in the context of Singapore that a mandatory order to mediate might be desirable, we only propose NCLT recommendation at this stage while institutional capacity in terms of qualified mediators with experience in insolvency matters is still developing. The market for insolvency professionals has developed very quickly in India and it is likely that allowing this option within the CIRP process will incentivise many insolvency professionals to qualify as mediators to take on these roles.