Mediation for Operational Creditors
Context:
The Insolvency and Bankruptcy Board of India (IBBI) has proposed new regulations allowing operational creditors to opt for voluntary mediation before initiating insolvency proceedings against a company. The goal is to reduce judicial workload and expedite insolvency processes.
Operational creditors are defined under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically in Section 5(20). They are individuals or entities to whom an operational debt is owed. This type of debt arises from transactions related to the provision of goods and services, including employment, as well as statutory dues payable to government authorities.
About the Regulations:
- Non-Settlement Report: If mediation fails, the mediator will issue a non-settlement report, which will accompany the application for initiating the Corporate Insolvency Resolution Process (CIRP) before the adjudicating authority (AA), according to the IBBI.
- This approach is expected to alleviate the authority’s caseload and speed up admissions.
- Expert Committee: This proposal aligns with recommendations from an expert committee, which, in a January report, suggested pre-institutional mediation as a preliminary step before filing insolvency applications.
- Causes: The IBBI highlighted common causes of disputes, including disagreements over quality or performance of goods and services, contractual disputes, discrepancies in amounts owed, and allegations of underpayment.
- It noted that operational creditors are often more interested in securing repayment than in initiating full insolvency proceedings.
- Data: Data from the AA shows that of 21,466 cases filed under Section 9 — initiation of insolvency by an operational creditor — only 3,818 were admitted as of April 31, with many cases settled before admission.
- The IBBI pointed out that pre-admission settlements for operational creditors have been more common than settlements at later stages, but the AA is required to hold hearings before accepting or rejecting an application, often resulting in delays.
Mediation, involving a neutral third party to help negotiate settlements, is seen as a potential tool to resolve disputes between operational creditors and companies early, potentially streamlining the admission process before the National Company Law Tribunal (NCLT).
Insolvency proceedings in India
These are governed primarily by the Insolvency and Bankruptcy Code, 2016 (IBC), which provides a comprehensive framework for the resolution of insolvency for individuals and corporate entities. The IBC aims to streamline the process of insolvency resolution and ensure timely recovery for creditors while balancing the interests of all stakeholders involved.
Key Features of Insolvency Proceedings:
- Types of Insolvency:
- Corporate Insolvency: Applies to companies and limited liability partnerships (LLPs).
- Individual Insolvency: Pertains to individuals and partnership firms.
- Regulatory Authority: The Insolvency and Bankruptcy Board of India (IBBI) is the regulatory body overseeing insolvency proceedings. It regulates insolvency professionals, agencies, and entities, ensuring compliance with the provisions of the IBC.
- Stages of Corporate Insolvency Resolution Process (CIRP): The CIRP consists of several distinct stages:
- Filing a Petition: Creditors can file a petition with the National Company Law Tribunal (NCLT) when a company defaults on payments. The minimum default amount required to initiate proceedings is currently set at INR 1 crore.
- Admission of Petition: The NCLT reviews the petition. If it finds merit, it admits the petition and initiates the CIRP, typically within 14 days.
- Appointment of Interim Resolution Professional (IRP): Upon admission, an IRP is appointed to manage the affairs of the company during the resolution process.
- Moratorium Period: A moratorium is declared, prohibiting any legal action against the corporate debtor for recovery of debts during this period.
- Resolution Plan: The IRP collects claims from creditors and invites resolution plans from interested parties. A resolution plan must be approved by at least 75% of the Committee of Creditors (CoC).
- Approval or Liquidation: If a resolution plan is approved by the NCLT, it becomes binding on all stakeholders. If no plan is approved within the stipulated time frame, liquidation proceedings may commence.
- Individual Insolvency Process: For individuals, a similar process exists but is typically less complex than corporate proceedings. Individuals can file for insolvency voluntarily or be declared insolvent by creditors through a petition to the Debt Recovery Tribunal.
