IBBI Proposes Mediation Option for Operational Creditors Before Starting Insolvency Process
The Insolvency and Bankruptcy Board of India (IBBI) has proposed a new option for operational creditors (OCs) and corporate debtors (CDs) to try mediation before beginning the formal insolvency process. This suggestion, published by the IBBI on November 4, aims to provide a faster and potentially less burdensome way to resolve claims.
Why Mediation Might Be Better for Operational Creditors
According to the IBBI, many cases started by operational creditors aren’t necessarily about declaring the company insolvent. Instead, OCs primarily want their money back rather than forcing the company into an insolvency process. As of April 2024, out of 21,466 cases filed by OCs, only 3,818 actually went into the formal Corporate Insolvency Resolution Process (CIRP), as most cases were settled before reaching that stage. This shows that OC claims are often resolved through early negotiations, without going into full insolvency proceedings.
How Mediation Could Speed Up the Process
Currently, if an OC files for insolvency, the National Company Law Tribunal (NCLT) has to conduct hearings to decide whether to accept or reject the application. This can take significant time, adding to NCLT’s existing backlog. By introducing pre-institution mediation, OCs and corporate debtors would have a chance to settle disputes at an early stage, potentially making the NCLT’s admission process quicker and less congested.
Proposed Amendment for Mediation in Insolvency Process
The IBBI suggests amending the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to give OCs the option to mediate before filing for insolvency under Section 9 of the Insolvency and Bankruptcy Code (IBC). In this process:
- An OC can opt to mediate, with the help of a mediator, under the Mediation Act, 2023.
- If mediation fails, the mediator will issue a non-settlement report, which the OC can then attach to their application when formally requesting CIRP before the NCLT.
This approach aims to reduce NCLT’s workload and speed up the handling of cases.
Invitation for Public Feedback
The IBBI is inviting public comments on this proposal until November 24. This feedback will help the IBBI gauge public opinion and refine the proposal before making any changes official.
Background: Types of Creditors and the Current Insolvency Process
Under the IBC, there are two main types of creditors:
- Operational Creditors (OCs): Those who supply goods or services to a company but have unpaid dues.
- Financial Creditors (FCs): Lenders who have provided loans and are waiting for repayment.
Both OCs and FCs can initiate the insolvency process if the default amount reaches ₹1 crore or more. However, after a case is accepted, only financial creditors are represented on the Committee of Creditors (CoC), which oversees the insolvency resolution.
Challenges Faced by NCLT in Handling Insolvency Cases
The NCLT has faced criticism for long delays in processing insolvency applications, despite the IBC’s guidelines for timely resolutions. This proposal for pre-institution mediation is similar to the approach under the Commercial Courts Act, 2015, which also allows parties to mediate before taking legal action, aiming to streamline the legal process and reduce court backlogs.
📄 Click here to Download IBBI Proposal PDF
