IBBI Proposes Voluntary Mediation for Operational Creditors Prior to Insolvency Applications

The Insolvency and Bankruptcy Board of India (IBBI) has suggested a voluntary mediation process for operational creditors before they file insolvency applications under the IBC guidelines. This initiative aims to lessen the workload on the Adjudicating Authority (AA) and speed up case admissions. The proposal is based on an expert committee's report and recommendations from the Indian Institute of Insolvency Professionals of ICAI (IIIPI).

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In a recent discussion paper, the IBBI outlined plans to introduce mediation as an initial step. This would allow operational creditors to resolve disputes with corporate debtors over issues like contract disagreements, quality concerns, underpayment claims, and set-off demands. The board observed that most operational creditors prefer settling money claims rather than pursuing insolvency or resolution of the debtor.

Mediation as a Preliminary Step

The IBBI highlighted that, by April 2024, 21,466 cases had been filed under Section 9 of the Insolvency and Bankruptcy Code (IBC), but only 3,818 were admitted. This indicates that many cases are settled before reaching admission. Section 9 allows operational creditors to start a corporate insolvency resolution process (CIRP). The high settlement rate before admission suggests mediation could be beneficial.

The AA must conduct hearings before deciding on an application, which can be time-consuming. To address this, mediation could be an effective tool for resolving disputes between operational creditors and corporate debtors early on, facilitating quicker admissions by the AA. The proposed framework allows operational creditors to choose mediation according to specific norms.

Benefits of Early Dispute Resolution

If mediation does not result in a settlement, the mediator will issue a non-settlement report to accompany the creditor's application to the authority. This approach aims to improve efficiency by resolving disputes early, reducing the number of cases needing formal adjudication. The IBBI has invited stakeholders to provide feedback on these draft regulations by November 24.

After reviewing comments from stakeholders, the board plans to establish rules under a clause of Section 196 of the code. This initiative seeks to streamline processes and enhance the effectiveness of dispute resolution within India's insolvency framework.