Introduction
The worlds of business and finance frequently cross over between mediation, insolvency, and bankruptcy, which are three separate legal processes. Whereas insolvency and bankruptcy are legal systems created to manage financial difficulty and debt payments, mediation is a voluntary technique of resolving disputes. This article examines the relationship between bankruptcy, insolvency, and mediation, highlighting the ways in which they might cooperate or compete in diverse contexts.
Mediation: A Dispute Resolution Mechanism
The informal yet systematic process of mediation. Employing a mediator makes it easier for parties to settle their differences amicably.
The fundamental features of mediation are a confidential, non-binding, voluntary, and interest-based process. After the initial meeting, parties are free to end mediation at any moment. The parties concerned cannot be forced to make a choice, and they are free to accept or reject a negotiated settlement. The secrecy concept guarantees that whatever decisions the parties make won’t have an impact outside of the mediation. Interest-based procedures allow for the inclusion of factors such as financial, economic, and personal interests in addition to legal requirements for determining a resolution.
The mediator’s responsibility is to help the parties negotiate a settlement. The mediator does not make decisions, in contrast to an arbitrator. The mediator just supports the parties’ dialogue and bargaining during a facilitative mediation. A non-binding evaluation of the dispute is also given by the mediator in an evaluative mediation.
Insolvency: The State of Financial Distress
When a company or individual can no longer pay their debts, it is said to be insolvent.
When a person or organization becomes bankrupt, insolvency procedures may be initiated. During these proceedings, the insolvent party may be sued and/or have assets sold to satisfy obligations. Owners of businesses have the option to speak with creditors directly and divide debt into more manageable payments. Since they want to be paid back and prevent damages, even when the repayment is on a delayed schedule, creditors are often open to this strategy.
If a business owner intends to restructure the company’s debt, they put out a practical strategy outlining how they may cut costs while maintaining business operations. The owner drafts a proposal outlining possible cost savings measures or other means of support that may be used to restructure the debt. The plan explains to creditors how the company may generate enough cash flow to operate profitably while also satisfying its debts.
Bankruptcy: A Legal Process for Debt Resolution
A person or corporation may file for bankruptcy if they are unable to pay their debts or other commitments. For those who are struggling to make ends meet, it provides a new beginning.
A petition is filed, either on behalf of the debtor, which is more often, or on behalf of creditors, which is less frequent, to start the bankruptcy process. All of the debtor’s assets have been measured and assessed, and some or all of the debt may be repaid with the help of the assets.
The Interplay
As a Pre-Bankruptcy Tool, Mediation: By offering a deadline- and creditor-driven resolution mechanism, the bankruptcy and Bankruptcy Code, 2016 (IBC) has completely changed the bankruptcy procedure in India. Conflicts between the debtor and the creditor are resolved in this procedure in large part through mediation. In a voluntary procedure called mediation, a neutral third person helps the parties to a dispute negotiate a settlement that will be agreeable to both. For issues to be resolved effectively and swiftly during the bankruptcy process, mediation is essential. An alternative dispute resolution (ADR) process called mediation can assist in settling disagreements between the debtor and the creditor before they become major legal conflicts. The mediator encourages communication during the collaborative process of mediation. For issues to be resolved effectively and swiftly during the bankruptcy process, mediation is essential. An alternative dispute resolution (ADR) process called mediation can assist in settling disagreements between the debtor and the creditor before they become major legal conflicts. In a collaborative process like mediation, the mediator helps the parties identify concerns, communicate with one another, and come up with solutions. The mediator assists the parties in coming to a mutually acceptable resolution rather than imposing a course of action.
The ability to maintain ties between the debtor and the creditor is one of the main advantages of mediation in the insolvency process. Many times, a lengthy legal dispute might have a severe effect on the debtor and creditor’s long-standing business relationship. Through mediation, the parties may be able to communicate more easily and cooperate to reach a resolution that is agreeable to everyone. The ability to lower litigation costs is yet another advantage of mediation. The bankruptcy process is not an exception when it comes to the cost of legal conflicts. By enabling the parties to collaborate with a neutral third party mediator to settle their conflicts in a timely and cost-effective way, mediation can offer a viable alternative to litigation. Mediation can assist in resolving disagreements over claims, asset value, and the distribution of proceeds in the context of insolvency. A number of parties, including the debtor, operational creditors, and financial creditors, are involved in the insolvency resolution process. Through mediation, these parties may be able to quickly resolve the insolvency process by coming to an amicable agreement.
The IBC allows for the appointment of a mediator if the parties agree to mediate the dispute because it acknowledges the value of mediation in the insolvency process. According to Section 74 of the IBC, the Adjudicating Authority may appoint a mediator to help the parties resolve their differences. Any time during the insolvency procedure, a mediator may be chosen, and the mediation process may go on even after the insolvency procedures have begun.
Conclusion
The interaction between bankruptcy, insolvency, and mediation serves as an example of the complex link between legal frameworks, financial difficulty, and conflict resolution. While mediation may be a helpful instrument to avoid insolvency and bankruptcy proceedings, supplement them, or simplify them, it is crucial to comprehend the unique facts and legal requirements of each scenario. In order to obtain best results while avoiding disputes and expenses, parties in financial difficulties should carefully analyze how various processes might function together. In India’s insolvency procedure, mediation is vital, to sum up. The IBC recognizes the value of mediation and allows for the appointment of a mediator to help the parties resolve their differences. The alternative conflict resolution method of mediation can assist reduce the time and expenses as well. The disagreement may move to formal bankruptcy proceedings if mediation fails to produce a resolution, lengthening the process of dispute resolution. Furthermore, the anonymity of mediation could conflict with bankruptcy’s openness rules.
Additionally, it may assist maintain the parties’ relationship, which is beneficial when there has been a long-standing commercial relationship between them. For issues to be resolved effectively and swiftly during the bankruptcy process, mediation is essential. The highlights the complexity of dealing with financial distress and conflict resolution in a legal setting, nevertheless. For debtors, creditors, and other parties looking to address financial issues, these processes can be effective tools. However, for their integration to be effective, it is necessary to have a detailed knowledge of their various responsibilities and to give considerable thought to how they will be used.
REFERENCES
https://timesofindia.indiatimes.com/blogs/voices/what-is-the-role-of-mediation-in-the-insolvency-process-across-jurisdiction/
https://blog.ipleaders.in/an-overview-of-mediation-and-its-future-in-insolvency-proceedings/
https://taxguru.in/corporate-law/research-paper-future-mediation-insolvency-proceedings-ibc.html
https://legiteye.com/a-case-for-mediation-in-indian-insolvency-resolution-regime/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3087979
*****
By: Garima Harsh (BA—LLB 4th YEAR) – University of Petroleum and Energy Studies
Author Bio
