The Insolvency and Bankruptcy Board of India (IBBI), guided by recommendations from its Expert Committee and the Indian Institute of Insolvency Professionals of ICAI, has released a discussion paper proposing that operational creditors (OCs) consider mediation before filing for insolvency under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016. The report highlights that a significant number of Section 9 applications involve disputes between the operational creditors and corporate debtors over issues like quality of goods, contract terms, or payment discrepancies. Many of these cases are settled before admission, resulting in only a fraction proceeding to insolvency. By promoting pre-filing mediation, the IBBI aims to ease the Adjudicating Authority’s (AA) caseload and address disputes more efficiently. Under the proposal, if mediation fails, a non-settlement report would accompany the OC’s insolvency application to the AA. This approach is intended to streamline the resolution process, reduce judicial delays, and facilitate quicker case admissions.
Insolvency and Bankruptcy Board of India
Discussion paper on Mediation by the operational creditors (OCs) before approaching Adjudicating Authority (AA) for filing Section 9 application
1.1 The Expert Committee on the ‘Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016’ constituted by Insolvency and Bankruptcy Board of India (IBBI) submitted its report in January, 2024. The report suggested a pre-institutional mediation, as a preliminary step before the filing of insolvency applications. This suggestion was further complemented by The Indian Institute of Insolvency Professionals of ICAI (IIIPI) in their report “Key Recommendations for the Amendments in Insolvency and Bankruptcy Code, 2016” submitted to the IBBI on 21st September, 2024.
1.2 In light of the above recommendation, this discussion paper deals with voluntary mediation by operational creditors before initiating an application u/s 9 before AA.
1.3 Problem Statement
There are several recurring issues in Section 9 applications, particularly disputes between OC and Corporate Debtor (CD). Common issues include (i) Disagreements on Goods/Services regarding the quality or performance of goods and services provided (ii) Contractual Disputes having allegations of non-compliance with contractual terms by either party (iii) Discrepancies over the exact amount owed or alleged underpayment (iv) Claims of the CDs against the OC for set-offs or damages. These issues are time consuming and eventually unnecessarily burden the limited judicial capacity.
1.4 In most of the OC-initiated insolvency cases, they are more interested in repayment of money claims rather than admission or resolution of the corporate debtor. According to the AA’s data upto (30.04.2024), 21,466 cases under section 9 were disposed before admission and only, 3818 cases were admitted. Therefore, a large number of section 9 cases were settled before admission and the settlement rate of CIRP pre-admission for OCs has been larger than at any other stages. Further, the AA is required to conduct hearings before accepting or rejecting an application, and the process often becomes time-consuming.
1.5 Thus, in order to resolve disputes between the OC and corporate debtor at the earliest stage, and facilitate faster admission by AA, mediation as an option may be considered as an effective tool.
1.6 Proposal:
It is proposed to have that an option of mediation can be exercised by the operational creditors before filing insolvency applications under Section 9 of the IBC. The operational creditor can undergo mediation with the aid of mediator, as provided under the Mediation Act, 2023 In case of failure of mediation settlement, the mediator will prepare a non-settlement report which shall be annexed with the application for initiation of CIRP before the AA. The proposal aims to reduce the burden on the AA and thereby expediting admissions.
