RBI issues norms for the provisioning of NPA (Non-performing assets) in the financials of all banks being a regulator. NPA means identification of a loan where the borrower defaults in repayment of the loan over 90 days from the due date. Overall there are huge NPA in aggregate for all banks which are into lacs crores ranging between 5-10% of the loan amount. As a recovery mechanism, Bank tries through several means as suits under different laws mainly used to get possession of the property under the SARFESAI Act. The latest is under IBC which is introduced in the year 2016 and supersedes all other laws. The Bank also issues a one-time settlement scheme giving partial/full waiver of interest/principal to settle or regularize the loan account. Therefore, while using all remedies by the bank for recovery of the loan, mediation is not being used as an effective tool.
There are different stages of NPA (default loan account) as prescribed by the regulator for banks. There are different percentages (10-100%) of provisioning norms based on the period of default and security again as prescribed by the regulator. Bank also takes all steps for recovery such as Sec 138, getting possession of the property, arbitration awards, taking control over the board, running CIRP under IBC, etc. Using all these means, Bank takes several years and substantial hair cut in the recovery because the value of underlying assets decreases over years.,
Because of the above, Mediation is the need of the hour to engage default borrowers and provide a platform to reach a mutually agreed settlement which would be a win-win situation for both, borrowers as well as banks.
The borrower would be released from having an insolvency tag or not lose reputation ,or have quick time again to restart his business and Bank, on the other hand, would be in a position to get a lesser haircut and get money to put in again into the system. If mediation fails , Bank as usual may move to other remedial steps for recovery of the loan amount .
The Insolvency and Bankruptcy Code was introduced in the Year 2016 with the objective of timely recovery (speedy resolution), low loss of recovery, and maximization of value for the stakeholders based on the Bankruptcy Law Reforms Committee (BLRC). Before IBC, there are various laws in place for recoveries such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFESAI Act), The Sick Industrial Companies Act, 1985 (SICA), etc. The various stakeholders under IBC are NCLT (adjudicating authority), NCLAT (appellate authority), Financial Institutions like Banks / NBFC, Default Borrowers (Companies who make defaults in repaying debts), IRP/RP (Resolution professional), IBBI (Regulatory authority). The entire process is well defined under the IBC and the total timeline for recovery of debts from a corporation that is under insolvency process is 270 days which may further be extended by 90 days, hence, a total of 330 days. The company against whom the insolvency process for recovery has been initiated, can settle the claim with creditors, and the case is treated as settled (Sec 12A – Withdrawal of case). The RP always tries to sell the Company as a Going concern as the main objective under IBC and if it doesn’t work then he initiates the liquidation process, sells the assets, and recovers the money for the various stakeholders. The realized proceeds under CIRP/ Liquidation are distributed under the waterfall mechanism as defined (Sec 53 – Distribution of assets).
Importance of Insolvency process under IBC as tool for recovery of NPAs approx. 5.40 Lacs crore as on September 2021
The Gross NPA has almost doubled as on Sept 2021 in compare to Jun 2014. The amount has been increased to Rs. 5.40 Lacs Crore from Rs. 2.24 Crore in agreement of 13 banks in the written reply submitted by Dr Bhagwan Karad, Minister of State for finance.
We can understand the sizable volume of NPAs which has increased from year to year for all Banks, the reasons are various including fraud, diversion of funds, economic crises, COVID, etc. Therefore, to bring money back to the system by the banks from these NPA accounts, initiate Corporate Insolvency Resolution Process (CIRP) process under IBC as the mechanism for recovery of debts. Because of the above, the insolvency process under IBC is a very important and time- bound tool to achieve the results from NPA accounts.
Successful IBC in the current regime
As per IBC data on Insolvency Resolution, as on Sept 2022, A total of 5893 CIRPs have commenced by the end of September 2022. Of these, 3946 have been closed which is 66.96%. Till September 30, 2022, the creditors have realized INR 2.43 lakh crore under the resolution plans. The fair value of the assets available with these CDs, when they entered the CIRP has estimated at INR
2.14 lakh crore and a liquidation value of INR 1.37 lakh crore against the total claims of the creditors worth INR 7.91 lakh crore. The creditors have realized 177.55% of the liquidation value and 84.00% of the fair value (based on 456 cases where fair value has been estimated). The IBC has succeeded in terms of overall recovery. Concerning Withdrawals under Section 12A, Till September 2022, a total of 740 CIRPs have been withdrawn under section 12A of the Code. The reasons for the withdrawal and distribution of claims in these CIRPs are presented in Figures 9 and 10. Almost three fourth of these CIRPs had claims of less than Rs. 10 crores.
One of the major challenges faced by the IBC process is the delay in meeting the timelines. It is mainly due to the pendency of cases before NCLT / NCLAT. The timeline for admission to CIRP is 14 days by AA, however, it takes more than one year. Further, various IAs are being filed by various stakeholders concerning Corporate which also results in a delay. There are limited judges against sanctioned posts, administrative challenges, and a heavy workload at the NCLT level, therefore, there is a delay in the entire insolvency process which are the main challenges faced.
Alternate Dispute Resolution – Mediation
Mediation is alternate dispute resolution which is gaining popularity in India. The reason is that Mediation is the least expensive and takes lesser time compared to the adversarial process (litigation). The mediator is a neutral party who assists both parties to communicate ,assists in exploring options, and reaching a mutually accepted agreement. Hence, the parties themselves decide the outcome without intervening by anyone. The mediation process is voluntary, confidential, timebound, etc.
Various methods of the settlement have been used widely and accepted such as Arbitration, Mediation, Conciliation, and Negotiation. The arbitrator acts as Adjudicator, the process is formal, and the award passed by him is legally binding upon all parties. The mediator acts as Facilitator, the process is voluntary and confidential, the proceedings are not legally binding, and the outcome results in a mutual settlement agreement agreed upon by both parties. Conciliation also acts as Facilitator; the process is informal, and the outcome is not legally binding.
Various laws which promote Mediation in India
The Government of India has taken several legislative measures to promote Mediation in the country. For instance:
Draft Mediation Bill 2021
This is a welcome step in India. It was introduced in Rajya Sabha on Dec 20, 2021, Referred to Standing Committee on Dec 20, 2021, Report submitted by Standing Committee on Jul 13, 2022, with major changes. This bill would help with recovery including insolvency cases. However, IBBI also needs to bring necessary amendments under the IBC process of being a regulator. Parties are allowed to opt for mediation sessions, if they failed to reach to consensus, then they may file cases before approaching the court/tribunal. It will reduce the burden on courts.
As mentioned in the background, Bank mostly takes the default entity into the insolvency process under IBC called CIRP (Corporate Insolvency Resolution Process) / or into Liquidation. At the time of pre / post-filing petition for admission before NCLT by the financial institution, the Mediation tool must be attempted to get a resolution between the defaulting borrower and the financial institution. Without mediation, present data of IBC shows a successful settlement made between both parties post admission of the application, post constitution of COC.
Therefore, Mediation if formally introduced by the legislature may be very effective for getting recovery by the institution from the defaulter. It will not address the present challenge of delay in meeting the timelines at all stages, especially at the NCLT level but also result in improvements in reducing the hair cut taken by banks. Mediation at the early stage (out of various stages of insolvency proceedings) would help other stakeholders like employees to save their job, other operational creditors which get almost nothing under IBC to get something, saving assets values which decrease due to delay in insolvency proceedings, reducing the burden at NCLT / NCLAT which are overburdened.
Successful Mediation in Insolvency process in Overseas Countries
The mediation process has proved very successful in Insolvency related cases. One example is – In 2008, Lehman Brothers declared bankruptcy. The company opted mediation process, out of 77 proceedings under mediation, only four were terminated without settlement. It shows that using mediation, not only saves time but also costs and finally, creditors can get maximum value from the assets which are subject matter.
ADR is also well accepted, and many members of the European Union have brought the ADR method to resolve the dispute at the pre-insolvency stages.
Singapore Govt proposed mediation in 2017, especially in insolvency situations. The responsible committee recommended that mediation centers be used, and panels of these centers are enhanced to include mediators with experience in cross-border restructuring.1
Singapore Convention on Mediation
The Singapore Convention on Mediation, also known as the United Nations Convention on International Settlement Agreements Resulting from Mediation, is a treaty that was adopted by the United Nations General Assembly in December 2018. It is considered a significant development in the field of international commercial mediation, as it provides a framework for the enforcement of settlement agreements resulting from mediation.
The convention establishes a mechanism for the enforcement of international settlement agreements resulting from mediation, similar to the way in which the New York Convention provides for the enforcement of international arbitration awards. Parties to a settlement agreement can now rely on the convention to enforce the agreement in other signatory countries, without the need for a new proceeding.
The convention also requires signatories to establish an efficient and streamlined process for the enforcement of settlement agreements and to provide for the protection of the parties’ rights and interests in the enforcement process. It also promotes the use of mediation as a means of resolving international commercial disputes by providing a reliable and effective mechanism for the enforcement of settlement agreements.
The Singapore Convention is important because it enhances the enforceability and predictability of mediated settlement agreements and encourages parties to use mediation as a means of resolving disputes. It will have a positive impact on the business community and trade relations by providing a more efficient and cost-effective way of resolving disputes. It also supports the efforts of the United Nations to encourage the use of alternative dispute resolution methods as a means of resolving disputes.
The Insolvency and Bankruptcy Code (IBC) 2016 was introduced in India as a comprehensive legislation to address the issues of insolvency and bankruptcy in the country. The code aims to streamline the process of resolving insolvency and bankruptcy cases and to provide a fair and efficient system for the resolution of such cases.
Since its introduction, the IBC has been successful in resolving a large number of cases and has been widely recognized as a significant reform in the Indian economy. However, there are still some issues that need to be addressed in order to further improve the efficiency and effectiveness of the code.
One of the main challenges facing the IBC is the shortage of qualified professionals to handle the large number of cases under the code. The Insolvency and Bankruptcy Board of India (IBBI) is currently working to address this issue by increasing the number of qualified professionals in the field and providing training to existing professionals.
Another issue that needs to be addressed is the lack of awareness among stakeholders about the code and the process of resolving insolvency and bankruptcy cases. The IBBI is working to address this issue by providing education and training to stakeholders about the code and the process of resolving cases.
The government is also making efforts to improve the implementation of the IBC. The government has recently introduced the Corporate Insolvency Resolution Process (CIRP) to improve the resolution process. This process will help to speed up the resolution process and to provide a fair and efficient system for the resolution of cases.
The future of the IBC is bright, as the code is expected to continue to play a critical role in resolving insolvency and bankruptcy cases in India. The government and the IBBI are continuously working to improve the implementation of the code and to address the challenges facing the code. With the continued efforts of the government and the IBBI, the IBC is expected to become even more effective in resolving cases and contributing to the growth of the Indian economy.
In present, IBC doesn’t have mediation clause under its procedures. Under other countries, mediation is being implemented during the insolvency process and its results are very successful as expected.
The Former CJI Hon’ble Mr Justice S. A. Bobde emphasis about mediation and said that how Mediation is one of most important ADR mechanism. It also mentioned that pre litigation could be mandated as far as commercial mattes are concerned.
An increase in NCLT benches cannot be a lasting solution for reducing the delay, unless the volume of litigation is reduced. The solution therefore, lies in promoting mediation, for out of court proceedings, with legislative recognition for speedier dispute resolution. Mediation as an alternative mechanism in insolvency could prove to be cost effective, non-adversarial and helping in maintaining cordial business relations and save honest entrepreneur from the stigma of insolvency.
Various studies on using Mediation in an Insolvency proceeding in overseas countries shows successful results for both parties . Financials institution can get maximum value from assets in a timely and cost-effective manner. In many overseas countries, mediation in the insolvency process has resulted in successfully yielding maximum recovery of the value of assets promptly.
The Mediation Bill 2021 is a step in the right direction. Mediation can indeed become the future of resolving insolvency proceedings since mediation prioritizes timelines and efficiency. Presently to overcome delay in timelines for the entire insolvency process, speedy resolution, saving repute and business relationships, and fear of insolvency could be substantially resolved/addressed with mediation tools as witnessed in many overseas countries as well as successful cases for settlement u/s 12A under IBC.
The Singapore Convention on Mediation is a significant development in the field of international commercial mediation and provides a framework for the enforcement of settlement agreements resulting from mediation. It enhances the enforceability and predictability of mediated settlement agreements, encourages parties to use mediation as a means of resolving disputes and supports the efforts of the United Nations to encourage the use of alternative dispute resolution methods.
In conclusion, the Insolvency and Bankruptcy Code 2016 has been a significant reform in the Indian economy and has been successful in resolving a large number of cases. However, there are still some issues that need to be addressed in order to further improve the efficiency and effectiveness of the code. The government and the IBBI are continuously working to improve the implementation of the code and to address the challenges facing the code. With the continued efforts of the government and the IBBI, the IBC is expected to become even more effective in resolving cases and contributing to the growth of the Indian economy.
Way forward for Mediation as constructive tool in Insolvency proceedings under IBC in India
“Know well what leads you forward and what holds you back and choose the path that leads to wisdom.”
DISCLAIMER: Author is an independent professional and opinion expressed is personal basis of knowledge and experience.