The Insolvency and Bankruptcy Board of India (IBBI) has proposed a significant change to the insolvency process for operational creditors. They are suggesting that operational creditors explore mediation before filing for insolvency under Section 9 of the Insolvency and Bankruptcy Code (IBC).
What is the proposal?
The IBBI is proposing that operational creditors, such as vendors and service providers, have the option to attempt mediation with the company they are owed money by before initiating formal insolvency proceedings.
Why is this being proposed?
- Reduce burden on courts: The National Company Law Tribunal (NCLT) is often overburdened with insolvency cases. Mediation aims to resolve disputes outside of the courts, freeing up the NCLT to focus on more complex cases.
- Faster resolution: Mediation can often lead to quicker resolutions than formal insolvency proceedings, which can be time-consuming and expensive.
- Potential for better outcomes: In some cases, mediation may lead to a more favorable outcome for both the operational creditor and the company, compared to a formal insolvency process.
How would it work?
- Voluntary: Mediation would be optional for operational creditors. They can choose to pursue it or directly file for insolvency.
- Mediator assistance: The mediation process would be facilitated by a mediator, as per the Mediation Act, 2023.
- Non-settlement report: If mediation is unsuccessful, the mediator will prepare a report outlining the issues and why a settlement couldn’t be reached. This report would then be submitted along with the insolvency application to the NCLT.
What are the potential benefits?
- Reduced workload for NCLT: By resolving some disputes through mediation, the burden on the NCLT can be reduced.
- Faster resolution for creditors: Mediation can potentially lead to quicker resolution of dues for operational creditors.
- Preservation of business relationships: Mediation can help preserve business relationships between operational creditors and companies, which can be beneficial in the long run.
What are the potential challenges?
- Effectiveness of mediation: The success of this proposal will depend on how effective the mediation process is in resolving disputes.
- Timeliness: It’s important to ensure that the mediation process doesn’t become another delaying tactic.
Overall:
The IBBI’s proposal to introduce mediation for operational creditors is a positive step towards streamlining the insolvency process and reducing the burden on the NCLT. It has the potential to lead to faster and more efficient resolutions for operational creditors. However, the success of this proposal will depend on its implementation and the effectiveness of the mediation process.
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