IBBI Proposes Mediation Option For Operational Creditors Before NCLT Process

(The Corner Office Journal) -- The Insolvency & Bankruptcy Board of India (IBBI) proposed operational creditors to consider mediation option before filing insolvency applications under Section 9 of the Insolvency & Bankruptcy Code (IBC).

The development comes after an expert committee, set up by the IBBI, in January 2024 suggested a pre-institutional mediation as a preliminary step before the filing of insolvency applications. The suggestion was also complemented by the Indian Institute of Insolvency Professionals of ICAI (IIIPI) in its report in September 2024.

As a result, the IBBI issued a discussion paper dealing with voluntary mediation by operational creditors before initiating an application under Section 9 of the IBC before the National Company Law Tribunal (NCLT).

Current Issues

The IBBI said there are several recurring issues in Section 9 applications, particularly disputes between operational creditors and corporate debtor.

Common issues include:

=> Disagreements on goods/services regarding the quality or performance of goods and services provided

=> Contractual disputes having allegations of non-compliance with contractual terms by either party

=> Discrepancies over the exact amount owed or alleged underpayment

=> Claims of the corporate debtors against the operational creditor for set-offs or damages.

The insolvency regulator said these issues are time consuming and eventually unnecessarily burden the limited judicial capacity.

Section 9 Resolution Status

In most of the operational creditors-initiated insolvency cases, they are more interested in repayment of money claims rather than admission or resolution of the corporate debtor, the IBBI said.

According to the adjudicating authority’s data up to 30 April 2024, 21,466 cases under Section 9 were disposed before admission and only 3,818 cases were admitted, it added.

The regulator said that a large number of Section 9 cases were settled before admission and the settlement rate of corporate insolvency resolution process (CIRP) pre-admission for operational creditors has been larger than at any other stages.

Further, the adjudicating authority is required to conduct hearings before accepting or rejecting an application, and the process often becomes time-consuming, it noted.

“Thus, in order to resolve disputes between the OC (operational creditor) and corporate debtor at the earliest stage and facilitate faster admission by AA (adjudicating authority), mediation as an option may be considered as an effective tool,” the IBBI said.

The regulator is seeking public comments on the proposed measure by 24 November.

Mediation Option

The IBBI proposed to have an option of mediation that can be exercised by the operational creditors before filing insolvency applications under Section 9 of the IBC.

The regulator said 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 adjudicating authority, it added.

“The proposal aims to reduce the burden on the AA and thereby, expediting admissions,” according to the IBBI.

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