Panel on insolvency proposes mediation at pre-default stage

An expert committee set up by the insolvency regulator has recommended mediation between lenders and borrowers even at the pre-default stage to “achieve faster out-of-court outcomes”.

The panel, headed by former legal affairs secretary TK Viswanathan, has said mediation at the pre-default stage would aid in resolutions “without recourse to insolvency”, while also suggesting mediation where insolvency proceedings have been applied for or initiated under the Insolvency and Bankruptcy Code (IBC).

“The committee is of the view that since this (pre-default) stage falls outside the formal insolvency framework of the Code, the use of mediation here may be encouraged by institutional lenders to achieve faster ‘out of court’ outcomes, where necessary,” the panel said in its report reviewed by ET.


“The committee strongly feels that the resolution of private disputes amongst debtors and creditors at this stage would be of great help in terms of recovery and resolution without recourse to insolvency.”

ET had on February 14 reported that the committee had pitched for a phased introduction of voluntary mediation between parties as a dispute resolution mechanism under the overarching IBC while maintaining the extant IBC timelines for resolution processes.

The panel, set up last year to examine the scope of use of mediation in respect of processes under the IBC, submitted its report with the Insolvency and Bankruptcy Board of India (IBBI) on January 31.

The panel's suggestions come as 68% of the insolvency cases, where resolution process was on until December 2023, exceeded the 270-day time frame stipulated for resolution under the IBC. The inordinate delays result in further erosion of impaired assets, leading to huge haircuts by creditors.

The report acknowledged that the fear of losing control over stressed firms has led to thousands of applications (27,514 involving default of Rs 9.74 lakh crore until October 2023, according to the official data) being settled before the cases reached the admission stage before the NCLT. Defaulting promoters run the risk of losing control of companies once insolvency cases are admitted by the NCLT.

To further facilitate such settlements, the committee has sought to follow the model laid down through Section 12A under the Commercial Courts Act, 2015, by recommending that both the NCLT and the parties involved should be competent to refer the dispute to mediation, said Yogendra Aldak, partner at law firm Lakshmikumaran & Sridharan.

“Given that the CIRP directly goes to the root of the existence of the corporate debtor (CD), an additional stage statutorily providing for an opportunity for amicable settlement will yield a significant increase in settlements as it safeguards both the CD and the creditors,” Aldak added.