India’s Insolvency and Bankruptcy Code, 2016 (IBC) was introduced with the aim of improving the efficiency of the resolution process. While there is much to be credited in the law, the practice of it has shown that the process is often delayed by excessive litigation. In our forthcoming article, Aparajita Kaul and I study delays under the IBC by assessing the law through a feminist lens. We argue that a feminist value missing from the practice of the IBC is the inclusion of stakeholders in the process. A curious feature of the IBC is that creditors are divided into financial creditors (those who are owed debts arising out of financial contracts) and operational creditors (mostly trade creditors and employees); and that operational creditors do not have voting rights. We therefore include operational creditors within the category of stakeholders in our analysis. We propose the inclusion of mediation within the resolution process to ensure that stakeholder views are taken on board, thus preserving relationships while also making the process more efficient.
Delays
Originally, the corporate insolvency resolution process (CIRP) was to be completed within a period of 180 days, which could then be extended by 90 days, taking the maximum period for completion to 270 days. However, as of September 2020, 1442 CIRPs were observed to have been in the pipeline for over 270 days. What caused these delays? The short answer is litigation. The longer answer is that there seems to be extensive stakeholder conflict under the CIRP. There is also the problem of institutional capacity. The designated adjudication tribunal, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are overloaded.
In order to account for time spent in litigation during a CIRP, the Insolvency and Bankruptcy Code (Amendment) Act, 2019 inserted two provisos into section 12(3) of the IBC, extending the overall time limit for a CIRP to 330 days. However, even this was not always realistic. In 2020, the mandatory nature of the 330 days limit was removed by the Supreme Court of India in Essar Steel v. Satish Kumar Gupta. A large part of the delays in Essar Steel was attributable to the conflict between operational and financial creditors and their differential treatment in the CIRP. Another cause was litigation necessarily to clarify aspects of the new law. Both of these are recurring problems under the IBC. While we can hope that the latter will eventually abate, we cannot wish away the former.
Feminist Analysis
We draw from various feminist perspectives within corporate law and insolvency law for our analysis of the IBC. In essence, we note that preserving relationships is key for reorganization. Even if the company is to be liquidated, it is in the interests of all stakeholders, the over-burdened NCLTs and the economy in general, that this decision is taken quickly without excessive litigation. In the IBC, financial creditors determine the fate of all stakeholders in the CIRP. This prioritisation subverts the feminist values of inclusion and preservation of stakeholder relationships. Further, while this hierarchy was meant to increase efficiency, in reality, it has caused excessive litigation because that is the only opportunity that many stakeholders get to voice their concerns. While India also provides for alternative dispute resolution options, these have mostly been ignored in the corporate insolvency process. Court proceedings can last years, while the corporate debtor continues to lose its value and stakeholders harden their positions in opposition to each other. We argue that it is possible to marry the goals of efficiency and inclusion in a mutually beneficial way by introducing mediation into the CIRP.
Mediation within the IBC
Our article proposes that mediation, which focuses on responding to all parties’ needs, and seeking solutions that serve collective interest, should be introduced into the IBC. We propose that parties should be nudged towards mediation during the CIRP where necessary. In cases where it is apparent that much of the litigation is a result of lack of cooperation between parties, the NCLT should recommend mediation to the parties. This is particularly relevant where the company is viable and parties expect to continue working with each other.
India already has the legal infrastructure to achieve this. Section 89 of India’s Civil Procedure Code allows courts to encourage settlement of disputes and to refer disputes to relevant ADR processes where suitable. The Companies Act, 2013 specifically provides for the setting up of a mediation and conciliation panel of experts to which pertinent cases may be referred by the NCLT. Despite stakeholders like operational creditors not having a say on the committee of creditors, they consist of important groups like suppliers and employees and taking their concerns to mediation will allow their voices to be heard. The process itself, focused as it is on compromise and win-win options, can help preserve relationships as against litigation. Even where a mediation does not result in settlement, mediation can improve communication and negotiation between parties to a dispute.
Beyond the NCLT referring cases to mediation, what needs to be developed in India is institutional capacity in terms of qualified mediators with experience in commercial matters. The market for insolvency professionals has developed very quickly in India and it is likely that allowing this option within the CIRP process will incentivise many insolvency professionals to qualify as mediators to take on these roles.