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Mandatory Mediation Pre-CIRP: A Thought

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was a much awaited and necessitated piece of legislation. If one is to look at the previous legislation which enabled the banks and financial institutions to re-cover the dues from the erring borrowers, namely, Recovery of Debts and Insolvency Act and the subsequent SARFAESI Act, though were termed as progressive legislations, to speed up the recovery of the debts due to the banks did not meet with the desired success. The fact that India has become a preferred destination for investors also required the nation to find an easy outlet for those investors from the companies where they have invested, should the company show stress. This resulted in the enactment of IBC. Statistics published by the government, always projected the sunny side of the said enactment. While there is no doubt that the said enactment has put the fear in the minds of the promoters of the erring borrowers as we progress, it has come to a situation that the said law is mostly used as a recovery mechanism rather than a reconstructive mechanism or a value creation mechanism as envisaged in the objects and reasons of the legislation. If one is to study the evolution and interpretation of law from 2016 onwards, this piece of legislation did undergo a tremendous change either by way of amendments or judge-made interpretations, from time to time. One of the classic an example of the legislature back tracking is with regard to the homebuyers who were impulsively added into the category of Financial Creditor and who were empowered to approach the Adjudicating Authority under Section 7 of the Code. It is also a fact that the constitutional validity of the said amendment which put embargo on a single homebuyer in approaching the Adjudicating Authority was upheld by the Hon’ble Supreme Court. Later introduction of Sections 12A and 29A are also classic examples of the legislation being pushed into the arena without much consideration.

Things being so under the Code, Section 7 envisages a Financial Creditor to approach the Adjudicating Authority for initiating a CIRP process without any prior need or necessity to try for a mediation. Likewise Section 9 also envisages an Operational Creditor to approach the Adjudicating Authority after simply complying with the procedure, namely, issuance of demand notice. Section 10 envisages the Corporate Debtor to approach the Adjudicating Authority to voluntarily get themselves under the CIRP.

These sections paves ways for the Adjudicating Authority to appoint a insolvency professional who later becomes the king of the jungle. One finds that a lot of judicial time is wasted by questioning the authority and functioning of the RP who is supposed to be working under the directions of the CoC.

It is also to be noted that the legislature in its wisdom has come out with a PPIRP for the resolution of a stressed corporate MSMEs as an alternate option if the stakeholders want to use it. However, it is only applicable if the default is less than certain amount. Whereas in the case banks and financial institutions who are regulated by RBI, RBI has come out with a direction, namely guidelines on Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances which empowers the lenders to resolve and restructure the dues within the said Prudential Framework without approaching the Adjudicating Authority under IBC. The Author’s experience points that with a mounting NPA positions and due to stringent provisioning norms stipulated by the regulator, banks and financial institutions prefer this method because of the fact that this saves the said lenders to put up a better balance sheet.

Even under the Commercial Courts Act, before a suit is taken up for hearing a reference is made for a compulsory mediation. Whereas under IBC no such stipulated is necessitated. In fact, the lack of a provision which stipulates compulsory mediation/ restructuring of the dues before approaching the Adjudicating Authority under IBC has put a fear in the minds of many functioning industries and workforce about the future as to whether the company if taken into CIRP will be beneficial to the workforce and whether the Resolution Professional who is appointed to manage the affairs of the company under the guidance of the CoC and who is most likely to act as a recovery agent at the behest of the lenders will rip apart the assets of the company to pay to the lenders rather than enhancing the value of the corporate debtor and thereby reviving the industry.

In western countries, where they have a strong bankruptcy act, it also envisages a pre-mediation or restructuring mechanism and only of it fails, the Corporate Debtor will be taken to a CIRP. Therefore, the author is of the opinion that a PPIRP coupled with the Prudential norms issued by the RBI should be extended to all the Corporate Debtor across the board and it should not be limited to MSMEs alone. Proper mechanism should be put in place to ensure that during this period when such a process of mediation is on-going the Corporate Debtor does not deal with any of the assets unless approved by the lenders.

As we go along, IBC should not become a tool for recovery and end up like a SARFAESI action where even though in the said act also Section 9 deals in a restructuring. Only of all the methods fail, then the Corporate Debtor should be sent to CIRP process and subsequently into liquidation. It is also necessary to raise the pecuniary jurisdiction for approaching the Adjudicating Authority regarding a claimant under Section 9, namely an Operational Creditor. As on date, Section 9 is the most misused Section and it is considered an easy way to avoid a civil litigation. There should be distinct pecuniary jurisdiction for approaching the Adjudicating Authority under Section 7 and Section 9.


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