Introduction
India is on the verge of becoming one of the fastest growing economies of the world. Despite, India being in its nascent stages in a number of sectors, yet, it has never looked back and has continued to excel rapidly. For a fast growing economy like India, where even multinational companies are investing rigorously, it is imperative for the law-makers or the legislation to provide the investors, both domestic and international investors; a proper piece of legislation securing and governing their rights and duties. It is because of this, an Insolvency and Bankruptcy Code was formulated and enacted by the Parliament in the year, 2016, ensuring a favourable jurisprudential environment for a number of investors, as well as securing the rights of a number of potential investors. The Insolvency and Bankruptcy Code was enacted in 2016 after a number of recommendations were put forward with regards to the changes that could be made to the previous insolvency regime, which was fragmented, fraught with delays and resulted in poor recoveries for the creditors.[1] The new Code brought about a plethora of changes as compared to the previous regime dealing with the various intricate aspects revolving around Insolvency and Bankruptcy. With regards to the corporate companies, the Code brought about a change and a âcreditor-in-controlâ method was introduced which primarily focused on securing the rights of the Financial Creditors as the previous regime dealt with a disparate process when it came to debt restructuring and dealing with matters pertaining to asset seizures which were imperative to get the insolvency process moving and to settle the debts of the creditors. There were a number of laws dealing with this process such as the Sick Industrial Companies Act, 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993 and lastly, the Companies Act, 2013. The provisions of all these acts along with the previous regime caused a severe hindrance in the entire debt restructuring process and this lead to the collapse of multiple organizations and along with them the collapse of their investors and their creditors as the non-performing assets of the corporation went on accumulating, however there was no proper regime in place to settle the debts by way of selling these assets and this resulted in creditors simply waiting for years to recover their money. The development of the Code brought about serious changes to the erstwhile bankruptcy regime in India as a time-bound resolution process was incorporated under the provisions of this Code, which in turn, lead to a straight reduction in the time frame which the parties usually spent when the matter went before the court. A number of well-known institutions like the IBBI or the Insolvency and Bankruptcy Board of India, Insolvency professionals and information utilities were established and setup under the ambit of this Code. One of the other important aims behind the enactment of this Code was to ensure that all the broken pieces of laws pertaining to insolvency, fall under the garb of one single Code which deals with all these broken pieces together and in their entirety. The purpose of combining all these laws pertaining to insolvency is to resolve the uncertainty and the ambiguity which tends to arise from the application of a number of laws administered and enacted by various authorities, thereby leading to procedural delays and also leading to a decrease in the value of the assets. The Code repealed and introduced a number of modifications to the various provisions of laws that were in direct conflict with it.[2] Yet, the scheme of a number of laws which were passed by the Central Legislature as well as the State Legislatures can still be deemed to be regarded as inconsistent with the other pieces of legislations. With regards to this, it is quite imperative to delve into the manner in which such inconsistencies can be dealt with, however, this article focuses on how the Insolvency and Bankruptcy Code, 2016 came into existence and how a nexus can be drawn between using the various methods of Alternative Dispute Resolution when it comes to dealing with Insolvency Proceedings.
Analysis
The Insolvency and Bankruptcy Code, 2016 provides the creditors of an organization, the ability or creates a path for them to commence the insolvency resolution process when a debtor or a company is unable to pay its creditors the amounts owed to them. The Code provides a clear demarcation between two prominent classes of creditors namely- Operational Creditors and Financial Creditors. A financial creditor is defined under the scope of Section 5(7) of the Code. Section 5(7) of the IBC, 2016 defines a âfinancial creditorâ, which means, âany person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.[3] Basically, a financial creditor can be deemed to be regarded as that individual or group of individuals with whom the insolvent company or the debtor, solely has a financial contract or a financial relation and where the said creditor has provided an amount to the said debtor or the said company against the consideration of time value of money. At this stage, it is imperative to throw light upon Section 5(8) of the Insolvency and Bankruptcy Code, 2016 which elucidates the meaning of a âFinancial Debt.â The term, âfinancial debtâ is defined under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 as, âa debt along with interest, if any, which is disbursed against the consideration for the time value of money.â[4] Â Section 5(8) of the IBC, 2016 also provides a list of transactions which fall under the scope and ambit of this definition. According to the provisions contained under the scope of Section 5(8)(f) of the Code, even homebuyers could be deemed to be regarded as financial creditors under the provisions of the Code.[5]Â This was laid down by the Apex Court in the case of Pioneer Limited v. Union of India (famously known as the âPioneer Judgementâ)[6], wherein the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018[7] was upheld by the Apex Court. In consonance to this amendment, homebuyers or the individuals who are allotted Real Estate, can be defined under the ambit of Section 2(d) of the Real Estate (Regulation and Development) Act, 2016 (RERA), were deemed to be regarded as, âfinancial creditorsâ and fell under the ambit of the definition of âfinancial creditorsâ as provided under the provisions of the Insolvency and Bankruptcy Code, 2016. The judgement was delivered by a three-judge bench which was headed by Honâble Mr. Justice Rohinton Nariman, who upheld the constitutional validity of the Amendment Act and disposed of the petitions which were filed by real estate developers who were of the view that the Amendment Act was ultra vires to the provisions of the Constitution. The Supreme Court, in this case, reiterated that RERA has to be read and understood in accordance with the provisions laid down under the Insolvency and Bankruptcy Code and if, under any circumstances a conflict arises then in such a case, the IBC, 2016 will always be upheld over the provisions elucidated under RERA. For instance, if a creditor is deemed to be regarded as a financial creditor, in such a case, the financial creditor should have the requisite powers to commence the insolvency resolution process. The said financial creditor also has the power conferred upon him/her to file claims during the course of the insolvency process and at the same time he/she has the right to be member who has been conferred with the power to vote and be a part of the committee of creditors, each of who accept or reject an insolvency resolution plan.[8]
Before understanding how the ADR methods can be used while dealing with insolvency procedures, it is imperative to understand what Operational Creditors are as defined under the provisions of the Code. Section 5(20) of the Insolvency and Bankruptcy Code, 2016 defines an Operational Creditor. An Operational Creditor is someone whose claims arise as and when a transaction in the business takes place. Basically, an operational creditor is someone who has delivered or provided goods or services to the debtor, which also could include his own employees or the employees of a State or Central Government. An operational creditor has the right to make an application and initiate the process of insolvency of a corporate debtor. Amongst other powers which are conferred upon Operational Debtors in consonance to the provisions of IBC, 2016, the Operational Creditor has the power to file a claim which deals with the insolvency resolution process and at the same time, he/she has the power to participate in the insolvency resolution process, however, he/she is not conferred with voting rights as are granted to the Financial Creditors. All in all, the Insolvency and Bankruptcy Code, 2016 has provided a plethora of rights to these creditors by undertaking their issues and dealing with them in a time bound manner.
Introduction to Alternative Dispute Resolution Methods.
Arbitration, Conciliation, Mediation and Negotiation are the four most important methods of resolving disputes outside the four confines of a courtroom. Alternate Dispute Resolution is a method wherein parties are provided with an opportunity to amicably and peacefully settle the various disputes arising between them, without entering the courtroom. It also includes negotiation, which can simply be described as a chat between the parties to the dispute and they come to a conclusion based on the points discussed during their chat. Then comes Mediation which can simply be described as a means of conducting a dialogue with a third party who, controls the mediation process and understands the perspectives put forth by either of the parties and then comes arbitration which can be simply described a private litigation method and the arbitral awards passed by the arbitrator in an arbitration proceedings can be deemed to be regarded as binding on both the parties to the dispute, unlike the decisions set aside by the Mediators in a mediation proceeding. Mediation and Conciliation can be deemed to be regarded as two important methods of conflict resolution wherein a third party regulates the proceedings. The conciliator, who presides over a Conciliation proceeding has the right to propose a solution to bring an end to the conflict, however, the mediator who presides over a mediation proceeding can help the parties to the dispute throughout the pendency of the mediation proceedings and provide them with a helping hand when it comes to finding a solution to their dispute. It is imperative to understand in depth, the various methods of alternative dispute resolution.
1.     Mediation: The Civil Procedure Amendment Act, 1999 or the âCPC Amendment Act, 1999â introduced the scope of Mediation as a method of alternative dispute resolution and the provisions dealing with it were laid down under Section 89 of the Civil Procedure Code,1908. This section which was inserted by way of the 1999 Amendment Act and was aimed specifically at introducing the provisions dealing with, âjudicial mediationâ, which can be deemed to be regarded in contravention to what a âvoluntary mediationâ is. The Court was conferred with the powers to find out cases wherein a peaceful settlement could be deemed to be regarded as the ultimate way to settle the dispute and then call for observations thereon of the parties to such a dispute.
Further, the Commercial Courts Amendment Act, 2018 also garnered a lot of importance to mediation. The Amendment Act, 2018, introduced an entire new chapter under the provisions of the Act. Chapter IIIA was introduced by way of this Amendment Act. It states that when a matter which does not require immediate or urgent interim relief, in such cases, the matter shall be referred to Mediation.
2.     Conciliation: Conciliation, as a method of alternative dispute resolution was introduced under the scope of Part III of the Arbitration and Conciliation Act, 1996.[9] Conciliation can be deemed to be regarded as one of the most effective means of settling disputes outside the confines of the court. The process of Conciliation can be deemed to be regarded as a process which is non-binding upon the parties to it and in this process, a Conciliator is appointed, who provides his necessary assistance to both the parties to the proceedings and helps them reach a settlement. Section 61 of the Arbitration and Conciliation Act, 1996 states, ââŠthis Part shall apply to conciliation of disputes arising out of a legal relationship, whether contractual or not and to all proceedings relating thereto.â[10]
3.     Arbitration: The law courts in India have innumerable cases pending before them and that is when arose the need to implement an alternative method of resolving disputes which could lower the burden upon the judiciary. In order to lower the burden upon the judiciary, the Legislature enacted the Arbitration and Conciliation Act, 1996 and provided that Arbitration can be used as a means to resolving disputes between parties located within the same country as well as between parties located within different countries (international arbitration). The Act provides provisions dealing with the making of the arbitral awards and how they can be challenged by the parties. This piece of legislature confers limited grounds under which an arbitral award can be challenged. It is imperative to understand the definition of Arbitration as provided under Section 2(1)(a) of the Arbitration and Conciliation Act, 1996. Section 2(1)(a) provides, âarbitration means any arbitration whether or not administered by permanent arbitral institution.â[11] It can be said that an arbitral award passed by an arbitrator is binding on both the parties to the dispute unlike the award passed by a mediator or a conciliator. There are various types of Arbitration proceedings in India:
a)Â Â Â Â Â Ad-Hoc Arbitration: There is no prescribed institution wherein the arbitration can be administered.
b)Â Â Â Â Â Institutional Arbitration: An institutional arbitration is when the arbitration proceedings are carried out by an institution or an organization.
c)Â Â Â Â Â Statutory Arbitration: It is that type of arbitration which is conferred upon or suggested by the law courts to the parties to the dispute.
d)Â Â Â Â Â Foreign Arbitration: The type of arbitration proceedings wherein the proceedings are conducted outside the territorial boundaries of India.
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Should Adjudication be upheld over Alternative Methods of Dispute Resolution?
Judicial adjudication or judicial proceedings are the common proceedings which are undertaken within the four confines of a court room and usually parties to a dispute believe that it is better to appear before the law courts and get their matter resolved. However, it is imperative to understand that the various methods of ADR have also been proven to be highly successful and in fact, in an arbitration or mediation or conciliation proceeding, there is no single winner, both the parties benefit out of it and get what they both want as the arbitrators or the conciliators or the mediators, sit down with both the parties, either together or conduct a separate meeting, the contents of which are not disclosed to either of the parties and they tend to understand the expectations and the desires of both the parties. This ensures the peaceful settlement of a dispute outside the four confines of a courtroom. However, if a matter is referred to judicial adjudication, then the advocates of both the parties simply argue before the Court and try to prove that their client is on the correct side of the law, while the other party is entirely at fault and these proceedings usually go on for decades with no solid result.
It is imperative to understand and draw a nexus between how Insolvency proceedings can be benefitted if they are referred to alternative methods of dispute resolution. As stated above, the Insolvency and Bankruptcy Code, 2016 was enacted by the Parliament to ensure that the insolvency resolution process is completed in a time bound manner and as per the provisions of the IBC, 2016, the code prescribes that when an application for the initiation of an insolvency proceeding is filed, a period of 14 days will be granted to the National Company Law Tribunal (NCLT) to take cognizance of the matter and make a decision with regards to whether the same shall be accepted or rejected. The NCLT cannot straightaway disregard or reject the application filed by the parties. The NCLT needs to scrutinize the application expeditiously and provide a time frame of 7 days to the applicant to correct the defects, if any, which are persistent in the application filed by the applicant before the NCLT. However, the NCLT also has a lot of cases before it and an insolvency proceeding is quite an intricate matter and a lot of debtors or business owners believe that an insolvency proceeding can rigorously tarnish the image of the company, as well as the image and the reputation of the business owners. Therefore, it is wise for parties to choose ADR over adjudication, when an insolvency resolution process is carried out as the privacy of the matter can be controlled and this certainly cannot happen if the matter goes up for adjudication before the Court of Law.
It is quite crucial to understand at which stage the parties to an insolvency resolution process shall refer the matter to ADR and use the methods of ADR to initiate an insolvency resolution process. The parties could refer the matter while working out the insolvency regime. This means that the parties could manage or reduce the debts and the debtor or debtors could sit down with their creditors (financial creditors) and discuss as to how would they repay the debt. This can be deemed to be regarded as a technique which could be commenced before insolvency proceedings are initiated. In countries like Belgium, Greece and Spain, the court usually maintains checks over these matters and ensures the validity of the agreement which the parties have reached to.
The parties could perhaps plan out a restructuring regime and these proceedings can be carried out with the help of ADR. Such a proceeding can be initiated when the debtor is certain that the company cannot survive any longer and that it would soon become insolvent. In a number of cases, it can also be commenced after a company or a debtor has gone insolvent, but the provisions with regards to this has not been provided anywhere in Indian laws and further it tends to incorporate the various methods of ADR, usually Conciliation is adhered to. In fact, only a Financial Creditor under the scope of Section 7 of the Insolvency and Bankruptcy Code, 2016 can initiate an insolvency resolution process, however, if a restructuring regime is made, then it can take under its scope all creditors and not just financial creditors. All in all, an insolvency resolution process can be commenced and solved with ease and can be finished in a time bound manner, perhaps it may be completed in much faster way as compared to referring it to proper adjudication.
Why is it necessary?
It is imperative to understand that Indiaâs insolvency regime at present focuses on providing an impetus to debt recovery over the debtorâs rehabilitation, which simply means debtorâs ability to further carry out business activities. The Preamble to the Insolvency and Bankruptcy Code, 2016, largely focuses on the reorganization and the rehabilitation of corporate persons which should be done in a time bound manner and should follow the measures of debt recovery. However, if disputes are referred to ADR, then it would also focus upon the intricate details of each debtor and each creditor of the corporation and also would reduce the burden which has been imposed upon the National Company Law Tribunal. In fact, Honâble Mr. Justice Sikri propounded that it is crucial that mediation be incorporated as a means of dealing with the Corporate Insolvency Resolution Process (CIRP).[12]Â In his article, Justice Sikri also reiterated that the desired time, as per provided under the IBC, 2016, to commence and resolve a CIRP, including the time taken for extensions is 270 days. However, seldom does the matter get over within a time-frame of 270 days and the cases usually go on for a period exceeding 365 days or perhaps even more. He elucidated in his article that the NCLT is overburdened and the time that is taken to liquidate a company or for a company to adhere and adapt a resolution plan, increases if NCLT is enable to deal with the backlog and the flouting of timelines through a problem-solution approach.[13] In certain situations, the commencement of the insolvency proceedings can also lead to a decrease in the total asset value of the debtorâs assets as it shows that the debtor is distressed and is making a distressed sale of his assets in order to accumulate funds. On the basis of all these aspects, the decision whether to put a company through the entire process of insolvency is taken only when there is a reasonable distress which requires immediate and prompt resolution and not when there are a number of intricate disputes which deal with the mere existence of that distress. On the other hand, when there is a clear scope to dispute a particular fact before the commencement of an insolvency process, the delay in the commencement can also lead to a reduction in the value of the assets and this can also lower the possibility of resolving the dispute immediately and amicably. However, if the matter is referred to NCLT, then with the humungous backlog, the total value of the non-performing assets (NPAâs) of the debtor would fall tremendously and also it could lead to severely tarnishing the image of the company. This is why, the Courts need to encourage the parties to an insolvency proceeding to refer the matters to mediation or arbitration. In fact, even Singapore has stated that it is crucial to adhere to mediation in an insolvency resolution proceeding, as it would also lead to the development of an international insolvency resolution sector. A committee was also set up to deal with these aspects and the judges of the Singapore Courts reiterated that it is essential to recommend parties to follow ADR as a means of resolving their disputes, specifically insolvency resolution processes. The Hong Kong Arbitration Centre (HKIAC), in 2008 itself propounded the establishment of a mediation scheme while dealing with the insolvency proceedings. The scheme also delved into how arbitration could be the other means of ADR which could be referred to while dealing with insolvency proceedings, in cases wherein mediation failed. This scheme propounded by the HKIAC can be deemed to be regarded as the âmed-arbâ scheme. HKIAC also contended that by 2009, 85% of the cases were proceeded to mediation or arbitration and HKIAC saw, 100% success rate as all the cases which were referred to mediation or arbitration were resolved. In the United States of America, Mediation as a method of ADR was referred to when the Greyhound Lines Inc. fell under the clutches of bankruptcy. A pre-reorganization mediation plan, taking into its ambit, innumerable claims against Greyhound Lines Inc., which were in consonance with the accidents or the road mishaps. In this case, a number of parties were claimants with regards to the damages caused by the various accidents caused by Greyhound vehicles and the mediators dealt with each creditor individually. The mediation process was carried out quite swiftly and was deemed to be regarded as quite efficient and successful. In fact, even the National Company Law Tribunalâs Mumbai Bench recently passed a judgement involving two companies titled, âIndus Biotech Private Limited v. Kotak India Venture Fund-1[14]â. The NCLTâs Mumbai Bench passed this judgement on the 9th day of June, 2020. The corporate debtor, âIndus Biotech Private Limitedâ, who filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 [15], praying that the matter be referred to arbitration for settlement of the matter between the two parties to the dispute. The NCLT passed this judgement after dismissing the Petition filed by the Financial Creditor, namely, âKotak India Venture Fund-1, who filed the petition under the provisions of Section 7 of the Insolvency and Bankruptcy Code.[16]Â The matter began when Kotak India Private Equity Group, the financial creditor, invested in Indus Biotech and was given a share subscription. The financial creditor was an equity shareholder of the company and also had a certain quantity of Optionally Convertible Redeemable Preference Shares (OCRPS). The financial creditor then wanted to convert their OCRP shares into equity shares wholly as they wanted to make a Qualified Initial Public Offering (QIPO) as prescribed by the Securities and Exchange Board of India. The Corporate Debtor, however, failed to convert or redeem the OCPR shares according to the terms of the agreement which was entered into by the parties and therefore, the financial creditor filed a Company Petition under the provisions of Section 7 of the Insolvency and Bankruptcy Act, 2016. The Corporate Debtor wished to invoke the arbitration clause in the agreement which was made between the corporate debtor and the financial creditor. The corporate debtor invoked the same and got a notice issued to the financial creditor invoking arbitration on 20th September, 2019. After the notice was issued to the financial creditor, the corporate debtor decided to file an application before the NCLT, under the provisions prescribed under section 8 of the Arbitration and Conciliation Act and contended that the dispute shall be referred to arbitration. The NCLT, after due deliberation on the said issue, contended that the application filed by the Corporate Debtor under the provisions of Section 8 of the Arbitration and Conciliation Act, 1996 can be upheld and the said matter can be referred for arbitration. The Tribunal, rejected the petition filed by the financial creditor, which was filed under the provisions of Section 7 of the Insolvency and Bankruptcy Code, 2016 and contended that, âCourts have a mandatory duty to refer the parties to arbitration where an arbitration clause exists.â[17]Â However, the Mu
mbai Bench of the NCLT failed to address the issue raised by the financial creditor, as to whether an insolvency petition can be referred to arbitration if the arbitrator cannot be conferred with the powers to begin with an insolvency resolution process. Regardless, the matter was referred to ADR.
Conclusion
With regards to India, there have been innumerable instances wherein the application or wherein the reference of a dispute to ADR has helped the parties to resolve their matters quickly and easily. However, it is imperative to understand that referring a dispute to ADR, allows parties to come up with new, innovative solutions and there is also a chance that the resolution or the conclusion at which the parties arrive, could be deemed to be regarded as financially beneficial for the financial as well as the operational creditors, instead of relying upon the court to draw or come up with a sugar-coated resolution plan which does not delay the entire process leading to a fall in the value of the non-performing assets.
[1] Bankruptcy Law Reform Committee, The Interim Report of the Bankruptcy Law Reforms Committee (2015).
[2] Section 243 of the Insolvency and Bankruptcy Code, 2016.
[3] Section 5(7)- âFinancial Creditorâ- The Insolvency and Bankruptcy Code, 2016.
[4] Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
[5] Section 5(8)(f) of The Insolvency and Bankruptcy Code, 2016.
[6] Judgement dated August 09,2019 in Writ Petition(s) (Civil) No. 43/2019.
[7] Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
[8] Committee of Creditors (CoC) is formed by the Interim Resolution Professional once the Corporate Insolvency Resolution Process (CIRP) is initiated against a Corporate Debtor. Committee of Creditors (CoC) is a committee consisting of Financial Creditors of the Corporate Debtor. This body forms the decision-making body in the CIRP of the Corporate Debtor. As per Section 18 of the Code, it is the duty of the IRP to constitute the Committee based on all the claims received against the Corporate Debtor and determination of the Financial Position of the corporate debtor. It shall consist of those financial creditors whose claims have been received within the time provided. In consonance to Section 24(6) of the Code, each creditor shall vote in accordance with the voting share assigned to it based on financial debts owed to such creditor- https://ibclaw.in/constitution-of-committee-of-creditors-under-section-21-of-ib/.
[9] Section 61 defines the Application and Scope of Conciliation, The Arbitration and Conciliation Act, 1996.
[10] Section 61(1) of The Arbitration and Conciliation Act, 1996.
[11] Part I, Chapter I, Arbitration- Section 2(1)(a) of the Arbitration and Conciliation Act, 1996.
[12] Mediation in Corporate Insolvency- A Game Changer by Justice A.K. Sikri- https://www.businessworld.in/article/Mediation-In-Corporate-Insolvency-A-Game-Changer/14-06-2019-171872/.
[13] Mediation in Corporate Insolvency- A Game Changer by Justice A.K. Sikri- https://www.businessworld.in/article/Mediation-In-Corporate-Insolvency-A-Game-Changer/14-06-2019-171872/.
[14] IA No. 3597/2019 in CP(IB) No. 3077/2019, order pronounced on 09.06.2020.
[15] Section 8-Power to refer parties to arbitration where there is an arbitration agreement, The Arbitration and Conciliation Act, 1996.
[16] Section 7- A financial creditor either by itself or jointly with other financial creditors may file an application for initiating a corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
[17] Indus Biotech Private Limited v. Kotak India Venture Fund-1, IA No. 3597/2019 in CP(IB) No. 3077/2019, order pronounced on 09.06.2020.