So what is the easier way out?
The first article gave us a general idea about the current insolvency regime in India and its shortcomings, paving way for us to understand why we should switch to an alternative paradigm where ADR is the preferred course for resolving insolvency disputes and how that can be done.
Adjudication versus ADR
Vis-à-vis adjudication, which is the current ‘road most taken’, ADR aims at reaching a peaceful settlement between the debtor and the creditor, along with reconciling the principle interests in insolvency cases, being the continuation of the debtor’s business and settling the creditors’ claims. The third and the most important benefit that flows from choosing ADR over adjudication, is the privacy of the matter, which certainly cannot be assured in the case of court proceedings. The masses will never give up their dose of entertainment for you.
In a socioeconomic sense, preventing a company from going bankrupt (winding up) when it is facing financial difficulties provides the opportunity to continue employment, efficiently utilize all available sources (natural resources, technical equipment) and preserve relationships, such as those with small suppliers of goods and buyers/customers of products and services. It thus has a significant impact on maintaining the society’s economic structure.
Why change the status quo?
The need to change the status quo is evident from the fact that we have a better option which has a significant amount of success in countries like USA and France, which is ironic since USA clearly ignored their better option in the presidential elections.
We will analyse the models followed in these countries while pondering over the possibility of applying the same to India, post assessing the individual elements and possibilities of using ADR to simplify the process of insolvency resolution.
Now, to what extent can we introduce out-of-court settlements? At what stage can the same be done? Are all creditors a part of the process? We will analyse the common aspects of various countries’ models to answer these questions.
Common aspects of international models
According to the stage at which we choose to use an ADR technique and the extent of its usage, based on a recent comparative study, two possibilities arise, besides the formal method of adjudication.
- Workouts: Just like your work out aims at reducing weight and staying healthy, this workout aims at reducing/managing debts and staying ‘weight-free’. In other words, the debtor renegotiates the debt repayment with creditors. But the catch is that, unlike insolvency proceedings, this is an informal negotiation which does not involve all creditors and is initiated while the person is still solvent and conducting business. Further, since this technique is initiated before insolvency, it is mostly the law of contracts that is followed and not the insolvency law. However, in some countries like Belgium, Greece and Spain, the court interferes in the last stage of the process to uphold the validity of the agreement reached.
- Pre-insolvency proceedings: These include ADR processes as a part of judicial proceedings which have very little direct role to play in them otherwise. These can be divided into two broad categories which, in some countries form two stages and in others, are unrelated methods.
- Workout supporting proceedings: Initiated when there is a possibility of financial downfall and does not have to include all the creditors. In some countries, these type of proceedings involve a mediator appointed by the courts. There is no further involvement of the court. The provision of court directed mediation has found a place in the Civil Procedure Code, 1908 but has not been applied for the purpose of insolvency resolution. The main aim of such proceedings is to resolve the situation before the stage of insolvency is reached.
- Restructuring proceedings: Such proceedings are usually conducted when it is certain that insolvency is to follow for the debtor. In some cases it can also be initiated after the declaration of insolvency, but this provision varies according to the national law. It includes various ADR processes, which mostly form an extension of conciliation, and multiple stages. Further, all creditors have to be involved for restructuring proceedings. The involvement of the judiciary is more in the instant process as compared to workout supporting proceedings where the judiciary takes a back seat after the mediator has been appointed.
It is clear from the above analysis that even if the interference of the judiciary cannot be completely eliminated, insolvency disputes can be resolved without all the repercussions that arise out of adjudication. The procedure detailed above lays down an outline for all such international models. Keeping the same in mind, we will analyse some successful international models which make use of ADR for insolvency resolution while elaborating on the possibility of India pursuing similar methods.
This is a series of three articles. To read the third article, click here. Read the first article here
