Home BlogArticles The Scope of Introducing ADR in India’s Personal Insolvency Regime

The Scope of Introducing ADR in India’s Personal Insolvency Regime

by Aishwarya Sethi
ADR and Insolvency Kanooniyat 3

Okay, it’s a good idea. But is India keeping up?

The first two articles threw light on the processes of ADR and personal insolvency resolution while analysing the scope of merging the two to make the latter a little more hassle-free. Going by India’s current insolvency regime under the IBC with respect to corporate insolvency, the norm is to prioritise debt recovery over the debtor’s rehabilitation, that is, continuation of his business. However, it has time and again been observed that the true objective of the IBC is rehabilitation, followed by debt recovery. A sincere effort towards achieving the same would also reduce the burden and the backlog of the National Company Law Tribunals.

Keeping this objective in mind, scholars have now suggested that tools of ADR, specifically mediation be incorporated in the process of insolvency resolution. The above suggestion was propounded by Hon’ble Justice Sikri himself, in a recent article. Examples were laid down of countries which have already adopted or are in the process of adopting a similar approach towards insolvency resolution.

International success

Singapore, for instance, recommended the use of mediation for insolvency resolution in 2017. The Committee set up to analyse the possibility of the same, suggested that judges should recommend disputes to mediation and the already existing mediation machinery should be made use of. Further, they also classified mediation processes into categories including individual creditor disputes, same nature disputes from multiple creditors and mediation to achieve consensus in a restructuring plan. While the recommendation was made keeping corporate insolvency in mind, these international models set an admirable example for better corporate and personal insolvency resolution techniques.

In the USA, mediation was used a couple of years post its introduction in 1986 when Greyhound Lines Inc. went bankrupt and set up a pre-reorganization mediation plan for thousands of claims against the company in connection with traffic accidents involving Greyhound vehicles. This case is a virtuous example of multi-party dispute resolution in which the debtor dealt individually with each creditor. The ADR procedure in the Greyhound dispute was quite detailed and successful. It consisted of three separate stages. First, the creditor had to complete a claim form for all losses (the “offer and exchange stage”). Second, the parties negotiated damages. If the creditor refused to participate in this stage or a final decision was not reached, the parties engaged in mediation for sixty days. Third, if the parties failed to reach an agreement, they had a recourse to arbitration. Half of the claims were resolved in the first stage itself. This is an example of a win-win negotiation which made it possible to resolve the case promptly, avoid adjudication and litigation costs, reconcile the interests of the parties, and end the dispute peacefully.

The Jaypee Infratech case in India is a shining example of a situation where mediation would certainly have been the easier way out to settle disputes between homebuyers and creditors. Just like the instant case, which led to the collapse of the real estate market in India, the Lehman Brothers insolvency too had led to the collapse of financial markets in the United States of America and internationally in the subprime mortgage crisis of 2008-09. In 2008, Lehman Brothers filed for bankruptcy. In the case of Lehman Brothers there were thousands of derivative contracts. Sensing the urgency of the matter, all of these were sent to compulsory court directed mediations which were notably successful. Subsequently, when multiple branches of the company went into liquidation in Hong Kong, the court directed the arbitration authority there to settle the claims using mediation, the failure of which would lead to the second stage of arbitration. This is a common model now, called the Med-Arb model. This step saw a magnificent success rate with 85% of the cases reaching full settlement.

Besides the above specified models, the French model has been leading the race (I am obviously talking about the insolvency resolution model, in case your mind wandered off) with a highly successful procedure for corporate and personal insolvency resolution based on ADR. The system consists of three stages, out of which the first two are meant to prevent reaching the stage of insolvency itself. Contrary to this, in the US bankruptcy law, ADR is used during the bankruptcy procedure, after its commencement. The three stages are as follows:

  1. Court assisted pre-insolvency proceedings
  2. Court directed pre-insolvency proceedings
  3. Formal judicial proceedings

The first two stages follow a path of mediation, negotiation and conciliation. While the first one is at an informal level with the involvement of the Court limited to holding the final agreement reached valid, the second stage has more input from the judiciary and loses the element of confidentiality. The primary goal of these procedures is to rescue the business. In the French legal system, only a debtor can initiate pre-insolvency proceedings, which is far from the situation in India, as discussed earlier. Both pre-insolvency procedures have proven to be successful in practice. For instance, approximately 1000 conciliation procedures were opened in France in 2015, and the success rate for these proceedings was approximately 70%.

The way forward in India with respect to ADR

With respect to India, even though there have been instances where the inclusion of ADR has bolstered dispute resolution, these have been limited to corporate insolvencies. The idea and structure of personal insolvency being comparatively new, the latest Report of the Insolvency Law Committee, released in March 2020, suggested that the Regulatory Authorities under the Code may undertake steps to develop infrastructure that aids debtors in utilizing mechanisms such as debt settlement, mediation, and debt counselling. ‘Efforts should be made at making debtors aware of various options available to them to resolve their over indebtedness through both formal and informal mechanisms, by undertaking awareness campaigns and advocacy measures.’ (Yes, sometimes the ideas in these reports are far-fetched.) Further, in this regard, changes in law have ‘not been deemed necessary’.

Evidently, even though the need of including outside court mechanisms has been recognized in India, there have been no efforts towards formalizing and codifying the same. The execution of such a system may also be slow because of the fact that India’s ADR regime has not fully developed yet, especially in terms of negotiation and mediation. Following an uncodified and untested practice cannot work in an ideal world. But this is India, and that only amplifies its chances of surviving here, considering the frequent spectacle of actions provoked by misinterpreted religious practices which undoubtedly gets everyone’s attention. So who knows, this might too! However, this may lead to ambiguity and arbitrariness, giving only some people the advantage of the said observation. But as research progresses and cases arise, we hope to see the contribution of judicial activism towards bringing changes in the structure which make ADR techniques sin qua non for personal insolvency resolution. That also might just bring us up in the Ease of Doing Business Index (All for acknowledging progress but 63 is not a very proud position.)

This article is a part of a series of three articles, read the first article here and the second article here

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