The Insolvency and Bankruptcy Code, 2016[1] was originally meant to alleviate one of India’s most pressing economic problems—the rising count of non-performing assets and failing businesses. Before the IBC India’s insolvency system was disconnected and ineffectual under various outdated laws like the Companies Act, 1956[2] and the 2013[3] version, the Sick Industrial Companies (Special Provisions) Act, 1985[4], and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993[5]. These regulations created a complex, inconsistent, and creditor-unfriendly system whereby years of insolvency would drag on eroding company value and reducing creditor recovery. The IBC aimed to right this by simplifying a time-bound process stressing resolution over liquidation. Under sections 7[6], 9[7], and 10[8] the adoption of a structured corporate insolvency resolution process (CIRP) and the establishment of the committee of creditors (CoC) under section 21 gave creditors more control over the result while so reducing judicial interference. The IBC has not fully addressed the problem even if it has substantially enhanced the efficiency and speed with which insolvency is handled. The process remains quite adversarial and contentious with creditors and debtors routinely caught in long disputes over claim acceptance, voting rights, and settlement plan approval. Often the strict deadlines under section 12—that which calls for insolvency resolution—are violated within 330 days by judicial delays and conflicting shareholder interests. The concentration of financial creditors inside the CoC marginalizes operational creditors even more, which generates disputes over claim management and vote outcomes. Growing backlog of unresolved problems before the National Company Law Tribunal (NCLT), value loss resulting from operating uncertainty, and worse recovery for creditors ensue from this. Mediation offers a controlled, interest-based bargaining strategy that advances consensus-building and quicker answers, so it may be very transforming here. Still, despite its promise, the IBC framework almost lacks mediation completely. The question is why mediation hasn’t been incorporated thus far, not whether it could suit India’s insolvency structure.
Scope for Mediation in Insolvency
Mediating into their insolvency systems has been successfully incorporated by certain top countries. Singapore’s Insolvency, Restructuring, and Dissolution Act[9] institutionalizes mediation at different stages of insolvency under the leadership of a competent mediator therefore allowing parties to discuss conditions of restructuring. The European Union’s Preventive Restructuring Framework[10] promotes similar early-stage mediation in order to help to prevent whole formal bankruptcy occurrences. Many parties with various interests demonstrate a growing awareness of these models, which illustrate that insolvency is not simply a financial problem but also a complex negotiation. Unlike litigation, which is by nature hostile, mediation is cooperative; it allows participants to establish shared interests, explore creative ideas, and preserve long-term economic relationships. In the Indian context, mediating issues at three key points of the bankruptcy procedure might be quite successful. First, mediation might assist to resolve pre-admission disputes under sections 7, 9, and 10 — where creditors and debtors commonly debate on the presence or magnitude of debt — therefore alleviating the NCLT’s burden and speeding the admittance process. Second, disputes over resolution plan approval inside the CoC under section 30(4)[11] would profit from mediation, in which a skilled mediator would help to arrange a plan that best maximizes value for all parties by enabling consensus among conflicting creditors. In the end, disputes about claim treatment and distribution under section 31—often disputed by operational creditors—could be resolved more swiftly by means of mediated agreements than by litigation. Judicial precedents have already given clues regarding the need of a more flexible and resolution-oriented attitude. The Supreme Court reiterated in Swiss Ribbons Pvt. Ltd. v. Union of India (2019)[12] that the primary objective of the IBC is resolution, not liquidation — thereby showing judicial openness to permit non-adversarial settlement techniques. The Court also concluded in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022)[13] that the acceptance of insolvency applications under section 7 is not automatic, therefore upholding the discretionary ability of adjudicating bodies to consider other possibilities. The NCLT approved a settlement proposal developed outside official IBC proceedings in Siva Industries and Holdings Ltd. (2021)[14], therefore proving the ability for coordinated talks even after bankruptcy has been brought about. These decisions provide a strong legal foundation for allowing mediation inside the IBC, however legislative action to officially support this position is necessary.
Challenges and Legal Difficulties
Bringing mediation into the IBC is most challenged by the rigorous procedural framework of the Code. The creditor-driven aspect of the resolution process—where financial creditors dominate voting inside the CoC under section 30(4)—allows minimal opportunity for negotiated solutions, unless they meet creditor interests. The minimum 66% majority needed inside the CoC indicates that this is also true, even a mediated settlement would need creditor buy-in; financial and operational creditors have distinct interests, so this is difficult. Moreover, the strict deadlines in Section 12[15] induce procedural pressure meant to discourage time-consuming talks or mediation. Medication requires for flexibility and time, qualities that are essentially incompatible with the legislative structure of the IBC unlike litigation, which follows set procedural processes. Another major problem is enforceability. Should a mediated agreement contravene legislative criteria for resolution plans under section 31[16], the NCLT bears the risk of rejecting or contesting a mediated agreement in the lack of a clear statutory framework for mediated settlements. Creditors are not ready to engage in mediation until they are sure the mediated outcomes will be legally enforceable and binding. The current legal uncertainty regarding mediation results has a chilling effect, discouraging participants from ever giving mediation any thought even if it might result in a speedier and more efficient resolution. The majority of financial creditors inside the CoC complicates the implementation of mediation even further. Especially large institutional lenders, financial creditors might be risk-averse and unwilling to deviate from standard legal practices. Mediating asks for a shift in viewpoint from combative litigation to cooperative negotiation—a change hard to come by without institutional incentives and regulatory backing. Especially in situations when the IBC’s creditor-driven structure gives creditors enormous authority over the resolution process, creditors are unlikely to willingly participate in mediation without legislative action mandating or encouraging it.
Cause for a change
The IBC will demand targeted legislative and procedural reforms. First, IBC’s section 12A[17]—which allows withdrawal of insolvency petitions relying on settlements approved by 90% of the CoC—could be altered to especially allow mediated settlements as the basis for withdrawal. Second, the section 424[18] of the Companies Act, 2013 governing the NCLT’s procedural power might be expanded to allow the tribunal to refer insolvency conflicts to mediation and apply mediated settlements. Third, mediation might be introduced into the settlement process at crucial points—including pre-admission disagreements under sections 7, 9, and 10, and plan approval conversations inside the CoC under section 30(4). Finally, a dedicated mediation panel headquartered inside the NCLT staffed by insolvency and mediation experts may ensure consistency in handling mediated cases and support coordinated discussions. Mediation should, first of all, improve rather than replace the present IBC resolution mechanism. Mediation could provide an alternate path forward when official procedures stall or creditor-debtor conflicts threaten to throw off the settlement process. By creating a parallel road for mediated settlements, therefore cutting resolution timelines and lowering dispute, the IBC may preserve corporate continuity, decrease litigation backlogs, and boost creditor recovery rates. Good integration of mediation would necessitate a shift in viewpoint from confrontational litigation to cooperative problem-solving; nonetheless, this transformation is fully attainable with specific legal recognition and enforcement procedures.
Conclusion
Mediation might revolutionize the landscape of insolvency resolution for India by providing a more efficient, flexible, and cooperative replacement for litigation. Judicial decisions have established a non-adversarial attitude to insolvency settlement; legislative action is needed to formalize this transformation. Mediating with statutory recognition, enforcement mechanisms, and procedural clarity helps to strengthen the IBC’s basic aims of value maximizing and rapid settlement. The time for half-measures is passed; India’s bankruptcy mechanism must accept mediation as a strategic tool for mitigating financial crisis and preserving of economic value.
[1] The Insolvency and Bankruptcy Code, No. 31 of 2016 [hereinafter IBC 2016].
[2] The Companies Act, No. 1 of 1956.
[3] The Companies Act, No. 18 of 2013.
[4] Sick Industrial Companies (Special Provisions) Act, No. 1 of 1986.
[5] Recovery of Debts Due to Banks and Financial Institutions Act, No. 51 of 1993.
[6] IBC 2016, §7.
[7] IBC 2016, §9.
[8] IBC 2016, §10.
[9] Insolvency, Restructuring, and Dissolution Act, No. 40 of 2018 (Singapore).
[10] Directive 2019/1023 of the European Parliament and of the Council of 20 June 2019 on Preventive Restructuring Frameworks [2019] OJ L172/18.
[11] IBC 2016, §30(4).
[12] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (India).
[13] Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352 (India).
[14] Siva Industries and Holdings Ltd., (2021) SCC OnLine NCLT 556 (India).
[15] IBC 2016, §12.
[16] IBC 2016, §31.
[17] IBC 2016, §12(A).
[18] Companies Act, 2013, §424.
Authors: Saksham Gadia and Lavanya Malani, are final-year law students at Jindal Global Law School
