The insolvency landscape in India has witnessed significant upheavals, particularly with the crises faced by Infrastructure Leasing & Financial Services Ltd (IL&FS) and Srei Group companies (Srei Infrastructure Finance Limited and Srei Equipment Finance Limited). These cases underscore the need for innovative mechanisms to navigate the complexities of financial distress. One such mechanism, mediation, holds the promise of offering a lifeline to distressed companies like IL&FS and Srei, potentially averting the specter of insolvency and facilitating their revival.
Understanding Mediation
Mediation, as recommended by the expert committee appointed by the Insolvency and Bankruptcy Board of India (IBBI), involves the involvement of a neutral third party to facilitate negotiations and resolve conflicts between conflicting parties. Unlike traditional legal proceedings, mediation offers a collaborative and voluntary approach to dispute resolution, allowing parties to retain autonomy over the outcome while benefiting from the expertise of a mediator.
It recommended a phased introduction of voluntary mediation as a dispute resolution mechanism under the Code while preserving the sanctity of the timelines for various existing insolvency resolution processes. The core essence of the framework is its independence and flexibility to provide room for rapid incorporation of implementation learning.
It suggested establishment of a dedicated and specialized NCLT-annexed insolvency mediation cell with an independent secretariat to manage, monitor, and administer the conduct of insolvency mediations under the Code.
The Case for Mediation in Insolvency
The recommendation for the introduction of a voluntary mediation framework under the Insolvency and Bankruptcy Code (IBC) comes at a critical time, offering a glimmer of hope for companies struggling with financial distress. IL&FS and Srei, with their extensive networks and strategic significance, could potentially benefit from the mediation process.
Reviving IL&FS: A Missed Opportunity
The collapse of IL&FS in 2018 sent shockwaves through the Indian financial system, leaving a trail of unresolved debt and shattering investor confidence. With a debt burden exceeding Rs 1 lakh crore, IL&FS faced insurmountable challenges compounded by structural defaults, layering of debt, and asset-liability mismatch. The absence of a mediation framework under the IBC denied IL&FS the opportunity to explore alternative avenues for restructuring and debt resolution.
If mediation were available, IL&FS could engage with its creditors, shareholders, and other stakeholders in a structured negotiation process aimed at rescuing the company. By addressing underlying grievances and exploring mutually beneficial solutions, mediation may have enabled IL&FS to restructure its debt, divest non-core assets, and chart a path to financial sustainability.
Srei: Saga of Unfulfilled Potential
The plight of Srei Infrastructure Finance Limited (Srei) underscores the inherent flaws in the Insolvency and Bankruptcy Code (IBC) proceedings, particularly regarding healthy companies pushed into insolvency despite their impeccable record and financial health.
Srei, with its pioneering role in infrastructure financing and a track record spanning three decades, found itself caught in the crossfire of insolvency proceedings, despite having no defaults or signs of financial distress. The sudden appointment of an administrator by the Reserve Bank of India (RBI) and the subsequent initiation of insolvency proceedings plunged Srei into a state of limbo, casting doubt on the fairness and transparency of the process.
The unfair nature of the IBC proceedings becomes evident when considering Srei’s proactive approach to dealing with its financial challenges. Recognizing the potential cash flow mismatches arising from the COVID-19 pandemic, Srei took a bold step by approaching the Company Court with a scheme of arrangement under Section 230 of the Companies Act. The scheme planned to harmonize their debts in an orderly manner, ensuring fair repayment to all creditors.
However, despite the absence of defaults and the proactive measures taken by Srei to address its financial challenges, the company found itself railroaded into insolvency proceedings, creating a sense of injustice among its stakeholders. The freezing of Srei’s bank accounts disrupted its day-to-day operations, further exacerbating the situation and calling into question the fairness of the insolvency process.
In addition, the preference shown to state-supported entities such as the National Asset Reconstruction Company Limited (NARCL) raises concerns about the impartiality of the resolution process. While private investors expressed objections, NARCL emerged as the preferred choice, raising questions about the undue influence of certain stakeholders in the insolvency proceedings.
The Srei saga highlights the need for comprehensive reforms in the insolvency framework, especially in terms of initiating proceedings against healthy companies and ensuring transparency and fairness in the resolution process.
Mediation could have offered Srei a lifeline, allowing it to navigate the complexities of debt restructuring and stakeholder negotiations in a non-adversarial manner. By fostering dialogue and cooperation, mediation could enable Srei to restructure its debts, explore strategic partnerships and emerge stronger from the crisis.
The Way Forward: Embracing Mediation
As India grapples with the aftermath of financial crises like IL&FS and Srei, the imperative for a proactive approach to dispute resolution is becoming increasingly apparent. The phased introduction of voluntary mediation under the IBC represents a step in the right direction, offering companies a viable alternative to traditional insolvency proceedings.
By embracing mediation, companies can harness the power of collaborative problem-solving, thereby mitigating the adverse effects of financial distress and preserving stakeholder value.
Going forward, policymakers and regulators must work to create a more balanced and inclusive insolvency framework that protects the interests of all stakeholders while fostering economic recovery and revitalization.
By addressing the gaps in the current framework, India can pave the way for a more equitable and sustainable approach to corporate resolution and revival.
Amid growing concerns about the initiation of insolvency proceedings, there is the need for a more comprehensive approach. Recent events, such as the case of Srei, underline the importance of re-evaluating the criteria for such actions. Regulators should consider wider financial contexts and ensure stakeholder representatives in decision-making processes. Transparency in resolution plan selection and fair treatment of all parties involved are also critical focuses. The overall objective should be the rehabilitation and revival of distressed companies, rather than mere asset liquidation as was seen in the case of Srei. By prioritizing justice and engagement, stakeholders aim to transform insolvency processes for economic revitalization.
This article is written by Vibhav Mishra, advocate-on-record, Supreme Court. All opinions expressed are personal.
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