Indian Dispute Resolution System: Is Mediation the way forward?

Indian Dispute Resolution System: Is Mediation the way forward? A special focus on mediation in commercial matters.

Introduction

The adversarial type of litigation has dominated the Indian dispute resolution system. Arbitration has evolved as one of the alternatives to the usual court system.However,since it is also an adversarial dispute resolution system, one party always wins the matter and the other party loses. Further with the advent of COVID-19, the already high pendency of litigations is on a new high and it is an appropriate time to discuss the role and scope of alternative dispute resolution mechanisms, which would provide a more robust, cost effective, and speedy method of resolving the disputes; and answer to all this is perhaps one of the oldest form of settling the disputes. The answer is mediation.

What is mediation?

Mediation is a process in which via a trained professional i.e. a mediator, parties themselves negotiate and arrive at a mutually agreeable settlement to their disputes and differences. Black’s Law Dictionary defines Mediation as a method of non binding dispute resolution involving a neutral third party who tries to help the disputing parties to reach a mutually agreeable solution. Mediation is therefore a process aimed at finding a middle path amidst the dispute between the parties so that a mutually acceptable solution can be worked out. It is a non adversarial approach towards dispute resolution and is a well recognized ADR process all over the globe. The object of mediation process is to reduce tensions and posturing, enabling the parties to realize and understand their priorities and interests and steer them towards a self determined and acceptable resolution. Role of mediator in this process is to facilitate the negotiation between the parties and leadpartiestowards the amicable resolution of the disputes or differences between them.

The Need for Mediation in Commercial Matters

One of the major hurdles faced by the Indian judicial system is the pendency of cases As per the statistics provided by the National Judicial Data Grid there are around 3.3 crore cases which are still pending. Further, with the advent of COVID-19 and the courts taking up only ‘urgent’ matters, the situation is likely to worsen. Furthermore, as far as, arbitration is concern it takes at least  around two years to receive the first award, however, the same will be subject to challenge in High Court and thereafter in Supreme Court. All these permutations and combinations tilt the scale in favour of mediation. Commercial firms and specially startups, MSME and emerging companies should be encouraged to take up mediation as a dispute resolving mechanism. Recognizing this, from August 2018, Pre-litigation Mediation has been made mandatory for commercial disputes in India, under the Commercial Courts Act, 2015. Further, Mediation is also globally gaining importance as an Alternate Dispute Resolution mechanism.

Mediation is more discussion-oriented and arbitration is more litigation based. Mediation is a good first step in trying to resolve business disputes. It is an easy and cost-effective step that seeks to maintain business relations between the parties by putting forth an agreeable solution. Moving straight to arbitration is a way of acknowledgement of loss of control over the situation. Arbitration is a good way to settle the dispute if mediation does not work effectively or the parties cannot bring themselves to work out a solution that benefits both of them. Thus, both are an essential step of resolving business disputes. Arbitration should follow mediation.

One of the key drawbacks of arbitration is that clause in which it is written that the seat of arbitration is in Singapore and the laws will be of U.K. which becomes problematic not only for clients but also for the judges. In contrast to above, mediation in “ADR” is seen as a medium to douse the fire and putting disputes to a conclusion.

Mediation is a mechanism to repair relationships whether they are commercial or matrimonial. In the case of individuals, there is always an opportunity to talk and reconcile but in the case of multinational companies, there are big guns, power play, no connection and nothing personal between parties. In this whilst of technological world they might had executed the agreement on mail, or might on a video conference .Therefore, in absence of personal connection between the stakeholders leaving no scope for negation, thereby, the disputes become larger.

In such a scenario, a trained mediator comes to play when the parties and their representatives do not take a stand and just come to watch the process. Thus, the mediators are trained to touch upon the reality and the problem.Further, after normalcy and walk of life resumes, the courts and tribunal come to rescue however, the litigants may face practical difficulty in filling the petition and passed orders on judicial side protecting the right to institute processing belatedly bring the scope of mediation 

Role of the Mediator

The role of the mediator is to only assist the parties involved.  One of the main functions of the mediator is to remove the obstacles in the communication of the parties,assist in the identification of the issues and to reach at a mutually agreeable agreement. The powers of the mediator are just limited to facilitate with the communication and the mediator cannot compel a party to make a particular decision or in any other way impair or interfere with the party's right ofself-determination. Mediation is all about facilitating or assisting negotiation between the parties. Mediation works between the parties because it gives chance to the parties to come to a settlement where both parties do not have to compromise their rights instead leads to a better solution.

Benefits of Mediation

·                                                 Speedy Settlement

One of the key imperative advantages of mediation over tradition dispute resolution methods is that mediation being an informal process takes less time to reach a settlement between the parties. It is essentially a type of a negotiation between the parties facilitated by an independent expert known as a mediator.

·                                                 Cost Effective

One of the key frameworks which mediation over other dispute resolution mechanisms is that when it comes to cost is perhaps the most effective system. There are no stamp duties obligation involved. Similarly, the role of the lawyers is also quite limited and parties if they are well versed with the facts of their dispute can also forego the services and can handle the dispute on their own taking the help of the mediator in coming to an agreeable settlement. Fees of mediators and institutions conducting the Mediation are competitive generally based on the amounts in dispute.

·                                                 Win-Win Situation

The best thing about the mediation process is that nobody succeeds or fails. This is so because the parties themselves come to a solution which is mutually amicable solution to both of them. However, in the case of arbitration the arbitral award is passed in favor of one of the parties. This is in turn spoils the relationships between the parties.

·                                                 Maintenance of Privacy and Confidentiality

Unlike court or arbitration, (unless it is agreed in the contract that arbitration will be confidential), the Mediation is private and confidential. The discussions or negotiations between the parties would not go beyond the four walls, even if parties could not arrive at an amicable solution to their disputes. In case parties fail to arrive at resolution to the dispute in Mediation, during court or arbitration proceedings such discussions and negotiations between the parties are not recognized as evidence.

Let us take Dispute online: Modern version of the ancient technique

Currently with the advancement in technology, all the three main ADR techniques-Arbitration, Conciliation and Mediation- are available with an online option. Whilst all the three are beneficial as against traditional litigation as discussed earlier, yet Online Mediation has a significant advantage over Online Arbitration when it comes to overall turnover rate and effortless dispute resolution.

There are basic two-fold benefits of opting for Online Mediation:

·           Efficiency: The litigants need not travel to the Mediation Centre/Facility, more focused environment is provided by online mediation by establishing tighter deadlines for settlements; e.g., Online Consumer Mediation Centre at National Law School of India University strives to complete the mediation process within 21 days.

·           Comparatively more informal than the traditional Mediation Process: The ability of litigants negotiating during the online mediation have the special advantage of being more candid with their settlement offers. This is achieved by eliminating the factor of posturing. With the removal of posturing, the focus of parties is concentrated towards solving the dispute rather than forming a rapport using physical posturing. This sole thing makes online mediation process more efficient.

There are a number of organizations that provide online mediation facilities in India currently. According to a circular posted on Department of Justice’s (Ministry of Law & Justice, Government of India) on 13 September 2018, department suggested for the Governmental departments and Organizations to explore other domains for settlement of disputes, i.e., Online Dispute Resolution (ODR). This suggestion came after the figure that out of pendency of 3.3 crore cases, 46% of the cases involve Government Agencies.

Department provided a list of fourteen organizations that specialize particularly in the field of online mediation. This clearly show the intention of Government for pushing towards online mediation. The organizations are:

1.      ASSOCHAM International Council of Alternate Dispute Resolution (AICADR)

2.      Bangalore International Mediation, Arbitration and Conciliation Centre (BIMACC)

3.      Centre for Advanced Mediation Practice

4.      Construction Industry Arbitration Council

5.      Delhi Dispute Resolution Society (DDRS)

6.      Indian Institute of Arbitration & Mediation

7.      International Centre for Alternate Dispute Resolution (ICADR)

8.      International & Domestic Arbitration Centre in India (IDAC)

9.      Mumbai Centre for International Arbitration

10.  NaniPalkhivala Arbitration Centre (NPAC)

11.  ODRways

12.  Online Consumer Mediation Centre

13.  Presolv360

14.  Centre for Mediation & Conciliation (CMC), an initiative of Bombay Chamber of Commerce and Industry

Every organization has its own set of rules that resemble in parts with the Delhi High Court Mediation Rules with respect to overall structure and function. For example, the Mediation Rules at Online Consumer Mediation Centre, National Law School of India University has its own set of rules regarding how mediation at their centre operates.

The organization’s role here is to provide with the possible online infrastructure to facilitate the process. Role of mediator remains the same of a facilitator in the process of mediation.

One factor that is common among all the organizations that facilitate mediation process is that the final settlement agreement drawn in private mediation is drawn according to section 73 of The Arbitration and Conciliation Act, 1996. Section 73 sets out directions for drawing out settlement agreement in the case of Conciliation proceeding. Hence, it would not be wrong to say that although there are set differences in the textbook meanings of Mediation and Conciliation, yet the terms are used interchangeably in case of private mediation.

Under the ongoing scenario of COVID-19, Online Mediation/Conciliation can make a huge difference when it comes to solving disputes. Everything from filing complaint/request to appearing in front of Mediator/Conciliator can be done without stepping out of residences.

Conclusion

In the light and scope mention above, we agree that no business is in the business of dispute. Disputes are irrupted primarily due to ego issues, differences in execution of contracts, lack of regular communication between the parties, trust issue and also due to economic compulsion arising out of force majeure events like COVID-19. The COVID-19 outbreak has disrupted the business globally and there is a possibility of arising differences or disputes between the parties to the contract after COVID-19 on various contractual issues unless parties act sensibly. Businesses must take into consideration that COVID-19 is a bad patch and occasional, whereas maintaining business relationship is critical for sustaining the business from long term perspective. Under the circumstances, Mediation would be a useful mechanism wherein parties may address their disputes without approaching the courts or arbitration. Regardless whether the parties have a Mediation clause in the agreement, parties may endeavor for amicably agreement to make an attempt to refer the dispute to the Mediation.

Businesses must take into consideration that COVID-19 is a bad patch and occasional, whereas maintaining business relationship is critical for sustaining the business from long-term perspective. Mediation could be a useful mechanism to address disputes.

IF A GOOD WRITER LIVES INSIDE YOU, THEN MAIL YOUR BIO, PICTURE WITH YOUR BLOG.... WE WILL SHORTLY PUBLISH IT

JUST MAIL US ON abizchancellor@gmail.com

AUTHOR: ABHISHEK BHATI

(Law Undergraduate at Law Centre-II, Faculty of Law, University of Delhi,

Compiler and Editor: Policy Document on Mediation for Mediation & Conciliation Project Committee, Supreme Court of India and Indian Council of Social Science Research

Research Assistant: Research Project titled ‘Effectiveness on Mediation’, funded by Ministry of Law & Justice.

Research Assistant: Book on Mediation titled Mediation by Law Centre-II, Faculty of Law, University of Delhi)

Contact: +91-9654041529

AUTHOR: GURKARAN SINGH

From a CA aspirant, to pursuing bcom hnrs,from someone working at Pwc to someone pursuing law from Faculty of Law Delhi University, life has been a roller coaster ride for Gurkaran Singh. Presently he is pursuing Law from Law centre 2 Delhi University. He has authored a policy document for ministry of law and justice. He has also worked as a research assistant on a book on mediation

Disclaimer: 

No reader should act on the basis of any statement contained herein without seeking professional advice. The results & the interpretation has been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. The author explicitly disclaims any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available herein before, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.

For any help/assistance write us on abizchancellor@gmail.com

Impact of Covid 19 on Rent Agreements

The Impact of Covid -19 On Rent Agreements.

With the widespread of the Coronavirus the supply chain has brutally hit by the COVID-19 flare-up, it is likely that obligation under numerous agreements will be deferred, interfered, or indeed, even dropped. Counterparties (particularly providers) to agreements may try to defer or potentially stay away from execution (or obligation for  non-execution) of their legally binding  commitments as well as end contracts,  either in light of the fact that COVID-19 has genuinely  kept them from playing out their legally binding commitments, or in light of the fact that they  are trying to blame it so as to remove themselves from a troublesome bargain. Further, organizations may not be capable to play out their commitments under their  client understandings due to their  provider's non-execution and may in go try to defer as well as maintain a strategic distance from  execution (or risk for nonperformance) of their legally binding  commitments as well as end contracts.

With the future uncertain about the set of the restrictions and obligations which would be imposed post 14^th April, in this context, it is an opportune moment to examine the impact of doctrine of frustration and force majeure on the lease agreements.

With the closure of the official leased premises, one of the imperative questions is regarding the payment of the rent.

Would lessee be saved by the doctrine of force majeure and doctrine of frustration, or would he be forced to pay the rent even though his commercial activity has been hit by the forced lockdown?What are the other remedieswhich are available to him? What are the options available to him?

To answer the above mention question it is imperative to understand this we have to first understand the meaning of the doctrine of force majeure and doctrine of frustration and whether or not these doctrines are applicable to the lease agreements?

What do mean by Force Majeure?

Force majeure is a French term meaning superior force refers to an unforeseeable event which excuses the parties from the performance of a legal contract obligation. It implies any unforeseen event or circumstances, beyond the control of man that renders the performance of any contract impossible. Examples of ‘force majeure’ events could be war, civil strife, natural disasters or governmental actions that frustrate the contract and render it impossible to perform by either party. Commercial property rental agreements, for offices and restaurants, do contain such ‘force majeure’ clauses. 

Restaurant and retail businesses, which pay the highest rentals, tend to incorporate force majeure clauses in their contracts which would suspend rent payment should any force majeure event occur. Interpreting such clauses assumes importance in the context of Covid-19, which has led to lockdowns and shut-downs across India.

Doctrine of Frustration

The doctrine of frustration is mention under Section 56 of The Indian Contract Act 1872 (“ICA”). The section contemplates that any act which has to be performed after the contract is made unlawful or impossible to perform, and which the promisor could not prevent, then such act becomes impossible or unlawful will become void. The doctrine of frustration comes into play when a contract becomes impossible of performance, after it is made, on account of circumstances beyond the control of the parties or the change in circumstances makes the performance of the contract impossible.

The Court can give relief on the ground of subsequent impossibility if it finds that the whole purpose or the basis of the contract has frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was not contemplated by the parties at the date of the contract would not prevent, then such act which becomes impossible or unlawful will become voidable.

Jurisprudence

At the very outset, it is pertinent to note that the general rule of force majeure and frustration does not apply to lease deeds.The Supreme Court clarified this position early on in Raja Dhruv v. Raja Harmohinder Singh[1], it was held by the Hon’ble apex court, agricultural lands were leased in erstwhile undivided Punjab for cultivation. Such cultivation subsequently became impossible on account of the partition of India. The Plaintiff (the initial lessee) commenced an action for refund of the previously paid rents. The Supreme Court dismissed the claim of force majeure under Section 56 on two broad grounds. First, it held that rights under a lease are not simply contractual rights and are instead governed under the provisions of the Transfer of Property Act, 1872 (“TPA”). Second, the Court reasoned that Section 56 of the ICA does not apply to a concluded contract where no further performance was required. The Supreme Court re-affirmed this position in Sushila Devi v. HariSingh[2] which also involved a claim for refund of rent and deposit in relation to lands that now formed part of Pakistan.

Therefore, in the cases of Covid-19 lockdown, the commercial tenants might cite the doctrine of frustration under section 56 and seek remission of the payment of rent payable during the lockdown period. However, the landlords may rely upon the Supreme Court rulings that since the Doctrine of Frustration of Contract does not apply to leases of property, it would not apply to leave and license agreements also, which form the basis of most commercial rental contracts.

But, that does not mean that the tenants do not have any recourse of law. In the case of DhruvDev Chand vs. Harmohinder Singh and Others[3], the Hon’ble Supreme Court held that the Doctrine of Frustration under Section 56 of the Indian Contract Act would not apply to leases of land. It, however, held that if the leased property is destroyed by fire, tempest, flood or violence, then the tenant has the option to declare the agreement voidable or non-performable under Section 108 of the Transfer of Property Act, 1882. However, in the light of above, the issue in the case of lockdown notifications issued by the government is that such lockdowns and restrictions are not of permanent nature. This would not permanently affect the long term usefulness of the property.

So, it can be inferred that recourse is provided under Section 108 of TPA. Section 108(B)(e) of the TPA provides “if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void ...

One of the most pertinent precedent regarding the interpretation of Section 108 is in the case of   VannattankandyIbrayi v. KunhabdullaHajee[4]In this case Supreme Court held that upon the destruction of a building due to fire, the lessee has the option to treat the lease as having become void and avoid further obligation to make rent. However, in the event that such option is not exercised by the lessee, he is not entitled to squat on the land. However, this decision was overturned by the Supreme Court in the case of SahaRatansiKhimji v. Kumbhar Sons Hotel[5] Pvt. Ltd,In this case the Hon’ble apex court observed that merely because the leased premises are destroyed, does not mean that the tenancy stands automatically terminated. Both of above mention decisions deal with situations where the leased premises were physically destroyed and not where tenants were prevented from accessing such premises due to supervening events. Therefore, in the light of above, accordingly it can be said that these both these judgments are no great authority in dealing with the current situation of Covid-19.

There are three conditions which need to be satisfied before any benefit of Section 108{B}{e} can be taken. These three conditions are

1.      The existence of an ‘irresistible force’

2.      Property becomes substantially and permanently unfit for use for which it was let

3.      The lessor must be informed of the lessee’s decision to render the lease deed void.

Therefore, it can be easily inferred by reading these conditions that in order to take the benefit under Section 108 it has to be established that Covid-19 rendered the property completely and permanently unfit for the purposes for which the property was leased out. In other words it is to be established that Covid-19 in itself is an instance of “irresistible force”. Further, under Section 108(B)(e) of TPA, it is the duty of the lessee to give a notice to the lessor. . If the lessee fails to give notice under Section 108(B)(e) of the TPA, the lease is deemed to remain unaffected regardless of a force majeure event. It is imperative to note that once this notice is sent, the lease agreement between the parties stands terminated.

Conclusion

One of the major concerns during this lockdown period would be regarding the payment of the rent despite the lessee not having the access to the leased property.  The question needs to be answered by the courts on case-to-case basis. However, in the earlier precedents mention above, it is clearly laid out that the lessee is in possession of the property and has access to is unless a notice under Section 108(B)(e) of the TPA is sent to the lessor.

In Shankar Prasad and Ors.v. State of M.P. and Ors[6], the High Court of Madhya Pradesh held that the obligation to pay rent by the lessee did not cease, even though the godown leased out was completely destroyed by a fire, as the lessee had not sent a notice under Section 108(B)(e) of the TPA to the lessor. This position of law has also been followed by the High Court of Bombay in Amalgamated Bean Coffee Trading Company v. Surjit Singh Jolly (2017) and the Delhi High Court in Chamber of Colours and Chemicals Pvt. Ltd. v. Trilok Chand  9 (1973) DLT 510 and Airport Authority of India v. Hotel Leela Venture Ltd  (2016) 231 DLT 457 . The logic governing these transactions is that unless the lessee satisfactorily surrenders the property by way of a notice, the lessee is deemed to be using the property and is obligated to pay rent. The lessee should be mindful to elaborate, in its notice, reasons as to why COVID-19 is an event of irresistible force under Section 108(B)(e) of the TPA. It is also settled law that a financial inconvenience in making payment does not qualify as a force majeure event.

Another caveat, which has to be kept in mind, is that most of the lease agreements and especially in the cases for lease of commercial establishments docontain an arbitration clause as a means for dispute resolution.  Such arbitration clauses can resort to the ‘fast track procedure’ contained in Section 29B of the Arbitration and Conciliation Act, 1996. Under the fast track procedure, the arbitral tribunal appointed by the parties can conduct the proceedings in a quick and summary manner and pass the arbitral award (or judgment) within six months.

But the jurisprudence regarding the arbitration of disputes under a lease deed is currently pending resolution by the Supreme Court. In Himangni Enterprises v. Kamaljeet Singh Ahluwalia(2017) 10 SCC 706  the Court held that disputes under the TPA were non-arbitrable. The correctness of this view has been doubted in VidyaDroliavsDurga Trading Corporation 2) RCR (Civil) 542and a reference to three judge bench is currently pending.

Given that there a large number of unanswered and open ended questions it would be quite interesting to note that how the courts react to the Covid 19 had an impact on the commercial relationships.

IF A GOOD WRITER LIVES INSIDE YOU, THEN MAIL YOUR BIO, PICTURE WITH YOUR BLOG.... WE WILL SHORTLY PUBLISH IT

JUST MAIL US ON abizchancellor@gmail.com

   AUTHOR: -GURKARAN SINGH. 

(Pursuing Law from Faculty of Law, Delhi University,Authored a policy document for ministry of law and justice,Research assistance on book on Mediation )

Mobile No.9582017055

AUTHOR: - JAIDEEP BHALLA

(Company Secretary (Aspirant), LL.B, B.COM Graduate, An Investment Portfolio analysts,
First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)
Mobile No. 7838684213

Disclaimer: 

No reader should act on the basis of any statement contained herein without seeking professional advice. The results & the interpretation has been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. The author explicitly disclaims any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available herein before, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.

For any help/assistance write us on abizchancellor@gmail.com

---

[1]Raja Dhruv v. Raja Harmohinder Singh AIR1024, 1968 SCR (3) 339

[2]Sushila Devi v. HariSingh[2] AIR 1756, 1971 SCR 671

[3]DhruvDev Chand vs. Harmohinder Singh and Others, AIR 1968 SC 1024

[4]VannattankandyIbrayi v. KunhabdullaHajee (AIR  2003 SC 4453)

[5]SahaRatansiKhimji v. Kumbhar Sons Hotel Pvt. Ltd AIR 2014 SC 2895

[6]Shankar Prasad and Ors.v. State of M.P. and Ors. (ILR [2013] MP 2146)

CORONA CRISIS:ALTERNATIVES TO INSOLVENCY AND BANKRUPTCY CODE UNDER NEW REGIME

Alternatives to Insolvency and Bankruptcy Code post COVID-19

Introduction

The Novel Coronavirus (“Covid-19”) has brutally hit, almost every sector. The pandemic has not only devastated the global supply chain, by halting international trade, but has also caused major economic disruptions in industries ranging from the service based hospitality sector to manufacturing and has also engulfed the finance world. The pandemic has forced governments across the globe to impose travel restrictions for work and restrictions on migration. The severity of the situation did require quick and decisive action from the Indian Government to prevent ‘further deepening’ of the crisis.  

Notification by the Finance Minister

Thereby, on 24^th March 2020, the Finance Minister made an announcement regarding changes in Insolvency and Bankruptcy Code, 2016 (IBC). Under this, Proviso to Section 4 of IBC was amended. This section provides, the Government of India, the ability to increase the threshold amount of debt required to file application under IBC, to any higher amount up to Rs 1 crore. The existing limit is Rs 1 lakh.

The Central Government has exercised this power, vide its notification dated March 24, 2020 to increase the threshold to 1 crore. Therefore, petitions now under the IBC cannot be filed, in respect of payment defaults below Rs 1 crore. Prior to 24^th March 2020 announcement, the threshold limit (of Rs. 1 lakh) seemed to be very creditor- friendly, as IBC was at its nascent stage. The threshold limit of default (of Rs.1 lakh) gave creditors the upper hand, particularly operational creditors. But this amendment, has been brought to save primarily the Micro, Small and Medium Enterprises (“MSME”) after the lockdown crisis.

In the absence of any silver lining, the economy will be in doldrums. Demand might reduce drastically in the wake of thinning disposable incomes. It will be difficult to raise finances, especially for operations amid crippling markets and weak investor confidence. To say that the vulnerable MSME sector would be the worst hit is an understatement. In that case, IBC would be, the proverbial Sword of Damocles hanging over these MSMEs, over the eminent default of their dues. To reduce this burden, the government decided to raise the limit under Sec 4 and prevent the MSMEs from being dragged into insolvency proceedings and in the worst case into liquidation. Having said that, the Government has also proposed suspension of Section 7, 9 and 10 of the IBC for 6 months, in case the challenges from the Covid-19 continues, which will do away with initiation of insolvency resolution proceedings against defaulting corporates.

However, the aforesaid steps undertaken by the Central Government has not foreseen resolution  mechanisms beyond the IBC route. Other legal options would still be available with the creditors. Following are some of the options under existing statutes for recovery of dues.

1)  Personal Guarantor to a Corporate Debtor

As per Notification dated 15^th November 2019, sections dealing with insolvency and bankruptcy of Individuals and Partnership Firms, in so far as applicable to Personal Guarantor of a Corporate Debtor, has been notified and has come into picture. As per Sec 78 of IBC, insolvency and bankruptcy proceedings can be initiated against personal guarantors, wherein the amount of default is not less than Rs 1000.

However, it is imperative to note that there has been no such update/amendment with regard to the personal guarantors, thereby, meaning that the limit for personal guarantor to  corporate debtor still continues to be erstwhile limits, that is, Rs. 1,000/-.

Hence, Creditors who have the personal guarantee for any Corporate Debtor as security, can invoke this section. This might be applicable to Promoters who have given personal guarantee against a loan. Personal Guarantor can subsequently recover the due from Corporate Debtor u/s 145 of Indian Contract Act, 1872.

2)  Debt Recovery Tribunal

Application can be made to Debt Recovery Tribunal under Payment of Debt due to Banks and Financial Institutions Act 1993. This was the mechanism adopted by Banks and Financial Institutions prior to the inception of Insolvency and Bankruptcy Code. The debt threshold is 20 lakhs. So this is the option for Banks and Financial Institutions for debt in the range 20 lakhs to 1 crores. However, it is imperative to note that Operational creditors cannot invoke this option for their recovery.

3) SARFAESI Act 2003: 

This allows Financial Institutions with dual option. First, it can take over the mortgaged asset and sell it to recover the dues, by-passing the DRT. Also, it allows the Banks to securitise the assets and sell the loan to Asset Reconstruction Company.

However, a question may arise, in case the banks have invoked SARFESAI, and if after three months, the Central Government reduces the default limit from 1 Crores to any lower limit, then whether the financial creditor may invoke the parallel proceedings under IBC or not?

The answer to the aforesaid question was addressed by the Hon’ble NCLAT in the matter ‘Punjab National Bank V. M/s Vindhya Cereals Pvt Ltd’[1], in which it was held by the Hon’ble NCLAT that, parallel proceedings under SARFESI ACT cannot constitute as ‘malicious or fraudulent’ proceeding. Thus, it conclude that parallel proceeding can be initiated. 

4)  Section 138 of Negotiable Instruments Act:

This is relevant mainly for operational creditors, wherein the receipt of dues was via Cheque. This is applicable when a cheque is dishonoured due to insufficiency of funds in account of the Drawer (Corporate Debtor). Under this section, following conditions needs to be satisfied:

(a) The cheque is presented within 3 months from the date it was drawn

(b) Payee (Creditor) gives a notice to the drawer within 15 days from the date the cheque was returned unpaid

(c) The Drawer fails to make payment to the Payee within 15 days of receipt of Notice.

(d) The cheque was drawn for the discharge of Debt.

The suit needs to be filed within 30 days. It is a compoundable offence .The only thing needs to be proved is existence of a debt and the fact that cheque is dishonoured. This is comparatively faster than a normal civil suit. After Negotiable Instrument (Amendment) Act 2018, the Drawer has to pay interim compensation of 20% to the Payee. This will help the creditor to get immediate financial liquidity.

However, a question which arises is that, whether an application under Section 9 of IBC is maintainable during pendency of proceeding under Section 138 of Negotiable Instruments Act, 1881.

The aforesaid issue was addressed by the Ho’ble NCLAT in the matter ‘Sudhi Sachdev v APPL Industries Ltd’[2] in which it was held that if a case is pending under section 138/141 of the Negotiable Instruments Act, 1881 (NIA), it cannot be held to be a dispute pending before a court of law. The pending case amounts to admission of debt and not the existence of a dispute.

5)  Summary Procedure under Order XXXVII of Civil Procedure Code:  

Summary Procedure is a unique legal provision wherein the court passes a judgement without hearing the defence, resulting in speedy and expeditious disposal of case(s). It is pertinent to note that Under Sub Rule 2 to Rule 1, recovery of Debt is covered under Order XXXVII. Under this,

·         The Plaintiff (Creditor) shall file a Plaint with the Court and serve a copy of it to Defendant.

·         The Court might or might not allow “leave to defend” to the Defendant. If leave to Defendant is granted, then security needs to be provided to Court. If leave to defend is not granted, then the Court may pass appropriate judgement as it deems fit.

The advantage of Summary Procedure is speedier recovery of debt vis-à-vis normal Civil Suit.

6) Alternate Dispute Resolution (Mediation and Lok Adalats)

Lok Adalat have been established under Legal Services Authority Act 1987. Lok Adalat can be approached either when the dispute is pending in court or at pre litigation stage. Parties at Pre Litigation stage may refer the matter to Lok Adalat by filing an application with State/District Legal Service Authority. Alternatively, the creditor can recover the money through Mediation and Arbitration mechanism, if there is a dispute over the ‘amount’ that is due.

7) Recovery of Workmen/Employees’ Dues:

Workmen/Employees are classified as Operational Creditors under IBC. The unprecedented hit of novel coronavirus will batter hard, the Workmen/Employees. Firstly, there might be mass lay-off or retrenchment due to sluggish economic issues. Secondly, Employers might not pay these Workmen/Employees, their outstanding dues. Since, the limit under Sec 4 has been increased, it is not possible for these workers to initiate Insolvency Proceedings against their employer. Thereby Workmen/Employees may file the application to Labour court under Sec 33C of Industrial Disputes Act, 1947 or under Sec 16 of Payment of Wages Act 1936 or both.

8)Trade Receivable electronic Discount System (TReDS):  It is an institutional system of Factoring/ Reverse Factoring for Micro, Small and Medium Enterprises. This mechanism has been approved by the Reserve Bank of India. It is to facilitate the trade receivable financing of MSMEs.  This is how the system works:

Step 1: Supplier supplies the Goods or Services

Step 2: In case of Factoring: Supplier logs in and uploads the Invoice for Receivables. In case of Reverse Factoring: Buyer logs in and uploads the invoice for Receivables.

Step 3: The invoice is converted into “Factoring Units” for bidding. Financiers bid against the Factoring Units.

Step 4: Supplier accepts the most favorable Bid. The TReDS generates settlement instruction debiting the Financier and Crediting the Supplier.

Step 5: On due date of Invoice Payment, the TReDS system generates settlement instructions for debiting the buyer and crediting the financier.

This system will be helpful to MSME in two ways.

1)      If any Operational Creditor (MSME) has supplied Goods or Service to any Company and if there is uncertainty over the receipt of consideration, then the MSME can sell its Invoice under TReDS, to a financier and it will create liquidity to the MSME.

2)      Also (Corporate Debtor (MSME) would be getting regular supply of Goods and Services from Operational Creditors, enabling them to maintain and run the business.

Conclusion

In the light of the on-going crisis, it is inevitable that the companies are going to go through a financial hardship, and hence, it may be imperative that the revision of threshold will indeed come as a saviour for small and medium sized companies, vulnerable to the wrath of lenders during these tough times.But recovery of debt is essential to enable credit availability in the economy.Therefore, in cases that involve large outstanding dues or the cumulative dues of financial creditors is high, they should actually take recourse under IBC.
However, in cases that do not involve large outstanding debt, above mentioned alternatives could be tried for Debt recovery.

No doubt, MSMEs should be protected in such tough times. But it is to be kept in mind that, creditors (mostly operational) would themselves be MSME and would rely on debt recovery as a source of working capital. Thus, future initiatives by the government should ensure that:

Cure is not worse than the problem itself

---

[1] Punjab National Bank V. M/s Vindhya Cereals Pvt. Ltd. (Company Appeal (AT) (Insolvency) No. 854 of 2019)

[2] Sudhi Sachdev  V. Appl Industries Ltd.( Company Appeal (AT) (Insolvency) No. 623 of 2018)

Disclaimer: This article is reserved for A Biz Chancellor.

AUTHOR: - Rohit Prabhakar (Chartered Accountant, 3rd year Law Student in Law Faculty, Delhi University Mobile no  +91-9999311546)

AUTHOR: - JAIDEEP BHALLAPARTNER AT A BIZ CHANCELLOR (ABC)(A FIRM OF CORPORATE EXPERTS )(Company Secretary (Aspirant), LL.B, B.COM Graduate, An Investment Portfolio analysts,First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)Mobile No. +91-7838684213

No reader should act on the basis of any statement contained herein without seeking professional advice. The results & the interpretation has been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. The author explicitly disclaims any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available herein before, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.

For any help/assistance write us on Abizchancellor@gmail.com