Mediation under Companies Act, 2013

Mediation under Companies Act, 2013

Date – 18/09/2020

Author – Sharqa Tabrez

Year – 3rd Year

Institute –  National Law Institute University, Bhopal

Introduction

The French philosopher Voltaire once said – ‘I was ruined but twice, once when I won a lawsuit and once when I lost one.’[1] It has been suggested since long that the discontentment with litigation as a means of dispute resolution seems endemic to human society.[2] Hence people look forward to more effective means of solving their conflicts.

Mediation is a form of Alternative Dispute Resolution mechanism (hereinafter “ADR”) wherein the contesting parties voluntarily agree to resolve their conflict amicably and reach a settlement with the assistance of a neutral mediator. ADR mechanisms have been recognised by several jurisdictions as an efficient way of settling disputes and India has also moved a step in this direction by enacting a number of laws. These include the Legal Services Authorities Act of 1987, the Arbitration and Conciliation Act of 1996, Section 89 and Order X Rules 1A, 1B and 1C of the Code of Civil Procedure of 1908, Section 442 of the Companies Act, 2013 and the Companies (Mediation and Conciliation) Rules, 2016 (hereinafter “Rules”).

Purpose of Section 442, Companies Act, 2013

The erstwhile law dealing with company law disputes was the Companies Act, 1956 which provided for several alternative dispute resolution bodies dealing with different subject matters. Section 442 of the Act of 2013 was enacted to streamline these mechanisms and to form a single forum for mediating and conciliating disputes relating to company law. The 2016 Rules brought about a significant improvement in the mechanism by laying down the procedure to be used.

The main object was to reduce the burden on the tribunals and to ensure expeditious disposal of cases. As per the Standing Committee Report, the purpose of creating the Panel was to allow parties to settle their disputes voluntarily and quickly.

Key Provisions

Some key provisions regarding mediation provided under the Companies Act, 2013 and the Companies (Mediation and Conciliation) Rules, 2016 are:

1. The Mediation and Conciliation Panel: Under Section 442, the Central Government must maintain a Mediation and Conciliation Panel (hereinafter “Panel”) consisting of experts having qualification as provided under Rule 4.[3]
2. Dispute before the Panel: A dispute may be brought before the Panel by either of the parties[4] or may be referred by the Central Government, the National Companies Law Tribunal (hereinafter “NCLT”) or the National Companies Law Appellate Tribunal (hereinafter “NCLAT”) (before which the proceeding is ongoing) suo motu if it deems it fit.[5] These authorities may be referred to as relevant authorities.
3. Cost effectiveness: The total cost of the entire mediation proceeding must be borne equally by the contesting parties.[6] This is to ensure that the process is economical for both.
4. Time limit: The Act specifies a time limit of three months for the completion of the mediation.[7] The Rules further elaborate that, in case of a proceeding before the NCLT or the NCLAT, the parties or the mediator or conciliator may seek an extension of upto three months to complete the mediation or conciliation.[8]
5. Confidentiality: The basic element of any mediation proceeding is the element of confidentiality and privacy which has been provided under Rules 21 and 22. The mediation must be conducted in privacy[9] and the events must not be disclosed outside either by the parties or by the mediator.[10]
6. Facilitative and Voluntary Process: The mediator must facilitate the process and encourage the parties to come an amicable solution voluntarily. He cannot impose any decision on the parties or terms for the settlement; the reins are in the hands of the parties themselves.
7. Good Faith: The contesting parties must act in a bona fide manner throughout the proceeding with the aim of resolving the dispute.

Empanelment of Mediator

For a person to be selected as a member of the Panel, he must fulfil either of the following conditions i.e. he must have been a Judge of the Supreme Court of India, or a High Court, or a District and Sessions Court, or a Member or Registrar of a Tribunal constituted at the National level, or an officer in the Indian Corporate Law Service or Indian Legal Service with fifteen years of experience, or a qualified legal practitioner for not less than ten years, or a Chartered Accountant or Cost Accountant or Company Secretary with at least fifteen years of continuous practice, or a Member or President of any State Consumer Forum, or an expert who has successfully undergone training in mediation or conciliation.

Rule 5 pertains to the conditions of disqualification of person from becoming a member of the Panel. It includes, among others, a person who is financially or otherwise interested in the matter or is related to either of the parties such that his neutrality might be compromised. This rule ensures that the mediation proceeding is conducted by an unbiased mediator with no specific interest in the matter or with the parties.

Role of the Mediator

The mediator’s job is simply facilitative in nature. He must encourage the parties to reach a settlement on their own accord and must not induce any settlement terms upon them unless the parties themselves consent to it. He must identify issues for the parties, facilitate communication, clarify their concerns, explore areas of conciliation and assist them in resolving their dispute.

The Rules also provide for ethics which must be followed by the mediator. These include, among others, observance of due diligence, upholding the impartiality and neutrality of the mediation proceeding, ensuring that parties make informed decisions by making them aware of all procedural aspects, disclosing his interest or relationship with either of the parties (if any) to prevent any kind of bias, maintaining confidentiality, conducting proceeding according to the relevant laws, etc.

Procedure under the Rules

A company law dispute may be brought for mediation in the following two ways:

1. By the parties on their own accord under Section 442(2) while the proceeding is ongoing before the Central Government, NCLT or NCLAT by filing an application; or
2. By the suo motu referring of the matter by the Central government, NCLT or NCLAT under Section 442(3).

When an application is filed by the parties or the matter is referred for mediation suo motu, one or more experts from the Panel are appointed to resolve the dispute. The mediator then fixes the date and time of the mediation with consensus of the parties and it is held at the place decided by the Central Government, NCLT or NCLAT or some other place decided by the mutual agreement of the parties. Ten days prior to the session, the parties must furnish a memorandum highlighting their issues, their positions and all other relevant details to the mediator who would then forward the same to the other party. It is interesting to note here that the mediator is not bound by the Indian Evidence Act, 1972 or the Code of Civil Procedure, 1908. But he must conduct the proceeding according to the principles of natural justice and impartiality keeping in mind the rights and obligations of each of the parties, the usages of trade, if any, and all other circumstances of the case.

The entire process of mediation must be completed within a period of three months otherwise it will be deemed to have failed. If an agreement is reached between the parties pertaining to one or more issue, the same must be penned down and signed by the parties or their representatives and then submitted to the Central government, NCLT or NCLAT as the case may be. If the relevant authority is satisfied that a settlement has been reached between the parties, it shall pass an order accordingly.

If an agreement is not reached between the parties or when the mediator feels that a settlement is not possible then he must report the same to the Central government, NCLT or NCLAT as the case may be. Upon the receipt of the report, the relevant authority would fix a date for hearing within fourteen days normally.

If a settlement is reached with regard to some of the issues and an order is passed accordingly then the relevant authority may proceed to decide the remaining issues.

When can a Dispute not be referred for Mediation?

Rule 30 specifies the situations when a dispute cannot be referred to mediation or conciliation. These are:

1. Matters dealing with inspection or investigation under Chapter XIV of the Companies Act, 2013;
2. Matters dealing with defaults or offences for which one or more parties have made applications for compounding it;

• Cases which involve serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion etc.;

1. Cases which involve prosecution for criminal and non-compoundable offences; or
2. Cases which involve public interest or interest of several persons not party before the Central Government, NCLT or NCLAT as the case may be.[11]

Criticism

The provision regarding mediation under the Companies Act, 2013 and the corresponding Rules is a welcome initiative but the same leave sufficient cause for concern.

1. Section 442 and the Rules use the terms ‘mediation’ and ‘conciliation’ interchangeably. But it must be noted that these are different processes under the Code of Civil Procedure. Conciliation follows the Arbitration and Conciliation Act, 1996 while mediation follows the procedure prescribed by the court.[12]
2. One of the aspects of a mediation proceeding is that it must be economical. Although the mediation proceeding conducted by the High Court is free of cost normally, under the Companies Act 2013, fee needs to be paid which is to be decided by the relevant authority and is not guided by any statute. It is dependent upon that authority to fix a reasonable sum.
3. Under the Companies Act, 2013, mediation is itself non – binding. After the settlement is reached, it must be brought before the relevant authority which would pass an order in accordance with the terms of the settlement. Parties with the intention of delaying justice may misuse this provision. Although delay of longer periods is to some extent prevented because of the time limit of three months specified under the Act, this non – binding nature of the mediation by itself may be misused by parties. The Rules do not provide procedures to address situations when a contesting party with mala fide intention tries to delay or stall the delivery of justice.
4. Judicial and quasi judicial officers are, as a matter of fact, trained on adversarial adjudication. Chartered Accountants, Cost Accountants and Company Secretaries are professionals not trained in law or mediation. Facilitative mediation requires skilled professionals who are trained in mediation. Except for one out of nine criterions mentioned under Rule 4, the others are not skilled professionals trained in mediation. Hence, there is a possibility of the failure of this mechanism. It would have been better if the legislators made the eligibility criterion for empanelment based on the mediators’ quality, skill and efficiency.[13]
5. Section 89 of the Code of Civil Procedure provides that the court i.e. a judicial body may refer a case sub judice before it for mediation. Section 442 of the Companies Act, 2013 departs significantly from this because it enables the Central Government and quasi judicial bodies to refer a proceeding ongoing before it for mediation.

Conclusion

The Honorable Supreme Court in Afcons Infrastructure Ltd v. Cherian Varkey Construction Co. (P) Ltd. observed that that cases which essentially relate to trade, commerce, contracts and consumer disputes can be mediated.[14] Section 442 of the Companies Act, 2013 has streamlined the process of mediation and conciliation with respect to disputes relating to companies. It was introduced to ensure early resolution of disputes in matters relating to companies and also because the government wanted to provide the parties with every opportunity to resolve their disputes amicably. Although the move is welcomed, how the entire process is conducted will determine its actual efficacy.

[1] Dougherty, Family Mediation: What does it mean for Lawyers?, 51 Texas Bar Journal 31, 31 (2001).

[2] Hensler, Our Courts, Ourselves: How the Alternative Dispute Resolution Movement is Re-shaping our Legal System, 108 Penn State Law Review 168, 168 (2003).

[3] Companies Act, §442(1) (2013), available at http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.

[4] Id. §442(2).

[5] Id. §442(3).

[6] Companies (Mediation and Conciliation) Rules, Rule 27 (2016), available at http://ebook.mca.gov.in/Default.aspx?page=rules.

[7] Supra note 3, §442(5).

[8] Supra note 6, Rule 19.

[9] Supra note 6, Rule 22.

[10] Supra note 6, Rule 21.

[11] Supra note 6, Rule 30.

[12] Ramesh Vaidyanathan & Mansi Singh, Can Mediation be an Alternative Mode of Dispute Resolution?, VCCircle, available at https://www.vccircle.com/can-mediation-be-alternate-mode-dispute-resolution/amp.

[13] Mediator for Company Disputes: How Efficient it would be, ADR Association, available at http://www.adrassociation.org/blog/mediators-for-company-disputes-how-efficient-it-would-be/?print=print.

[14] Afcons Infrastructure Ltd v. Cherian Varkey Construction Co. (P) Ltd., 8 SCC 24 (2010).