COMPANIES MEDIATION AND CONCILIATION RULES

Section 442 of the Companies Act, 2013 (`Act`) empowers the Central Government to constitute a panel of experts to mediate and settle disputes pending before the National Company Law Tribunal, National Company Law Appellate Tribunal (`Tribunals`) or the Central Government. The Ministry of Corporate Affairs (`MCA`) through a recent notification enacted the Companies (Mediation and Conciliation) Rules, 2016 (`Rules`) which prescribe the procedural aspects of such mediation and conciliation.

In this legal update we summarise the following important provisions laid down by the Rules:

• Constitution of Panel of Mediators or Conciliators: The Regional Director is empowered to constitute a panel of persons to act as mediators / conciliators, from persons who are (a) former judges of the Supreme Court, High Court, District Court; (b) former Members or Registrars of a Tribunal constituted at the National level under any law for the time being in force; (c) former members of the Indian Corporate Law Service or Indian Legal Service with fifteen years experience; (d) those who are qualified legal practitioners for not less than ten years; (e) those who have been professionals for at least fifteen years of continuous practice as Chartered Accountants or Cost Accountants or a Company Secretaries; (f) former Members or Presidents of any State Consumer Forum, or (g) experts in mediation or conciliation who have successfully undergone training in mediation or conciliation.

• Procedure of mediation and conciliation: The parties are free to appoint a sole mediator or conciliator of their choice. If however, the parties are unable to arrive at a mutual decision, the forum in which their litigation is pending may direct each party to appoint a mediator / conciliator of its choice or appoint a person from the panel of experts to act as the mediator/conciliator. The Tribunal may also suo moto refer a dispute, pending before it to mediation / conciliation if it deems fit.

• Duty of mediator/conciliator to disclose certain facts: It shall be the duty of a mediator or conciliator to disclose to the Tribunal or Central Government, as the case may be, about any circumstances which may give rise to a reasonable doubt as to his independence or impartiality in carrying out his functions.

• Mediator and Conciliator not bound by the provisions of the Indian Evidence Act and CPC: The mediator or conciliator shall not be bound by the Indian Evidence Act, 1872 or the Code of Civil Procedure, 1908 while disposing the matter, but shall be guided by the principles of fairness and natural justice, having regard to the rights and obligations of the parties, usages of trade, if any, and the circumstances of the dispute.

• Role of the mediator/conciliator: The mediator / conciliator shall facilitate a settlement between the parties and attempt to arrive at a mutual consensus. However, he shall not and cannot impose any settlement nor the mediator or conciliator give any assurance that the mediation or conciliation shall result in a settlement and the mediator or conciliator shall not impose any decision on the parties.

• Time limit for mediation or conciliation: The process for any mediation or conciliation shall be completed within a period of three months from the date of appointment of expert or experts from the Panel. However, in the case of a mediation in relation to a proceeding before the Tribunals, it may on the application of the mediator or conciliator or any party to the proceedings, extend the period for mediation or conciliation by such period not exceeding three months. If a party fails to attend a session or a meeting fixed by the mediator or conciliator deliberately or wilfully, two consecutive times, the mediation or conciliation shall be deemed to have failed and mediator or conciliator shall report the matter to the Tribunals/ Central Government, as the case may be.

• Communication between mediator or conciliator and the Central Government/Tribunals: In order to preserve the confidence of parties in the Tribunal, as the case may be, and the neutrality of the mediator or conciliator, there shall be no communication between the mediator and the Tribunal, in the subject matter. However, if any communication between the mediator or conciliator and the Tribunal, as the case may be, is necessary, it shall be in writing and copies of the same shall be given to the parties or their authorised representatives. Further communication between the mediator and the aforesaid authorities can only be limited to the topic stated in the rules.

• Expenses of the mediation/conciliation: At the time of referring the matter to the mediation or conciliation, the Tribunal/Central Government, as the case may be shall fix the fee of the mediator or conciliator. As far as possible, a consolidated sum may be fixed rather than a fee for each individual session or meeting. The expenses of the mediation or conciliation shall be borne equally by the various contesting parties, unless otherwise directed.

• Bar on initiation of judicial or arbitral proceedings during pendency of mediation/conciliation: The parties shall not initiate, during the mediation or conciliation any arbitral or judicial proceedings with respect to the same matter, except that, a party may initiate arbitral or Judicial proceedings, where, in his, opinion, such proceedings are necessary for protecting his rights.

• Matters which shall not be referred to for mediation/ conciliation: The following matters shall not be referred to mediation or conciliation: (a)matters relating to proceedings in respect of inspection or investigation, matters which relate to defaults or offences for which applications for compounding have been made by one or more parties; (b) cases involving serious and specific allegations of fraud, fabrication of documents forgery, impersonation, coercion etc; (c) cases involving prosecution for criminal and non-compoundable offences; (d) cases which involve public interest or interest of numerous persons who are not parties before the Tribunal.

MHCO COMMENT

The notification of these rules and establishment of the Panel of mediators and conciliators is a much needed step, which shall hopefully translate into an increase in the use of mediation and conciliation for commercial disputes and reduce the burden on the Tribunals.

This article was released on 17 October 2016. 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

AMENDMENTS TO SECURITIZATION LAWS

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act (Act) recently received Presidential assent and thereafter was duly notified in the official gazette. The Act seeks to empower banks to confiscate security in the case of a loan default, a development that assumes significance in view of the recent defaults made by industrialist Mr Vijay Mallya. Finance Minister Arun Jaitely emphasized the need for 'firmness coupled with fairness' in recovering bad loans. The Act majorly seeks to amend four laws:

• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

• Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).

• Indian Stamps Act, 1899.

• Depositories Act, 1996.

This legal update is an attempt to highlights key amendments brought out by the Act.

AMENDMENTS TO SARFAESI ACT

The SARFAESI Act specifies 3 (three) modes of recovering outstanding debt:

• sale of property;

• arrest and detention of defendants; or

• appointment of a person to manage the property of the defendant.

Section 14 of the SARFAESI Act allows secured creditors to take possession over collateral, against which a loan had been provided, upon a default in repayment. This process can be undertaken by the secured creditor, making in request in writing to the Chief Metropolitan Magistrate or District Magistrate, to take possession of the same. The same process under the new Act will have to be completed within 30 days by the District Magistrate. At the same time the Act also provides that secured creditors will not be able to take possession over the collateral unless the transaction and the collateral security has been registered with the Central registry, established under the Act by the creditors or secured creditors.

Revamping the DRT mechanism, the Bill proposes electronic filing of recovery applications, documents and written statements. The Act initiates regularization of all the records of transactions related to secured assets and creates a Central database for the pursuance of the same.

The Act also provides that in the event any secured creditor jointly with other secured creditors or any asset reconstruction company (ARC) or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired a controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.

The Act further empowers RBI to audit and inspect ARC from time to time and in the event the RBI is satisfied that business of an ARC is being conducted in a manner detrimental to public interest or to the interests of investors in security receipts issued by such ARC, the Reserve Bank may, for securing proper management of an ARC, remove the chairman or any director and appoint central bank officials to its Board. The Central Bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.

AMENDMENTS TO RDDBFI ACT

Section 28 of the Act provides that the Presiding Officer of the Debt Recovery Tribunal (DRT) shall hold office for a term of 5 years and shall be eligible for reappointment. It also increases the retirement age of the Presiding Officer from 62 years to 65 years. It also increases the retirement age of Chairpersons of Appellate Tribunals from 65 years to 67 years

Also Section 14 of the Act describes the local limit of jurisdiction where an Application can be filed before the DRT:

• where the cause of action, wholly or in part, arises;

• where the secured asset is located; or

• the branch or any other office of a bank or financial institution is located.

The Act maintains that the banks and financial institutions will be required to file cases before the DRT which has jurisdiction over the defendant’s area of residence or business. The Act further allows banks to file cases in DRT which has jurisdiction over the area of bank branch where the debt is pending.

AMENDMENTS TO THE STAMP ACT

The Act now amends Section 8F of the Indian Stamp Act exempting deed of assignment signed at the time of an Asset Reconstruction Company buying a loan from a bank from the levy of Stamp duty.

AMENDMENTS TO DEPOSITORIES ACT

The Act now states that every depository, on receipt of intimation from a participant should register any issue of new shares in favour of any (a) Bank; (b) Financial Institute; or (c) ARC (collectively referred as Lenders) or any other assignee of such Lenders, by conversion of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the company and such Lenders.

MHCO COMMENT

The major motive of the new amendments is to empower the banks to take effective legal action against defaulters. The current amendments to securitization law and DRT law would ensure fulfillment of that the objective. It has also been assured by government that the Banks would take a compassionate view on education loan defaults. The newly enacted law hence simplifies the procedure for quick disposal of pending cases of banks and financial institutions by the DRT.

This article was released on 4 October 2016.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.