The Intersection Of Insolvency And M&A In India - Mediation As A Key To Future Policy And Practice

Author: LawSphereX

Category: Corporate & Insolvency

Published: 2026-08-23T21:23:17.519695+00:00

Updated: 2026-08-30T07:05:27.521Z

THE INTERSECTION OF INSOLVENCY AND M&A IN

INDIA: MEDIATION AS A KEY TO FUTURE POLICY AND PRACTICE

Sanjith S, LL.B., Symbiosis Law School, Pune

ABSTRACT

The research paper delves into the application of the mediation mechanism in settling disputes around Mergers and Acquisitions involving Financially Distressed Companies in India while also examining the integration of mediation into existing legal framework. The research identifies the factors influencing the successful mediation settlement involving distressed companies' mergers by making a comparative analysis of economically super power countries’ legislations and practice, particularly from the United States and the European Bankruptcy, ADR, and Competition Laws. The paper points out the opportunities and challenges of positioning India's mediation approach, comparing to International Practices and Track Records, establishing the potential advantages on refining the existing laws, and promoting efficient settlement of disputes involving high stakes.

The research paper, by analysing International Legislations, Legal Scholars', and Experts' opinions, case studies, and scenarios, addresses loopholes of the existing legislations and recommends that while India making progress, further actions and efforts are needed to affirm the successful and reliable application of mediation for the disputes around Insolvency and Mergers and Acquisitions (M&A) transactions. Keywords: Mediation; Insolvency; Mergers and Acquisitions (M&A); Mediation Act 2023, Killer Acquisition.

INTRODUCTION

Companies filing for liquidation, where they attempt to windup all operations because of business failure, are always a curse for the investors and other stakeholders in the company who contributed financially or non-financially throughout the functioning of the business. Before the Insolvency and Bankruptcy Code of 2016, no Act or Law in India prioritized the interest and claims of the creditors. Though the Companies Act 2013 dealt with the winding up of the business, it didn't provide any provisions offering privileges and priority on the claims of the creditors when companies file for insolvency. Companies Act rescues financially distressed companies by making several arrangements with the creditors of the company and hooking the so-called distressed company (target company) with other financially sound corporates (acquiring company) through Mergers and Acquisitions (M&A).

In the whole process of an M&A transaction, numerous disputes may arise between the target company and the acquiring company or between the creditors of the target company and the acquiring company regarding debt restructuring, asset liquidation, price adjustments, share valuation, etc. In order to settle these disputes faster and more confidentially without incurring enormous costs, Mediation is the one among the other alternative dispute resolution mechanisms facilitating the parties to dispute to arrive at a settlement by themselves without the court's interference. In India, the use of mediation mechanisms between the Insolvency process and Merger and Acquisition transactions has become highly significant for quick dispute resolution, preserving business relationships among the stakeholders, confidentiality, and value maximization.

In India, Mediation Act 20231, where mediation has been recognised as a preferred method for dispute resolution with respect to civil and commercial matters prescribed under this Act. Though the Insolvency and Bankruptcy Code 2and Company Law framework34 explicitly and indirectly implies the use of ADR mechanisms in settling disputes, the Mediation Act 2023 provides the agreement to be a binding nature equivalent to a court order or decree. At the same time, the Act has too many loopholes where one party having the upper hand might exploit certain provisions in favour of their interest. But still the Act is not exhaustive. Countries like Europe and the United States have adopted the mediation mechanism to settle disputes between 1Mediation Act, 2023, §5

2 Insolvency and Bankruptcy Code, 2016, §12A

3 Companies Act, 2013, §442

4 Companies Act, 2013, §230

corporations arising during distress to M&A, notable cases like Lehman Brothers 5and American Airlines6, with a number of legislations supporting that. The purpose of this research paper is to examine how effectively the Indian legislations guide distressed companies to settle disputes using mediation while going for a merger and also get insights from the international viewpoint on mediation practices by the United States and Europe in terms of distressed companies' merger, ensuring the smoother transactions and maintaining business continuity.

RESEARCH

METHODOLOGY

The research paper completely relies on secondary data analysis, basically qualitative research that includes thorough research on legislations such as the Mediation Act 20237, Insolvency and Bankruptcy Code 20168, Companies Act 2013 9and other international legislations like EU mediation directive, United States Bankruptcy Code etc. , for comparative analysis of the United States and EU with India. With that, numerous research papers, online journals and academic articles have been reviewed in our study to gain valuable insights from the legal scholars and practitioners specialized in mergers and acquisitions as well as bankruptcy. Their opinions, through their research papers, were critically examined to understand the practical consequences and problems of mediation in resolving Mergers and Acquisitions involving insolvent corporations. The notable U. S.

case studies like the Collapse of Lehman Brothers and American Airlines Merger were included for scenario and stress testing analysis with the existing Indian Legal framework. Also, this paper includes observations from a panel discussion meeting hosted by Khaitan & Co. , India's Tier-one Law Firm, which is very well known for its significant expertise in Mergers and Acquisitions. This discussion was accessible through Khaitan's official social media channel and provided useful insights into Alternative Dispute Resolution Mechanisms for M&A, assessing whether mediation was successful or failed in M&A transactions from the aspect of the Indian Legal Framework. From this, our study will be able to bridge the gap between Insolvency and M&A transactions effectively and provide actionable recommendations for the existing Indian Legislations on applying 5 Library, H. B. (n. d. ).

Global impact of the collapse | baker library | bloomberg center | harvard business school

6 Rushe, D. (2013, December 9). American and US Airways officially merge to create world’s biggest

airline. The Guardian.

7 Mediation Act, No. 5 of 2023, Acts of Parliament, 2023 (India)

8 Insolvency and Bankruptcy Code, No. 31 of 2016, Acts of Parliament, 2016 (India)

9 Companies Act, No. 18 of 2013, Acts of Parliament, 2013 (India).

mediation mechanisms to settle disputes. FINDINGS/ RESULTS ROLE OF MEDIATION IN M&A DISPUTES INVOLVING INSOLVENT CONPANIES INDIA Before the enactment of the Mediation Act 2023, India had several legislatures encompassing the use of mediation in settling disputes between the parties. Insolvency and Bankruptcy Code

2016 highlights the entailment of mediation in the corporate insolvency resolution process.

Though not explicitly provided, Section 12A of the code implies the withdrawal of proceedings through initiation of mediation for facilitating the settlement of disputes, under the alternative dispute resolution provisions allowed by National Company Law Tribunal (NCLT). Shifting to the Companies Act 2013, Section 442 gives power to National Company Law Tribunal and National Company Law Appellate Tribunal (NCLAT), referring the parties to a mediation way of resolving disputes. It also mandates that the mediation expert possess the qualifications determined by the concerned parties in the dispute. Here, the Central Government is responsible for maintaining the mediators' panel.

Moreover, in section 230 of the Act, NCLT has been granted powers to facilitate a mediation process in terms of compromise between the distressed company and the creditors or the company’s shareholders concerning restructuring the liabilities, mergers or demergers, and other relevant issues with respect to revival. Arbitration and Conciliation Act 1996 explicitly delegates the arbitral tribunal, the power to settle the dispute through mediation. Section 30 of the Arbitration and Conciliation Act allows the tribunal to encourage dispute settlement by mediation at any time during the arbitration proceedings with the agreement of the parties to dispute. In case the parties decide to settle the dispute, the tribunal will end the arbitral proceedings, and the settlement agreement will be considered an arbitral award. The Khaitan & Co.

panel discussion, led by Khaitan Partner Anushka Sharda, has expertise in Dispute Resolution, highlighted the stages and ADR involvement in conflicts or disputes taking place in Mergers and Acquisition transactions, and categorized the stages into three stages - Pre-Signing Stage, Signing to Closing Stage and Post-Closing Stage. Starting with the presigning stage, parties will agree to the Letter of Intent (LOI) or term sheet, which lays down the principal terms and conditions to abide by, thus creating a legally binding relationship. Most of the disputes arising from this stage are the breach of confidentiality clauses by either of the parties. In the second stage, the Signing to Closing stage, only the least number of disputes may occur.

Those will arise over non-fulfilment of conditions precedent or other contingent obligations set out in the term sheet or agreement, such as obtaining relevant approvals or placing amounts in the escrow a/c arrangements, etc. Then, finally, in the last stage, the post-closing stage, the most common dispute that arises between the parties is the interpretation of clauses in the agreement related to price adjustments. Also, disputes may arise over the party's obligation to make contingent payments within a certain period at this closing stage. The last dispute might be the breach of warranties and representations that the parties have made to one another.

Speaker has also pointed out the most successful use of mediation in settling the dispute between Private Equity Fund Investors and Promoters of the Company regarding the IPO issues like the issues on those promotors not honouring the exit rights to the Investors, etc. Before the Mediation Act, parties usually filed reference to arbitration, which then triggers severe discussions on the settlement, using the offices of senior people from their industry to mediate and arrive at a settlement. Earlier, before effective implementation of ADR legislatures, parties had tendency to move always with the conjunction of arbitration and mediation. Otherwise, parties have the second option, the Commercial Courts Act, Section 12A, stipulating preinstitution mediation.

The insights from a discussion about the Mediation Act, 2023 provisions provide matters relating to the mediation proceedings are to be kept confidential with only exception being that where the disclosure only being necessary for registration, enforcement or to challenge the settlement and binding nature of the mediation settlement agreement will help the parties to move forward with this resolution mechanism. USA In USA, as the court acknowledged the fact that the traditional litigation in bankruptcy and insolvency cases often leads to delay and incurs enormous costs, the United States Bankruptcy Court, notably in the Central District of California10, has established a Mediation Program for facilitating the parties to settle their disputes amicably instead going forward to the litigation

10 Mediation program | central district of california | united states bankruptcy court. (n.d.).

https://www. cacb. uscourts. gov/mediation- process. In Chapter 11 of the United States Bankruptcy Code11, though there's no mandating provision, but the courts often encourage the litigants to go for mediation regarding any issues relating to restructuring the debt, settlement, liquidation of assets including M&A transactions. The application of alternative dispute resolution mechanisms like mediation in these transactions are supported by the Alternative Dispute Resolution Act (1998), giving courts the power to refer mediation or any other ADR mechanisms in bankruptcy proceedings. Federal Rules of Bankruptcy Procedure, Rule 9019 stipulates the use of mediation in terms of compromise or settlement between the debtors and creditors with the court's approval, and further conflicts can be dealt with in the way of arbitration.

In 2004, the District of Delaware Bankruptcy Court mandated that the parties to dispute, try to reach a settlement agreement by mediation before any adversary proceedings with respect to bankruptcy cases. EUROPE In Europe, the European Union has its own mediation framework with respect to civil and commercial issues, which is the Mediation Directive 2008/52/EC12. This directive also applies to cross-border disputes and insolvency proceedings under the EU Regulation 2015/848. Several states in the EU, like Germany, France, and Italy, have also established Pre-Insolvency Resolution procedures to safeguard creditors and rescue distressed companies' debtors13. In France, the French Insolvency Law lays down a procedure during insolvency proceedings, named ad hoc mandate. It facilitates a confidential negotiation process between the creditors and debtors, helping them to reach a settlement.

Germany follows the procedure of “INSOLVENZPLAN”, enabling the parties to dispute, that is, debtors and creditors, to negotiate and conclude a resolution plan. The Italian Bankruptcy Law has different legal instruments to keep the businesses as going concern. One among them is the Recovery plan, a contractual agreement that doesn't need any Court approval. It's confidential in nature and is binding only on the creditors. The other instrument is the Debt-Restructuring Agreement (DRA), interpreted under Article 182 of the Italian Bankruptcy Law14. The agreement is reached by a semi-formal negotiation on debt repayments and cancellation, asset liquidation, etc. , and the same as a recovery plan binding towards creditors. However, in this instrument,

11 11 U.S.C. §§ 1101–1174

12 Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 on Certain Aspects of Mediation in Civil and Commercial Matters, EP, CONSIL, 136 OJ L (2008)

13 Mani, R. (2020). Mediation in Insolvency Matters.

14 Art. 182-bis, IBL

the court supervises the whole process and approves the agreement. There's a mandate that the agreement should be published in the Companies Registrar according to Article 161 of the Italian Bankruptcy Law15. Lastly, the Preventive Arrangement with Creditors (PAC), where the process is the same as Chapter 11 of the United States Bankruptcy Code. The most crucial common thing among these three instruments is the involvement of qualified professionals to verify the feasibility and viability of the plan, which then ends up in the form of an agreement.

DISCUSSION/ANALYSIS/ARGUMENT In analysing the comparative approach of the United States and European Union with India in facilitating the distressed companies to M&A, India emphasises more structured approach by having legislative frameworks like Mediation Act 2023, particularly mandating the prelitigation mediation for civil or commercial matters with the intervention of the qualified mediator being registered with the Mediation Council under Section 5 of the Act. This provision contrasts the United States and EU where their system offers court referral or voluntary nature of facilitating the mediation process, thus being more flexible on the ground rather being more formalized structure.

Coming to the point on legal enforceability, Section 27 of the Mediation Act 2023 explicitly states that the mediation settlement agreement will be considered as the court decree or judgment, once the agreement is signed by the parties to dispute with the mediator’s authentication, affirming the legal certainty to the parties involves, particularly in Insolvency and Mergers and Acquisitions disputes. The United States has a secure and well-established position for rescuing the financially distressed companies, through its Bankruptcy Code Chapter 11 16by facilitating the mediation process frequently to negotiate with the stakeholders of the company. The EU, with its Country specific laws like French and Italian Bankruptcy laws as discussed before, provides both informal and semi-formal out of court negotiations but doesn’t signify mediation specifically except its Mediation Directive.

Though India has several legislations like IBC 2016, Mediation Act 2023, Companies Act 2013 etc. , where some provisions introduce formal mediation, but it remains in untested in large, high stakes involving corporate disputes unlike the United States where it has proven track records like Lehman Acquisition 17and American Airlines merger. (Lehmen Case and American

15 Art. 161, par. 2, IBL

16 11 U.S.C. §§ 1101–1174 (2024)

17 Mediation as a bankruptcy and insolvency game changer. (n.d.).

Airlines). The Lehman Brothers Investment Bank Bankruptcy18, known for its significant collapse and becoming one of the domino factors triggering Financial Crisis 2008. The Bank filed for bankruptcy under Chapter 11 United States Bankruptcy Code, where the core United States operations was acquired by Barclays bank and European and Asian operations was by Nomura Holdings. This Acquisition has involved numerous negotiations through mediation process as Lehman had over One Lakh creditors including financial institutions, bond holders and derivative counterparties. Here, the court has supervised the mediation process because of the huge stake involved, thus preventing the litigation delays and protecting the creditors.

As the bank had his vast investment in the portfolio of derivative contracts, involving the counterparties worldwide, UNCITRAL model law came into play where the United States has adopted and helped in facilitating the confidential mediation process and settled cross-border disputes, even for the asset ownership and creditors’ claims in different jurisdiction. In this case, not only U. S. Bankruptcy Code, but an umbrella of legislations like Security Exchange Commission Regulations, Securities Investor Protection Act, International Swaps and Derivatives Association and General Contract Law entered the scene and resolved numerous disputes regarding asset liquidation and debt repayments. This case is a notable example where mediation managed to rescue the creditors and stakeholders of the Lehmen, but not the Lehman.

American Airlines and US Airways merger is a one remarkable case where mediation facilitated the distressed to successful M&A. Prior to the merger deal, American Airlines filed for Chapter 11 of U. S. B. C19. Then, the restructuring process involved mediation facilitating the merger negotiations regarding stakeholders’ interest, new labour agreements for gaining the support of the union, regulatory approval from the United States Department of Justice, securitizing the antitrust concerns for the merger. 20 For labour disputes, US National Mediation Board21 facilitated the mediation process between the company and the labour union. By addressing the concerns through mediation, both the airlines merged in the name of American Airlines Group Inc. , positioned as largest airline in the world.

While making scenario and stress testing analysis by comparing these two cases with the Indian Legal Framework, found that it has both Strengths and Limitations. Mediation Act 2023 guarantees confidentiality process 18 Michael J. Fleming and Asani Sarkar (2014) The Failure Resolution of Lehman Brothers, New York Federal Bank

19 11 U.S.C. §§ 1101–1174 (2024)

20AA, US airways, DAJ agree on mediator for merger. (2013, October 29). NBC 5 Dallas-Fort Worth.

21 American Airlines, flight attendants union seek mediation in contract negotiations, Reuters

under Section 20 of the Act, benefiting the companies to safeguard their sensitive information while negotiating and encouraging open communication between the parties. This helps them to build consensus on critical issues like regulatory hurdles, labour agreements, and other settlements. But Section 19 of 2023 Act on mediation settlement agreement exhibits several loopholes for its vagueness and absence of specific guidelines. The significant problem occurs when the acquiring company having an intention of executing a “killer acquisition” plan. Killer Acquisition is a strategy of the acquiring company, planning to acquire the target company which may be a potential threat to the acquiring company or being competitive in the market.

Once after acquiring the target company, the acquiring company will involve in the key important decisions by discontinuing its projects of the company acquired, preventing the innovations reaching the market, absorbing the talents and make sure the company jeopardizes, thus eliminating the rival and gaining back the competitive advantage in the market. In this case, the creditors of the target company will be the worst sufferers, if they had agreed that the repayment of the debt be paid only from the profits of the target company, after the acquisition. These kind of acquisitions affects the interests of the creditors to the larger extent by default in the repayments due to plummet in the target company’s profits.

Even if the creditors had mediation settlement agreement prior to the acquisition, will be difficult for the them to invoke clauses for other dispute resolution mechanisms like arbitration. In case of arbitration, the company who has upper hand in the contract clauses (mostly the acquiring company) may appoint the arbitrator, again which may result in the biased decision. Then, to set aside the award will be a difficult task for the creditors as to challenge the award in the court is limited to certain grounds under Arbitration and Conciliation Act, 2023. Even if the creditors want to bypass the Arbitration Proceedings, will not be possible if there’s arbitration clause in the mediation settlement agreement, which again lead to delay process in settling the creditors. In the case Ayyasamy v.

Paramasivam22, CJI Chandrachud has quoted that “all the ‘right in personam’ cases should first go to arbitral tribunal, before the parties initiating the suit in terms of litigation. There's only one exception, when there's no presence of Arb Clause in the contract of the parties to dispute”. As Indian market rapidly responds to the political and financial factors, affects the reputation of the creditors including financial institutions which might lead to fluctuations in the operating profit of such institutions. This might affect the investors of

22 A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386

those institutions due to this contagion effect. Because of the vagueness and absence of specific guidelines regarding the inclusion of the other stakeholders in the Section 19 provision, whose interest will be indirectly affected through such mediation process, there’s high chance that the acquiring company will exploit the provision.

SUGGESTIONS AND

CONCLUSION

From the comparative analysis of the United States, EU, and India shows that India takes a structured approach by making mediation settlement agreements equivalent to the court decrees. This is beneficial for the parties in dispute, ensuring the enforceability of such agreement, particularly in Insolvency and M&A cases. However, there are several challenges that the Indian Legal Framework needs to address it, as Mediation Act 2023 is not exhaustive. Some provisions in the Mediation Act needs refinement for its vagueness and absence of detailed guidelines on stakeholder inclusion. There should be a separate Board like US got National Mediation Board23, focussing on labour dispute settlement around railways and airlines or provision within the Mediation Act for addressing the pitfalls, such as killer acquisition strategies taken by the acquiring companies.

Though the Competition Commission of India is in the field prohibiting the cut-throat competition, addressing the issues in dispute settlement agreement requires a separate framework. The Act should include punitive action for the partial breach, protecting the stakeholders against any harm. India could adopt courtsupervised voluntary mediation procedures as witnessed in the Lehman Brothers case, where the interest of the creditors will be protected by timely intervention of the court. Among these suggestions, the main recommendation would be integrating the mediation clauses in the M&A term sheet or contracts, providing a default option for the parties to go for mediation way of settlement. Even at the time the dispute has arisen, the court will refer the parties to the mediation in the presence of the mediation clause before litigation like witnessed in Ayyasamy v. Paramasivam 24case.

But still, because of various market factors and to avoid time delays, parties have a tendency to go for arbitration as the stakes involved are huge and India has no track records like the United States. To encourage the parties to do so, the Indian Framework should offer incentives in terms of regulatory clearances; this makes the parties explore mediation more seriously than going for litigation at an early stage. To keep the mediation 23 National Mediation Board – The National Mediation Board helps to maintain the flow of interstate commerce in the airline and railway industries through representation, mediation and arbitration services, from https://nmb. gov/NMB_Application/

24 A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386

settlement agreement intact after the post-closing stage in M&A transaction, there’s a need for Post-Mediation Monitoring Body to resolve or settle any disputes around interpretation of the clauses in the agreement and affirming that all parties are abiding by the terms of the agreement. As Section 19 (5) of Mediation Act imples that the agreement resulting from online will also be a mediation settlement agreement, India can implement Mediation-Based Online Dispute Resolution platforms to settle any disputes concerning cross-border insolvency and M&A cases efficiently. This development will result in the more frequent interactions between the parties under the facilitation of the mediator, thus reducing time and cost.

To conclude, India will make good progress with the Mediation Act by taking into consideration the above suggestions and recommendations, particularly working well in resolving M&A disputes involving distressed companies. By adopting the international best practices like the United States and Europe, India will strengthen the existing legal framework inclined more towards the use of mediation mechanisms to settle the high stakes involving corporate disputes.

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