Taking a Cue from Mediation in Insolvency of Lehman Brothers
Author: Mrinalini Srivastava
Legal Consultant, CUTS Institute for Regulation & Competition
The insolvency of Lehman Brothers in 2008 was a watershed moment in global financial history, causing far-reaching economic repercussions and prompting a reevaluation of insolvency procedures worldwide. In the aftermath of this significant event, the mediation mechanism used in the insolvency proceedings of Lehman Brothers presented a unique opportunity to understand the leverage of mediation compared to another form of dispute resolution.
In September 2008, Lehman Brothers initiated bankruptcy proceedings. One of Lehman Brothers' group companies, involved in derivatives trading, was a counterparty to approximately 1.2 million derivative transactions with over 6,500 different entities. In September 2009, the court-mandated compulsory mediation to address the derivative contract disputes arising from this bankruptcy. During the ensuing years, a total of 110 mediations were conducted, resulting in $333 million being recovered from Lehman Brothers' estate. This experience demonstrates the effectiveness of mediation in complex insolvency disputes. Mediation proved to be a valuable mechanism for parties to find mutually acceptable resolutions, maximising recoveries and bringing closure to the multitude of claims arising from international insolvencies.
Mediation in the insolvency resolution process is another door to reaching a settlement without undergoing the long formal adjudication process. The insolvency resolution process takes an ample amount of time and money. Including ‘mediation’ as a dispute resolution mechanism can leverage the economics of time and the cost associated with it. However, before incorporating ‘mediation’ in Insolvency Resolution Process, we must weigh it on these grounds: legality, impartiality and confidentiality. Generally, ‘mediation’ is not legally enforceable; it is based on trust and is informal in nature.
Keeping in mind that a win-win mediation in insolvency dispute resolution can help resolve a dispute promptly to mutual satisfaction, avoid adjudication costs and end the dispute peacefully. There should be guidelines for conducting ‘mediation’ as pre-insolvency dispute resolution. Some legality should be accorded to mediation agreements to avoid a multiplicity of procedures. The guidelines should bring ‘trust’ in terms of ‘confidentiality’ and ‘impartiality’ in mediation procedures.
Mediation provides equitable relief against the inherent procedural impediments of Insolvency Adjudication while keeping the business as a ‘going concern’. In Indian Legal System, section 442 of the Companies Act 2013 provides for referring company disputes to ‘Mediation’ by the National Company Law Tribunal (NCLT) and Appellate Tribunal read with the Companies (Mediation and Conciliation) Rules, 2016. Also, section 12A of the Commercial Courts Act 2015 provides for Pre-Institution Mediation in commercial disputes. Although, as of now, ‘mediation’ has not found its place for resolving insolvency disputes.
Integrating Online Dispute Resolution (ODR) platforms into the insolvency resolution process presents a transformative approach to streamline and expedite conflicts in insolvency cases. By leveraging digital communication tools and neutral third-party mediators, ODR offers accessible, cost-effective, and efficient solutions. It allows stakeholders to engage remotely, breaking geographical barriers and ensuring convenience. Moreover, ODR enhances data security and confidentiality, addressing concerns related to sensitive financial information. While challenges like technological adaptation and cross-jurisdiction enforcement may exist, the benefits of speedy resolutions, reduced costs, and improved accessibility make ODR an invaluable addition to the insolvency resolution process.
The instance of mediation in the insolvency of Lehman Brothers provides a significant case that highlights the potential benefits of integrating mediation principles and techniques into insolvency proceedings. By adopting an approach that prioritises effective communication, cooperative problem-solving, relationship preservation, and confidentiality, the resolution of complex insolvency cases could be expedited, and outcomes could better align with the interests of all stakeholders involved. Mediation in insolvency matters offers an opportunity to enhance the effectiveness and efficiency of future insolvency proceedings, ultimately contributing to more successful resolutions and the restoration of economic stability.
