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The authors are Meenakshi Gopakumar and Arshia Ann Joy, fourth-year students at the National University of Advanced Legal Studies, Kochi.
Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced by the Indian Government to consolidate all the laws for the time-bound resolution of claims involving insolvent companies. The IBC entrusts the Resolution Professional (“RP”) with significant powers from the acceptance of application to initiate CIRP, to the execution of the Resolution Plan, to the initiation of liquidation if the CIRP falls through. However, these powers granted to the RP are abused in certain situations. There have been documented cases of misconduct, such as RPs neglecting to correctly catalog claimant lists, declining to authenticate corporate debtor assets, enlisting previously suspended directors to operate the company, transferring inadequate corporate debtor documentation, etc. It is in this scenario that when the RPs make claims against the erstwhile directors of corporate debtors especially on the grounds of avoidance transactions under Section 66, 43 etc., these directors should be given adequate rights to contest and defend against such claims. The authors argue that cross-examining the RP is an effective tool for the erstwhile directors in examining the veracity of the claims by the RP in proceedings related to the IBC, which is in line with the principles of natural justice. Although this right to cross-examine may be extended to other relevant issues under the IBC, the scope of this article is confined to avoidance transactions alleged against the directors or partners of the Corporate Debtor (“CD”). The legislative scope of cross-examination is discussed by citing the previous instances where cross-examination has been allowed by the NCLT and other judicial or quasi-judicial authorities. Further, specific solutions are suggested for efficiently addressing the concerns regarding allowing cross-examination in summary proceedings, which is seen as a major characteristic of the IBC.
One of the most essential principles of natural justice, audi alteram partem necessitates that both sides be heard before any order is passed. Cross-examination is one such efficient and effective way to seek the truth, determine accuracy, and test the credibility and reliability of the witnesses and evidence produced. If a court grants the right to cross-examine, the parties get an opportunity to refute and correct any information that might be detrimental to them. The courts have time and again reiterated that no material against a person should be relied on without that person being given an opportunity of explaining them.
By submitting an application to the Adjudicating Authority (“AA”), the Resolution Professional may, under the terms of the IBC, avoid or undo a class of transactions which is deemed as avoidance transactions. Presently, the IBC proceedings related to avoidance transactions do not particularly allow for the cross-examination of RPs. This article is therefore an attempt to address the ambiguity surrounding cross-examination, and argues that it should specifically be allowed in IBC proceedings.
Impact of RP’s powers on Avoidance Transactions
The IBC grants immense powers to the RP to safeguard the interests of the creditors and to maximize the value of the CD’s assets. When the CDs engage in financial transactions either detrimental or causing unjust enrichment to the creditors, such transactions can be avoided under the IBC. Through Section 25(2)(j) of the IBC, the RP is made duty-bound to file an application for avoidance of such transactions if any, in tune with Chapter III of the IBC. An RP making allegations against the director or partner of a CD is required to do so by providing adequate evidence to support his case. For this purpose, the RP relies on documents provided by the CD. However, a 2021 research initiative by the IBBI shows that 83% of the total number of 1189 companies surveyed lacked proper documentation models for both statutory registers and non-statutory registers like Sales registers, invoices etc. As much as it reflects the multiple hurdles faced by the RP in collecting the necessary information, this data points to the fact that there is always a possibility of the RP basing his allegations on incomplete or incorrect information. It can hence be inferred that the analysis done and the allegations raised by the RP against the directors or partners of a CD regarding avoidance transactions, need not always be fool-proof while such allegations could mean grave consequences to the opposing party.
The RP is given immense powers as per Sections 43, 45, 50, and 66 to file applications before the AA and raise allegations against the directors or partners regarding potential avoidance transactions. If the allegations raised by the RP against the directors/partners are accepted by the AA, such directors/partners may be instructed to transfer hefty sums to the CD at high interest rates as deemed appropriate. The impact of such allegations can be seen in the case of Tirumala Balaji Alloys Private Limited v. Sumit Binani where the National Company Law Appellate Tribunal (“NCLAT”) upheld the National Company Law Tribunal (“NCLT”) order directing the promoters to transfer the impugned amount along with an exorbitant rate of interest. The tribunal found that the promoters had entered into preferential transactions with their relatives during the relevant time as per Section 43 of the IBC. This however could translate to unintended consequences to the stakeholders involved, especially to the erstwhile directors and partners of the CD, if the RP engages in unprincipled acts.
In addition, in recent times, the resolution professionals have been held liable for inaction, misleading statements etc. In the Report of the Bankruptcy Law Reforms Committee dated November 2015, Insolvency and Bankruptcy Board of India (“IBBI”) pointed out that due to the RP’s significant involvement in every stage of the insolvency resolution process, it is possible that any unjust behavior on the part of the RP could jeopardize the interests of the parties involved. When the RP makes allegations against the erstwhile directors, it is necessary to ensure the veracity of his claims. Along with filing the affidavits, cross-examining the RP offers this very opportunity to the directors faced with allegations especially those of avoidance transactions involving the assets of the CD.
Further, the RP is bound by a few rules and regulations and the failure to adhere to the same would vitiate the process initiated by him. The RP is mandated to adhere to a certain Code of Conduct for Insolvency Professionals provided in the Insolvency Professional Regulations, 2016. He is mandated not to conceal any material information to the AA or to any relevant stakeholder. Furthermore, as per Regulation 35A(2) of the CIRP Regulations, the RP is required to make a ‘determination’ regarding preferential, undervalued, and extortionate credit transactions, and fraudulent or wrongful trading within one hundred and fifteen days from the insolvency. The directors/partners must hence be given a chance to verify the claims made by the RP and ensure that all the checks and balances devised by the statute and the rules are adhered to. Cross-examination of the RP at the stage of evidence provides this opportunity to the directors/partners to verify the claims made and build a stronger case.
Legislative Scope of Cross-Examination Under the IBC
As per Section 60(1) of the IBC, the NCLT is the adjudicating authority statutorily empowered to deal with matters related to insolvency resolution and liquidation of corporate persons. The NCLT or the NCLAT are not bound by the Code of Civil Procedure (“CPC”) whilst disposing of any proceeding before it. As per Section 424 of the Companies Act, 2013, these tribunals are bound by the principles of natural justice and are required to adhere to the relevant rules and provisions. However, Clause (2) of the aforementioned section provides that both the tribunals shall have the same powers as vested in a civil court for the purpose of summoning, enforcing the attendance and examining a person on oath.
The legislative provision dealing directly with cross-examination can be found in Rule 39(1) of NCLT Rules, 2016. According to this Rule, the NCLT is empowered to direct the parties to give evidence by affidavit. Clause (2) of this rule further provides that if the “Tribunal considers it necessary in the interest of natural justice”, it may order the cross-examination of any deponent on the points of conflict on an application moved by any party.
Similarly, as per Rule 40, if the tribunal requires any additional evidence or any witness to be examined, it is empowered to record the reasons in writing and allow such additional evidence or examination of a witness. The provisions of Order XVI of the CPC concerning summoning and enforcing the attendance of witnesses apply mutatis mutandis to the proceedings of the NCLT. Furthermore, the Tribunal has inherent powers to pass orders as necessary for meeting the ends of justice or for preventing the abuse of the process.
However, Rule 10(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 indicates that only Rules 20 to 26 of the NCLT Rules, 2016 apply to proceedings under the IBC. Since cross-examination is dealt with primarily under Rule 39, it would not apply to IBC proceedings according to Rule 10(1). Similar is the case with Rule 11 of the NCLT Rules, 2016 which deals with the inherent powers of the Tribunal. The Supreme Court further clarified that inherent powers of the tribunal cannot be invoked in proceedings related to the IBC. However, in Nui Pulp and Paper Industries, NCLAT held that Rule 11 powers can be employed by the Tribunal in an IBC proceeding if it meets the ends of justice. From the aforementioned decision, it can be inferred that Rule 10(1) of the Application to Adjudicating Authority Rules is not relied on mandatorily by the tribunals and hence there can be no absolute bar on cross-examination based on Rule 10(1). Thus, cross-examination can be allowed by the NCLT in IBC proceedings too if it aligns with necessity and the principles of natural justice.
Part II of this piece can be accessed here. It will outline previous instances of cross-examination being permitted by the NCLT, and will evaluate the scope of cross-examination within the procedural framework of the IBC. Specific solutions will then be proposed to efficiently address the concerns around allowing cross-examination in IBC proceedings.
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