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PART II - Ensuring Natural Justice: A Case For Cross-Examination In IBC Proceedings On Avoidance Transactions

The authors are Meenakshi Gopakumar and Arshia Ann Joy, fourth-year students at the National University of Advanced Legal Studies, Kochi.

Part I of this piece that can be accessed here, introduced the need for cross-examination in IBC proceedings, particularly those relating to avoidance transactions, and traced the legislative scope for the same under the IBC and Rules thereunder and applicable thereto. This part will now 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.


Instances of Cross-Examination Being Permitted by the NCLT

Rule 39(2) of the NCLT Rules states that, “where the Tribunal considers it necessary in the interest of natural justice, it may order cross-examination of any deponent on the points of conflict…on an application moved by any party.

There are several instances where the NCLT has allowed such cross-examination under Rule 39 of the NCLT Rules, 2016 in company petitions. However, there has been no previous instance of such a procedure being allowed in an IBC proceeding, especially one involving avoidance transactions. Exercising powers under Rule 39(2) of the NCLT Rules, 2016 is a matter of the Tribunal’s subjective judicial discretion. In the P. Manmadh Rao case, when the authenticity of the documents produced was in question, the NCLT considered it ‘just and necessary’ that evidence be led to determine the authenticity. A Commissioner was appointed with a mandate limited to receiving evidence and allowing the cross-examination of the witnesses. The NCLT specified that cross-examination be restricted to the compilation of documents and should not touch any other aspects of the pleadings. Furthermore, cross-examination was employed as a means of ascertaining the probative value of reports produced before the Tribunal. A Report of the Commissioner by itself could not be considered ‘a substantive finding on matters in dispute’. It was hence held that cross-examining the Report of the Advocate Commissioner or Forensic Auditor was one way of ascertaining its evidentiary value.

One of the major requirements of Rule 39 is that cross-examination can be allowed only if there is a ‘point of conflict’ in the evidence produced. The NCLT in Niklesh Tirathdas Nihalani explained the term ‘point of conflict’ in the following manner:

“It can only be said that there are points of conflict when there are two versions from the same person but not conflicting versions between two persons.”

In a company petition involving the sale of shares, the NCLT allowed cross-examination because it found certain ‘points of conflict’ as required under Rule 39. Hence it can be concluded that cross-examination is employed as a useful tool by the NCLT in several instances especially when it comes to ascertaining the veracity of reports and documents. This tool when employed in IBC proceedings involving avoidance transactions would enable the erstwhile directors/partners to have a fair chance at building a stronger case considering the immense powers enjoyed by the RP in such proceedings.


Is cross-examination beyond the objective of the IBC?

The proceedings before a tribunal or an authority are summary in nature if a short procedure is to be followed in place of the general lengthy formal procedure. The rationale is to ensure expeditious disposal in such cases. The foundational objectives of the IBC as outlined by the IBBI strive for the consolidation of laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for the maximisation of value of assets. Section 12 of the IBC mandates that the CIRP procedure be completed within 180 days or within an extended period of 90 days. The NCLT had directed the parties in SBI v Jet Airways India Ltd to conclude the proceedings expeditiously without relying on the completion of the statutory period prescribed under the IBC. The IBC hence envisages a system where matters are adjudicated upon and culminated in the least possible time frame.

Furthermore, although the NCLT is not required to follow summary proceedings in all cases, it is bound to follow the same whilst acting as the AA under the IBC. In Nandamuri Meenalatha the NCLAT noted,

“It is to be remembered that the 'Proceedings', under the I & B Code, 2016, are 'Summary in Character', and that an 'Adjudicating Authority', not being a 'Recovery Fora' or 'Court', no elaborate enquiry is conducted like that of a 'Regular Trial' of a 'Civil' case…”

Cross-examination forms a major part of the regular trial before a civil court. It may not be allowed in a summary proceeding on account of time constraints. However, this article attempts to argue that allowing cross-examination by itself does not affect the summary nature of the proceedings. For substantiating this, a parallel can be drawn between the IBC and Section 34 of the Arbitration and Conciliation Act, 1996. An application filed under Section 34 is to be disposed of within a period of one year similar to the IBC. In 2023, the Supreme Court in Alpine Housing reiterated that applications under Section 34 are summary proceedings and the primary objective of the Arbitration Act is the speedy resolution of the disputes. Further, both do not specifically allow cross-examination as per the wordings of the provisions and the CPC is not wholly applicable to both. Despite this, in several cases involving Section 34, the court has allowed cross-examination when it was deemed necessary to do so. For instance, the court in Fiza Developers had held that cross-examination may be permitted for the persons swearing to the affidavit if the case so warrants. This ratio was further discussed and clarified in Emkay Global that setting aside an arbitral award should generally not require anything more than the record that was before the arbitrator but cross-examination of persons swearing in to the affidavits should be allowed if it is absolutely necessary. Cross-examination may be allowed in exceptional circumstances and not as a routine procedure for Section 34 proceedings. The subsequent decision in Canara Nidhi follows the same rationale. It is pertinent to note here that the scope of the term ‘absolutely necessary’ is not defined. The judicial analysis hereinabove on Section 34 shows that allowing cross-examination itself does not negate the summary nature of the proceedings. It becomes all the more imperative to allow the same at least in the cases where the NCLT finds it necessary to do so.

Moreover, certain statutes expressly permit cross-examination when deemed necessary, irrespective of the summary nature of the proceeding, indicating the legislative intent favoring cross-examination. For instance, Section 225 of the Uttar Pradesh Revenue Code, allows for conducting cross-examination of any witness who has filed an affidavit if the Revenue Court deems it necessary to do so in the summary proceeding. Similar to the AA in an IBC proceeding, the Rent Court or the Rent Tribunal under the Tamil Nadu Regulation of Rights and Responsibilities of Landlords and Tenants Act, 2017 are not bound by the procedure laid down in the CPC, but Section 34(2) of this Act allows for cross-examination in the summary proceeding, if it appears necessary to do so in the interest of justice. It can hence be argued that allowing cross-examination in a summary proceeding need not be considered an aberration.


Conclusion and Recommendations

From the above analysis, it can rightly be concluded that cross-examination is important in ascertaining the veracity of the evidence produced in the form of affidavits before the tribunal. By incorporating cross-examination in the procedure under the IBC, any form of ambiguity in the evidence produced can be minimised, ensuring justice. The quality of analysis of evidence must not be compromised for the sake of brevity.

The need of the hour is to formulate comprehensive guidelines governing the application of Rule 39 of the NCLT Rules to the IBC particularly in the context of avoidance transactions, considering the immense powers enjoyed by the RP in framing allegations against unsuspecting directors/partners. These guidelines may specify a time limit within which procedures like cross-examination are to be completed in company petitions alleging avoidance transactions. This is all to ensure consistency, fairness, and efficiency in the process of admitting and analyzing evidence in IBC proceedings while adhering to the principles of natural justice.


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