The manner in which the Chapter 11 bankruptcy cases involving three Nirav Modi companies in the US has been evolving appears to have raised concerns in the United States Department of Justice (DoJ).

A day after Punjab National Bank (PNB) sought a motion seeking the appointment of a Chapter 11 trustee for Firestar Diamond Inc., A Jaffe Inc. and Fantasy Inc, the DoJ arm responsible for overseeing bankruptcy cases, known as the US Trustee, has also called for an independent fiduciary to preserve what remains of the debtors’ operations and value.

The US Trustee, in its motion, states that the links among the debtor entities, their suppliers, and Modi alone would justify the appointment of an independent fiduciary. However, coupled with the collapse of the sale process (the auction of A Jaffe’s assets was held on May 3 and later set aside) and the sudden resignation of Mihir Bhansali, President of A Jaffe, there is now an urgent need for an independent trustee to take over the reins of these entities, it said.

The US Bankruptcy Code allows debtors to retain management and control of the business operations. However, the debtor-in-possession has fiduciary duties and must protect property and refrain from acting in a manner that could damage the estate, or hinder its successful reorganisation.

If the debtor fails to do so, an alternative management in the form of a Chapter 11 trustee may be appointed, as has been sought by PNB.

Bankruptcy experts state that with the US Trustee also seeking the appointment of a Chapter 11 trustee, chances are high that the motion will be granted. The Chapter 11 trustee can, among other things, assume control of the assets and bring potential actions against Modi, the Modi entities, and Bhansali.

According to the court documents accessed by BusinessLine , the US Trustee argues that although the debtors (entities in the US) themselves have not been charged with any wrongdoing in connection with the criminal investigation in India, they cannot simply divorce themselves from that probe by virtue of the fact that they operate in the United States.

“The Debtors are part of Modi’s jewelry business. He, as the ultimate owner of the Debtors — albeit through various holding companies — controls the Debtors,” the US Trustee argued in its motion.

Cloud over process

The United States Bankruptcy Court had recently directed the appointment of an examiner to take a closer look at Nirav Modi’s ties to the US companies that filed for bankruptcy.

But the US Trustee argues that the Court cannot wait for the examiner to issue his report. “Allegations of communications between Modi and the US entities during the sale process cast further doubts about the integrity not only of the sale process, but also of the administration of these cases,” the motion states.

Liquidation option

Interestingly as an alternative to appointment of a Chapter 11 trustee, the US Trustee can call for conversion of the bankruptcy cases to Chapter 7, which governs the process of liquidation under US bankruptcy laws. A Chapter 7 Trustee takes control of the assets and liquidates them.

In the case of Firestar, according to the US Trustee, the debtors’ ability to rehabilitate the business was made difficult because of the events leading up to the filing of the Chapter 11 petitions. “Not only was there a shadow cast over the Debtors’ operations by the scandal in India, but also, the companies that supplied the Debtors with inventory were shuttered. That action forced the Debtors to sell their assets in a relatively short time.”

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Published on May 25, 2018