After the US Bankruptcy court ordered a probe into Nirav Modi’s ties to Firestar Diamond, PNB’s latest motion seeking appointment of a Chapter 11 trustee, if granted, would clearly indicate underlying issues in the manner in which Nirav Modi’s companies — Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — filed for bankruptcy in the US.

According to the court documents accessed by BusinessLine , PNB has sought the appointment of a Chapter 11 trustee who can oversee a sales process not tainted by the Modi fraud and the disturbing evidence of ongoing mismanagement and misconduct by the debtors’ (Firestar and affiliates) management following the commencement of these Chapter 11 cases.

While the auctions for the assets of Firestar and Fantasy were adjourned, an auction for the A Jaffe assets was held on May 3, 2018. The sale happened at a significant discount. The highest bid came in at only $ 8 mn, far below the brand’s original appraised value of $22.8 million, according to court papers. The bidder, Parag Diamonds (Paramount Jewels), is also run by an Indian-born diamond trader. In fact, in a subsequent declaration, Parag Diamonds owner Panna Jain disclosed that company manager Anurag Jain is married to the sister of Sumay Bhansali, who is the CEO of A Jaffe.

PNB had raised concerns over the auction significantly undervaluing the company and the number of disturbing facts about the debtors’ conduct during the Chapter 11 sales process that came to light during the sale hearing. The sale motion was subsequently withdrawn.

Appointment of trustee

According to Seth R Freeman, Senior Managing Director of GlassRatner Advisory and Capital, LLC, a global specialty financial advisory services firm based in San Francisco, in Chapter 11, the US Trustee, who is a part of the US Department of Justice performs the task of overseeing the Chapter 11 process including the formation of an Official Committee of Unsecured Creditors.

Often the Unsecured Creditors Committee (UCC) investigates the debtor’s past and current affairs, including wrongdoings as a function of its role to identify opportunities to maximize distributions to unsecured creditors.

In the Firestar case, no UCC was formed. “The US Trustee keeps an eagle-eye on the case to ensure the integrity of the Chapter 11 process and monitors the Debtor in Possession for compliance with the laws. But in the case of Firestar Diamond and A Jaffe, in light of the serious Modi fraud allegations and CBI charges coming out of India and as there was no unsecured creditors committee formed, the US Trustee called for the appointment of an Examiner,” he explains.

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.

“The latest Motion filed by PNB seeking appointment of a Chapter 11 Trustee, if granted, would clearly indicate that there are serious concerns about the manner in which the Nirav Modi’s companies, as ‘Debtors in Possession’, have conducted the Chapter 11 process and their capacity going forward. Unlike the directors and senior management of a Debtor in Possession, a Chapter 11 Trustee is appointed by the Court and is deemed an officer of the Court, reporting to the bankruptcy judge. When a Chapter 11 Trustee is appointed, they take control over the Debtors and the assets to ensure the Chapter 11 process is properly completed,” says Freeman.

In India, under the IBC process, it is a ‘creditor in possession regime’ where the resolution professional takes over the reins of the company after the powers of the board are suspended.

Concerns raised

In light of the alleged fraud involving Nirav Modi in India, PNB has raised a series of concerns in its motion for appointment of a Chapter 11 trustee. Modi, being the indirect majority shareholder of the debtors (Firestar and affiliates), he and other Modi entities have substantial ties with the debtors and their management, PNB argued.

Firestar Diamond, Inc, is wholly owned by Firestar Group, Inc, which is wholly owned by Synergies Corporation. This is in turn is wholly owned by Firestar Holdings Limited, which is wholly owned by Firestar International Limited, based in India. Synergies Corporation owns 95 per cent of A Jaffe, Inc, while Fantasy Inc is wholly owned by Firestar Diamond, Inc.

The ₹14000-odd crore fraud in India was perpetrated by a handful of bank officials at PNB by issue of unauthorised issue of Letter of Undertaking (LOUs) to Nirav Modi’s firms. PNB in its motion points out that against the LOUs, funds should have been dispersed to the “exporter/beneficiary” to finance the import of goods into India; however, funds were dispersed to other Modi Entities instead of third-party exporters/suppliers and were not used for bona fide import/export purposes. Of the funds released by foreign banks, some of the proceeds were used to repay credit previously disbursed to the Modi Entities by foreign branches of Indian banks pursuant to prior fraudulent LOUs.

“According to the Debtors’ schedules, the total amount owed to certain suspect exporters and importers is approximately $6.5 million. In fact, A Jaffe’s two largest creditors, Pacific Diamonds FZE and Tri Color Gems, are named as the ‘exporter/beneficiary’ on LOUs already identified as fraudulent,” argues PNB in the recently filed motion.

At a steep discount

PNB also raised concerns over the recently concluded sales process of A Jaffe which had resulted in a proposed sale at a significant discount.

According to the court documents, A Jaffe had put inventory worth $10 million, loose diamonds worth $0.5 million, finished jewellery worth $6.8 million and $6.3 million in account receivables—on the block. Most of these were auctioned at 40-60 per cent discount to the book value. For instance, inventory fetched $4.6 million, while accounts receivable was proposed to be transferred at $3.2 million.

The sale motion was subsequently withdrawn, after disturbing facts came to light in the sale hearing.

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Published on May 24, 2018