The bankruptcy proceedings of Nirav Modi’s entities in the US highlight the urgent need for a robust cross border insolvency law
Even as banks taste their first success under the Bankruptcy Code through the resolution of Bhushan Steel there is a gaping hole showing up in the Code in the matter of resolving cross-border insolvency cases. Ever since the ₹14,000-crore fraud at Punjab National Bank (PNB) came to light, investigative agencies have been in a tizzy attempting to bring the alleged perpetrator, Nirav Modi, to book. Even as the agencies seized his assets in India and froze his accounts, Modi’s overseas entities— Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — filed for bankruptcy in the US, making it difficult for Indian lenders to proceed against his assets there. A recent analysis of court filings in the US by this newspaper revealed that Firestar Diamond Inc. held inventory of polished diamonds worth $3.8 million belonging to Firestar International Pvt. Ltd., based in India, in which Modi is the majority shareholder. It soon became evident that the authorities in India would not be able to touch the assets of Firestar International.
Importantly, unlike in India where the Bankruptcy code puts creditors in possession of a debtor’s assets, the US Bankruptcy Code allows debtors to retain management and control of the business. This has raised concerns of a possible rushed sale by Nirav Modi of his businesses in the US. It is heartening though to note that PNB has made significant headway in thwarting Modi’s attempt to hastily dispose of assets in the US. The US Department of Justice too is uncomfortable with the manner in which the bankruptcy process is being handled by the three companies and has sought the appointment of a fiduciary to take over the reins of the businesses.
While the developments in the US in the Modi case appear to be unfolding in favour of Indian lenders, the entire saga has highlighted the urgent need for a robust cross border insolvency law in India. Some of the US court filings clearly suggest that assets of Modi’s entities in the US may have been obtained by using monies fraudulently obtained from PNB. This brings to light the ingenious ways in which Indian companies through their multi-layered structure, move cash and other assets to other jurisdictions, making recovery proceedings difficult. The UNCITRAL secretariat issued its Model Law on Cross-Border Insolvency in 1997 to assist countries regulating corporate insolvency and financial distress involving companies which have assets or creditors in more than one country. Under sections 234 and 235 of the Bankruptcy Code, the Centre is empowered to enter into agreements with foreign governments to enforce the Code’s provisions on defaulters who may be abroad. Yet, there has been no attempt until now to stitch up such agreements with foreign governments. The Nirav Modi scam drives home the urgency for the Centre to activate the powers available to it in the matter of cross-border insolvencies.