How PNB can join bankruptcy proceedings against Nirav Modi firms in US

Mumbai: A New York court, in an order on Friday, dissuaded creditors and lenders to Nirav Modi’s Firestar Diamond lnc. from their debt-recovery processes.

While the firms have not named Punjab National Bank (PNB) as a creditor, the bank still has legal options, according to bankruptcy law experts.

The legal options include petitioning the court to be an unsecured creditor, requesting the US Trustee for an independent administrator and further seeking an examiner.

The court passed an interim order on Friday that dissuades creditors and lenders to Nirav Modi’s firms from their debt-recovery processes. The court, in a two-page order, said, “creditors generally may not take action to collect debts from the debtor or the debtor’s property.”

“Once a part of the creditor’s committee, Punjab National Bank can ask the US Trustee for an independent administrator to manage the day to day affairs of the company on the grounds of suspecting malfeasance. Unlike the Indian bankruptcy code, the US law follows a debtor in control model and independent professionals are not appointed for managing the company till the insolvency resolution,” said Sanjeet Malik, partner at law firm Samvad Partners.

The US Trustee Program oversees administration and litigation for enforcement of the bankruptcy law.

“India does not have a cross border bankruptcy so the only way PNB can be a party to the case is to petition the court to become an unsecured creditor. But the catch is that the assets of these firms are just to the tune $90 million which is quite insignificant as compared to the scale of fraud. So PNB will have to weigh costs against the possibility that Modi firms could be using this as a test case,” said Gaurav Dani, founding partner, IndusLaw.

According to a court filing on Wednesday, Modi’s US-based firm under bankruptcy has received interest from potential buyers. Mihir Bhansali, president and director at the firm, filed for bankruptcy 26 February after the Enforcement Directorate (ED) seized assets of Modi’s India-based firms on the allegation that Rs6,498 crore of banking funds have been siphoned off and these were further laundered.

ED is in the process of sending over a dozen letters rogatory to foreign jurisdiction, including US, for assistance in the PNB fraud by Nirav Modi and Mehul Choksi of Gitanjali Gems Ltd.

“It is possible some of the bank funds could have gone to some of the US based subsidiaries and companies,” said an ED official.

Indian probe by ED and Central Bureau of Investigation (CBI) is separate from the proceedings at the US court.

“It would again have to be PNB who can let the court or US Trustee know that there may be a case of fraud. In such a scenario PNB can ask for an examiner to verify whether there is a case of fraud and that Indian enforcement agencies are looking at the group as a whole for alleged fund diversion and siphoning,” said Malik of Samvad.

US Trustee also has the power to investigate criminal, fraudulent, or abusive conduct for possible civil or criminal prosecution. Further, the US Trustee can refer cases of apparent criminal fraud to the US Attorney for investigation and criminal prosecution.