While several news reports around Nirav Modi’s companies — Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — filing for bankruptcy in the US have been hinting at it as a pre-emptive move to seek protection against lenders, digging into court filings reveals that the move, a hasty one, was made to safeguard assets.

For instance, under the section where the debtor has to indicate the chapter under which the Bankruptcy Code is being filed, the companies seeking voluntary bankruptcy have left all boxes unchecked.

Among these, the key ones that indicate genuine business failure or attempt by the debtor to work out a resolution plan, by filing for bankruptcy, have been left unchecked. This shows the application has not been made with any prepared resolution plan.

While this may not be altogether unusual, experts believe that in this particular case, not filing a resolution plan indicates a hasty move to protect assets.

“The fact that the companies filed for bankruptcy under Chapter 11 without any resolution plan or creditor induced schemes, appear to indicate that it was a hasty filing done to safeguard assets and liabilities,” says KS Ravichandran, Managing Partner, KSR & Co, Company Secretaries LLP.

The CBI and the ED have been intensifying the crackdown on Nirav Modi — accused of defrauding Punjab National Bank of $2 billion — seizing jewellery and assets worth thousands of crores of rupees.

Once a company files for bankruptcy in the US, there is an automatic stay on certain collection and other actions against the debtor and the debtor’s property.

While lack of any resolution plan indicates that the filing was done in a haste and not triggered by any legitimate business failure, another section in the bankruptcy petition documents implies no financial distress.

In the section marked ‘debtor’s estimation of available funds’, the companies have stated that the funds will be available for distribution for unsecured creditors. “This clearly shows that the companies do not face any stress and even unsecured creditors are protected. Why then is there a need for resolution under bankruptcy code?” queries Ravichandran.

Cross-border insolvency

While the filings indicate that the move by Firestar Diamond and affiliates is a pre-emptive one to protect the companies’ assets from any fallout of the ongoing investigations here, it will be a while till the US court decides on the case.

Unlike in India, where IBC is time bound — 180 days with 90 days extension — in the US there is no defined time-line to decide the case.

Also, in India, the IBC is governed by the ‘creditor in possession’ principle. Once the insolvency case is admitted by the NCLT, the power of the board of the corporate borrower is suspended and the insolvency professional (IP) takes over the reins of the business.

In the US, however, the ‘debtor in possession’ principle applies where the debtors continue to manage their assets.

With the Indian authorities here intensifying the crackdown on Nirav Modi, such applications from connected enterprises (overseas) bring to focus the need for a robust cross-border insolvency law. This is imperative to help lenders tap defaulter’s assets overseas.

“Currently under the IBC, there are sections 234 and 235 enabling the government to enter into agreements with other countries so that resolution professional or liquidator will be able to apply to the other country where Indian debtor’s assets are located,” says Ravichandran.

The UNCITRAL Model Law on Cross-Border Insolvency was issued by the secretariat of UNCITRAL in 1997, to assist countries regulating corporate insolvency and financial distress involving companies which have assets or creditors in more than one country.

Typically, in insolvent situations, debtors move cash or other assets to other jurisdictions necessitating the filing of cross-border applications in foreign courts to attach assets of debtors lying in other jurisdictions. Sections 234 and 235 of the IBC are enabling provisions and India must take further steps in this direction, adds Ravichandran.

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