The multi-layered structure of Nirav Modi’s companies – Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc – that have filed for bankruptcy in the US, makes it difficult for lenders in India to proceed against their assets, even if they are held for companies based in India.

Information obtained by various court filings in the US with respect to the case reveal that Firestar Diamond Inc holds inventory worth $4.8 million, as ‘property for another’, of which, $3.8 million-worth of polished diamonds belong to Firestar International Pvt Ltd based in India.

Nirav Modi is the majority shareholder of Firestar International, the ultimate parent of Firestar Diamond Inc.

The structure goes like this. Firestar Diamond Inc is wholly-owned by Firestar Group Inc, which is wholly-owned by Synergies Corporation. This, in turn, is wholly-owned by Firestar Holdings Limited, which is wholly-owned by Firestar International Limited, based in India.

Thanks to the confounding maze of companies, proceedings in India will not be able to touch the assets of Firestar International. The bankruptcy filing by Firestar Diamond has imposed a stay on collections and other actions against it or its property.

Minimal claims

According to the bankruptcy filing by Firestar Diamond in February, the company had listed out the assets and liabilities in the range of $50 million to $100 million.

It had been evident from the initial filing that the move by Firestar Diamond was not triggered by any legitimate business failure, and there was no financial distress.

According to the latest information on the case, there have been only two claims registered against Firestar Diamond so far. One is American Express National Bank, for an amount of $25,288, with respect to a credit card account.

The other is American Express Travel Related Services Company Inc, also in the nature of a credit card claim, to the tune of $19,983.

PNB, in its objection filed against approving the sale of all or substantially all of the debtors’ assets (Firestar Diamond), says that it “objects…., among other reasons, to the extent that any such assets may have been obtained by the debtors using monies fraudulently obtained from PNB”. The statement of financial affairs of Firestar Diamond reveals that the gross revenue of the company was around $63 million for FY18 (until filing date of March 27, 2018).

Under the ‘property held for another’ section, the court filing lists out the assets Firestar Diamond holds on behalf of other entities. Vinod Kothari, a financial and legal consultant and insolvency professional explains that ‘property held for another’ is property, which is not owned by the company. For example, the inventory lying in stock of Firestar Diamond, presumably does not belong to them. In such a case, the assets are held by the company in bankruptcy in fiduciary capacity. These assets are not included as a part of the “liquidation estate”, the assets from which the creditors of the company will be paid.

In the case of Firestar Diamond, about 88 per cent of such inventory in value is held for Firestar International, the Indian entity, in the form of loose polished diamonds of over 5,000 carats valued at $3.8 million. The balance inventory in the form of jewellery is held for Nirav Modi Inc, a company registered in the US.

Legal experts indicate that the complex structure of the company makes it difficult for Indian lenders to proceed against the assets held on behalf of even the Indian entity – Firestar International.

While the value of assets in question may appear petite, in view of the massive $2-billion fraud at PNB, it brings to light the ingenious ways in which companies move cash or other assets to other jurisdictions, making recovery proceedings a difficult task.

While India’s Insolvency and Bankruptcy Code has enabling provisions, they sadly do not provide a comprehensive framework for cross-border insolvency matters.

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