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A New Development In The Nirav Modi Entities’ Bankruptcy Case Has PNB Worried       

Nirav Modi entities propose a fire sale of assets; PNB says these are not wasting assets that merit expedited sale.

A pedestrian walks past a Punjab National Bank (PNB) branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
A pedestrian walks past a Punjab National Bank (PNB) branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

There’s a new twist in the Punjab National Bank-Nirav Modi story. Three Modi affiliates—Firestar Diamond, Firestar Inc. and A. Jaffe—have filed for bankruptcy in the United States. The companies have asked the U.S. bankruptcy court to allow an expedited sale of assets which Punjab National Bank is now objecting to, according to the filing made in the U.S. court on Wednesday.

Firestar Diamond, Firestar Inc. and A. Jaffe have Nirav Modi as their majority shareholder. Modi has been accused of playing out an over Rs 6,000 crore scam on Punjab National Bank. On March 23, these three entities filed an application with the U.S. court to sell a substantial part of their assets that are free and clear of claims, interests and encumbrances. PNB has objected to the proposal calling it an extraordinarily expedited sales process.

The three Modi companies had reasoned in their filing that an expedited sale process is necessary to one, realise the maximum values of the assets, and two, to give the ultimate purchasers sufficient time to prepare for an industry trade show set to be held in early June.

The companies say that they want to sell the assets quickly because there is a trade show coming up and they believe that any buyer would want to control the assets before the trade show in order to make a sale there but PNB is arguing that this is a bogus reason, Seth Freeman, senior managing director and restructuring advisor at EM Capital Management explained. “We’re not talking about clothing merchandise which would be valuable because it’s seasonal,” Freeman added.

PNB has argued in its filing that an expedited process, conducted in consultation with existing and perhaps conflicted management, without the benefit of the participation of an official committee of unsecured creditors or even the full involvement of any other interested party, such as PNB, may lead to the exact opposite result—a rushed fire sale of the businesses at a deeply discounted price.

If these U.S. entities acquired merchandise from Indian companies owned by Modi and that merchandise is a result of the alleged fraud against PNB, it’s possible that PNB would be entitled to a constructive trust—i.e. the merchandise or the proceeds of its sale in the U.S. case can be held in a trust on behalf of PNB due to unjust enrichment through the alleged fraud, Freeman said.

PNB’s filing also states that the three companies have refused to provide it with critical information that would the bank to determine whether any of the assets to be sold were obtained with funds fraudulently obtained from PNB or whether the companies were otherwise used to launder funds.

To ensure that bidding procedures are both fair and efficient while maximising the value of the debtor’s estate, courts may refuse to expedite the bidding and sales process where doing so would limit the ability of interested parties to obtain the information needed to fully participate.
PNB’s Court Filing

The case will be heard by the U.S. bankruptcy court on Wednesday.