Argentina: The Tango Effect: More Flexibility for Restructuring Debts

Last Updated: 5 August 2003
Article by Hernan Oriolo

Introduction

As part of the Argentine economic crisis that ended with the default of its public debt, the Argentine government enacted several laws. Among them, two laws were passed in order to amend the Argentine Receivership Proceedings and Bankruptcy Law nro. 24.552 (hereinafter "RPBL").

Firstly law 25.563 was passed1 and, shortly after, a counter reform was performed2 through law No. 25.589. One of the most relevant issues modified by this second amendment is the reform of the out-of-court reorganization agreements (Acuerdo Preventivo ExtrajudicialAPE-).

Although this kind of agreements already existed within the framework of law 24.522 the terms of those agreements could not be imposed on all the unsecured creditors and were only binding for those creditors that executed the agreement. Instead with the new regulation provided by law 25.589, if an APE is approved by the necessary majorities, its effects are extended to all the unsecured creditors whether they have approved it or not.

This relevant amendment has made possible to begin using the out-of-court agreements providing more flexibility in order for companies to restructure their debts with legally binding effects for all its unsecured creditors, with lower costs, avoiding the filing of.

General Procedure

According to section 69 of the RPBL a company that is unable to timely perform its payments –estado de cesación de pagos- or is under general financial or economic difficulties may reach an APE with its creditors and submit it to a commercial court for its judicial approval.

Regarding the agreement it is specifically provided that the parties can freely agree on its content3. The agreement can consist in the proposals that are specifically admitted in receivership proceedings (for example deference in time of payment, reduction of the amount to be paid, payment in installments, payment with goods, issuance of bonds, etc.) or any other kind of licit offers. The deal so reached is binding among the parties that executed the agreement whether it obtains judicial approval or not.

In addition, during this procedure, the company has no external control. No receiver is designated within the APE framework. Therefore another important difference with the receivership proceeding is that the management can exercise its rights and perform its obligations without the restrictions set forth in receivership procedures4.

At the same time the fact of not filing the traditional receivership proceeding avoids the negative impact that such process may produce in the commercial name and/or brand of the company that is within a restructuring process.

To obtain a judicial approval of the proposed agreement, the company must reach its approval by the majorities set forth by the RPBL. The majorities required are i) a simple majority of the number of the company’s creditors and ii) those creditors must represent two-thirds of the total unsecured liabilities of the company5.

Additionally, Section 45 bis of the RPBL regulates the voting procedure in case of credits originated on securities or bonds ("titulos valores emitidos en serie"), such as Negotiable Obligations. This section provides that, regarding to the headcount majority, votes of holders of notes voting in favor of the APE proposal shall be counted as one vote - regardless of the amount of principal they might hold - and those ones voting against the APE shall also be counted as one vote. Therefore headcount votes would be neutralized.

Once the company reaches the necessary majorities, it may submit the agreement before a local commercial court and request its judicial approval. Section 72 of the RPBL, set forth the documentation that the debtor must submit together with the agreement in order to request its judicial approval, which mainly are:

  1. A description of the assets and liabilities of the company.
  2. A list of all debtor’s creditors.
  3. A list of pending legal actions (judicial, administrative, etc.)
  4. A description of the accounting books and other books of interest.
  5. The amounts and percentages gathered by the company making the filing.

The documentation to be submitted must be certified by a public accountant.

As from the moment in which the company files the APE before the commercial court, all the legal actions against the debtor get suspended.6

In order to protect creditors and third party’s rights, the law states that the petition of approval of an APE must be published in the Official Gazette and in an major Argentine newspaper during five business days.

The creditors acknowledged by the debtor and those that evidence to be a creditor not informed by the debtor (in the list of creditors submitted to the court) may oppose the judicial approval of the agreement.

Such opposition has to be filed within the ten business days following the last publication made in the Official Gazette and applicable newspaper. The only grounds admitted by the law (Section 75) to oppose the approval of the agreement are I) omissions and/or exaggerations of the debtors assets or liabilities or II) lack of achievement of the majorities set forth by Section 73 of the RPBL.

In case an opposition is filed, if necessary a ten days evidence stage will follow. Afterwards the Judge shall decide within 10 business days of the end of the evidentiary process, if the opposition is rejected (in such a case the Judicial resolution should include the approval of the APE) or accepted (in such a case the agreement would be valid for the creditors that executed the agreement but will not be impose in the creditors that did not signed).

Apart from the opposition remedy the nullity declaration of the APE could be requested (as for Sections 76 and 68 of the RPBL). However the nullity can only be based on willful I) exaggeration of the debtor’s liabilities II) fraudulent acknowledgement of securities in favor of certain creditors or III) hiding or exaggerating assets; provided the same are discovered after the APE approval by the Commercial Court.

In case the debtor fails to comply with the agreement so reached, bankruptcy of the company can be declared by the judge.

If the APE approval is not obtained the company still have the right to file its receivership procedure.

Conclusions

We believe that the APEs will have an important role in the process of restructuring liabilities of companies. We summarize herein below the most relevant features of this regime.

  • Flexibility: We believe that the possibility of reaching the APEs outside of the court atmosphere will help to achieve the necessary commercial understandings without the usual delays involved in the traditional judicial proceedings.

The flexibility is also determined by the freedom of the parties to determine the content of the APE. Such freedom will help to achieve solutions applicable for each particular case.

  • Economy: The costs of this process are lower than the ones set forth for receivership proceedings. There is neither participation of receiver nor participation of creditor’s committee.
  • Thus the legal fees involved would be lower compared to those fixed for receivership proceeding.
  • Lack of receiver’s control and restrictions to the management: The lack of restrictions in the management of the company and receiver control in the negotiation process might help to easily overcome the economic difficulties of the company with out suffering limitation to the management autonomy.
  • Imposition on all the unsecured creditors: The most important benefit introduced by the new amendment is that the effects of the agreement reached, if approved by the necessary majorities, will be imposed on the creditors that did not vote in favor of the APE.
  • Suspension of lawsuits: Another important advantage ins the suspension of the lawsuits filed against the debtor as from the filing of the APE.

We hope that this amended tool may help companies undergoing economic difficulties. However the jurisprudence to come will help to define the limits of this important device in debt restructuring.

Footnotes

1 See "Modifications to the Argentine Receivership and Bankruptcy Law" by Hernán Oriolo and Martín Litwak published in International Business Lawyer, Vol 30 Nº 3, March 2002.

2 See "Amendments to Argentinian Insolvency Proceedings Resulting From Act 25.589" by Marta Di Stefano and Miguel Eduardo Rubin in International Business Lawyer, Vol 30 Nº 8, September 2002.

3 See section 71 of law 24.522 as amended by law 25.589.

4 As per section 16 of the RPBL a company under receivership proceedings can only perform acts that are within the ordinary course of the business. Any other kind of acts can only be performed with judicial authorization.

5 Section 73 of the LCQ, excludes the voting right of certain creditors such as, controlling companies, members of the board of directors, etc.

6 According to section 72 which states similar suspension effects for lawsuits to those set forth for companies if the company where under a receivership proceeding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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