Fernando Hernández of Marval O'Farrell & Mairal assesses the bankruptcy and insolvency regime in Argentina
Section 1: processes and procedures
1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?
In Argentina, reorganisation and bankruptcy is governed by Law 24,522 (the Bankruptcy Law), which provides for the following insolvency processes.
A reorganisation process (similar to US chapter 11 reorganisations), that may only be commenced by an insolvent debtor, upon: a voluntary petition filed at any time prior to bankruptcy adjudication; or a petition for the conversion of a bankruptcy adjudication. The process is controlled by the court, who appoints a receiver and a creditors' committee. The receiver supervises the process and receives submission of proof of claims. The purpose of the process consists in the reorganisation of the debtor's pre-petition unsecured claims under a reorganisation proposal which, if endorsed by the court after approval by the required majorities of unsecured creditors, will be binding against all unsecured creditors.
An out-of-court restructuring agreement (similar to the US pre-package agreement) which consists of a private restructuring agreement with the debtors' unsecured creditors. To the extent the agreement is executed by the required majorities of unsecured creditors the debtor may file it for court endorsement, upon which it will be binding on all pre-petition unsecured creditors. The out-of-court restructuring agreement has the following main differences with the reorganisation process: (i) the petition for endorsement does not require insolvency, but rather requires that the debtor is in a situation of general economic or financial difficulties; (ii) there is no receiver or judicial control of the restructuring process, except for the verification of the required majorities and court endorsement; (iii) there is no submission of proofs of claims; and (iv) there are no restrictions to the debtor's management and disposition powers.
A liquidation process (similar to US chapter 7 liquidations) of insolvent debtors, which may be commenced by the creditor (involuntary liquidation), on filing of a petition providing summary evidence of its claim and the signs of the payments cessation; or, by the debtor (voluntary liquidation), on filing of a description of the causes of the financial distress, the signs and date of the payments cessation, a statement of assets and liabilities and, a listing of creditors. The liquidation is performed under the control and supervision of the court, who appoints a receiver who receives submission of proof of claims, takes possession of the state and seeks to liquidate the debtor's assets and distribute the proceeds among the debtors' creditors.
1.2 Is a stay on creditor enforcement action available?
Upon commencement of a reorganisation proceeding, all pre-petition unsecured monetary claims (excluding expropriations, ordinary proceedings pending, labour claims and claims where the debtor is joinder defendant) are stayed. However, the enforcement actions on claims secured with mortgage or pledge are not stayed; provided that in order to be able to realise the collateral or obtain precautionary measures on the collateral the secured creditor must first have filed proof of the secured claim. However, in the case of manifest need or urgency the court may order a temporary stay of a mortgage or pledge enforcement action and the effects of a precautionary measure on the collateral for a term of not more than 90 business days.
On the publication of notices informing the filing of an out-of-court restructuring agreement for court endorsement, unsecured claims (except those excluded above) are also stayed. Secured claims are not affected by the commencement of the out-of-court restructuring agreement, which does not provide for specific provisions for the request of a temporary stay; despite that, the court may order such temporary stay by analogous application of the provisions for reorganisation proceedings described above.
In liquidation cases, all proceedings (other than enforcement actions) on unsecured claims (except those excluded above) will continue with the control of the receiver until the bankruptcy adjudication becomes final and definitive, upon which all unsecured claims' proceedings (except those excluded above) will be stayed. Subject to the filing of proof of the secured claim, creditors secured with mortgage or pledge may request to the court the realisation of the collateral at any time after granting a guarantee of preferred creditor. After giving notice to the receiver, the court will decide whether admitting or denying the request which, if admitted, will proceed at an ancillary proceeding (special liquidation proceeding). The receiver may request court authorisation to satisfy the secured credit in full with liquid funds available or through the sale of other assets or the granting of other securities. Upon bankruptcy, adjudication by the court may order the continuation of the debtor's business activities for a fixed term, during which secured claims enforcement actions on collateral needed for the business activities continuation are stayed when: (i) the secured claim is not due as of the bankruptcy adjudication date and the receiver continues performing the obligations due after such resolution; (ii) the secured credits are due as of the bankruptcy adjudication date but the security is not admitted by a final and non-appealable resolution; or (iii) the secured creditor consented the stay. In addition, in case of continuation, the court may also order the stay of secured claims enforcement actions at the request of an employees' cooperative (formed for purposes of bidding for the purchase of debtor's equity in the competitive bidding process or otherwise requesting the acquisition of debtor's equity prior to liquidation of the estate) for a maximum term of two years.
1.3 What are the key features of a reorganisation plan and how is it approved?
Reorganisation plans may include any variety of all available payment alternatives (including debt for debt, debt for equity or debt for cash proposals – or any combination) provided that the plan is subject to the following minimum requirements: (i) the plan must not discriminate between opposing classes by banning such creditors from choosing among the available payment alternatives or allocating to such creditors consideration of inferior value; (ii) the payment received under the plan by the opposing classes must not be less than the dividend such creditors would receive in the liquidation; and (iii) the plan must not be abusive towards creditors' rights.
Reorganisation plans must include at least three mandatory categories of creditors (unsecured, labour and secured) and may include subcategories.
The debtor has an exclusivity period of 90 business days (extendable once for another 30 business days) within which the debtor must formulate a reorganisation plan for the unsecured creditors and obtain consent by the required majorities of unsecured creditors within each category, representing: a headcount majority of more than 50% of heads of all unsecured creditors and a principal majority of at least two-thirds of the aggregate principal amount of the unsecured claims. Holders of debt securities issued in series must grant their consent at a holders' meeting or in such other manner as provided in the documents governing the securities (as admitted by the court). The headcount and principal majorities at the meeting are computed as follows: in respect of the headcount, all votes of the holders supporting the plan are computed as given by one person and all votes opposing the plan are computed as given by one person; and in respect of the principal amount, following broadly accepted case law, the principal amount of the securities held by the holders not attending the noteholders' meeting or abstaining from voting at the meeting are not computed in the calculation of the principal majority.
Any reorganisation plan addressed to secured creditors (or other creditors with other special or general preference) requires the unanimous consent of all such creditors.
1.4 Can a creditor or a class of creditor be 'crammed-down'?
Yes. If the required majorities are not reached the court may impose the plan over the objections of some classes of unsecured creditors and, therefore, confirm the plan if the plan was approved by both: (i) the required majorities within at least one of the impaired classes of unsecured creditors; and (ii) unsecured creditors representing at least three-quarters of the aggregate principal amount of unsecured credits.
If the court decides not to exercise its cram-down power, then in the case of certain debtors (such as corporations and limited liability companies), prior to declaring the debtor bankrupt, the court will open a five-day period for the registration of the creditors, workers cooperatives or other third parties interested in acquiring the debtor's equity and formulating alternative competing reorganisation plans (the competitive bidding process). During this period the debtor may also file a new competing plan. These plans must be approved by the same required majorities of creditors (see 1.3).
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
No, except in liquidation. The assets of the estate are sold by the receiver, who may sell the assets jointly or separately, or the business as a single unit.
The assets may be sold through: one or more public auctions; direct sale; or, sale at securities exchange or market where trading or registered.
The sale of the business may be made through a public auction or a two-call bidding process.
1.6 What are the duties of directors of a company in financial difficulty?
The directors of a company in financial difficulty continue owing the general corporate law fiduciary duties, including the duty of loyalty, which embraces the obligation to act with the correctness of an honest person and in defense of the interests of the debtor. Further, the duty of diligence imposes the obligation to perform their responsibilities with the diligence of a good businessman. The good businessman standard requires that the directors have minimum qualifications and that they perform their responsibilities in accordance with such qualifications, including during the investigation and due diligence required to adopt any decision.
When the debtor becomes financially distressed, however, the directors will be required to adopt any available measure to overcome the financial difficulties or reduce the losses (including the filing for reorganisation, the negotiation of an out-of-court restructuring agreement, or even the petition for bankruptcy). Even if the Bankruptcy Law does not oblige the directors to file for bankruptcy or reorganisation, the directors may be subject to liability if the decision to avoid the filing for reorganisation or bankruptcy or the delay of such filing finally aggravated the financial situation of the debtor.
The directors must avoid any actions in fraud of the creditors' rights and engaging in any deceit or negligent action affecting the creditors' rights.
1.7 What priority claims are there and is protection available for post-petition credit?
In liquidation, claims have the following order of priority:
Claims with special preference
The following claims have priority in respect of the proceeds of the certain assets: (a) expenses for the construction, improvement or maintenance of property; (b) labour claims (credits for six-month salaries, severance payments and indemnification for health claims); (c) taxes on property and assets; (d) claims secured with mortgage or liens; (e) the amounts owed to a creditor retaining property of the debtor; (f) naval and aeronautical mortgages; and (g) the foregoing liens extend to the proceeds of the liquidation of any of the foregoing collateral or property. The priority extends only to the amount of principal owed, except for (x) the interests accrued in respect of the labour claims during the last two years after the claim became due and payable; and (y) the litigation costs and expenses, all interests accrued during the two years immediately preceding the bankruptcy adjudication and remunerative interests accrued since the bankruptcy adjudication and until effective payment, in respect of the secured claims described in (d) above.
Administrative expenses
Debt in connection with the administration of the case and the estate.
Claims with general preference
Including: (a) labour claims (credits for six-months salaries, severance payments and indemnification for health claims), including the interests accrued during the last two years after the claim became due and payable and litigation costs and expenses; (b) the amount of principal owed to the national, provincial or municipal social security system; (c) the amount of principal of taxes; and (d) the amount of principal for up to Ps$20,000 ($2,200) on credit bills accepted for each vendor or lessor. These claims will only have priority on the amount equal to 50% of the proceeds of the estate property after payment of the claims with special preference, the administrative expenses and the principal amount of any labour claims described in (a) above. Any distribution among the creditors holding claims with general preference will be made pro rata until their payment in full up to the maximum amount.
Unsecured claims
Subordinated claims
Generally, unsecured post-petition financing does not enjoy any priority, except where the proceeds of such financing are used for the payment of any costs and expenses relating to the maintenance and administration of the estate, in which case the court may grant to such financing the priority of the administrative expenses.
1.8 Is there a different regime for banks and other financial institutions?
Financial institutions may not apply for a reorganisation proceeding or file a petition for its own bankruptcy under the Bankruptcy Law; and may not be adjudicated bankrupt until the Argentine Central Bank first revokes its licence.
When a financial institution is insolvent or has liquidity problems, prior to revoking its licence, the Argentine Central Bank may authorise the financial institutions' restructuring through different alternatives, including the exclusion, transfer and assignment of assets and liabilities (which remarkably, has been the option adopted in all cases). The main features of this option may be summarised as follows: deposits are excluded from the distressed financial institution and transferred to another financial institution. Further, all or almost all the assets of the distressed financial institution are transferred in trust to a trustee who in turn, issues: (i) a senior certificate of participation in an amount equal to the excluded deposits, which is delivered to the financial institution assuming the excluded deposits; and (ii) a subordinated certificate of participation in an amount equal to all the assets it holds less the amount of the senior certificate of participation, which is delivered to the distressed financial institution. The assets of the trust are realised by the trustee, and most of the distressed financial institution's employees are rehired by the financial institution that assumed the deposits, which is also allowed to open branches in the same places as the distressed financial institution.
If the restructuring fails, the Argentine Central Bank may revoke the financial institution's licence and, unless the revocation resolution includes the order to file a petition for bankruptcy or the institution's creditors file a petition for bankruptcy after 60 days from the revocation resolution, the financial institution will be subject to a judicial liquidation procedure.
Section 2: international/cross border issues
2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
Under the Bankruptcy Law, foreign residents may become debtors in full plenary insolvency cases in Argentina with respect to such foreign resident's property within Argentina. For the commencement of an insolvency case against a foreign resident, it is required that all the eligibility requirements of the Bankruptcy Law must be met, that is, the filing of evidence showing that the foreign resident holds property within Argentina, that the creditor holds a claim past due and payable, and that the foreign resident is in payments cessation.
Upon commencement of a liquidation case in Argentina an estate will be created comprising all of the foreign resident's property located in Argentina.
The venue for the insolvency proceedings of a foreign resident in Argentina will be the court of the place of the foreign resident's administrative office in Argentina or, in the absence of any such administrative office, the court of the place in Argentina where the foreign resident has its main business, commercial activities or exploitation.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
Argentina has not yet adopted the Model Law on Cross-Border Insolvency of the United Nations Committee on International Trade Law (Uncitral) and, except for residents of Bolivia, Brazil, Colombia, Chile, Paraguay, Peru and Uruguay (parties with Argentina to the Conventions of Montevideo of 1889 on International Procedural Law or of 1940 on International Procedural Law and Insolvency), cross-border insolvency cases are governed by the Bankruptcy Law.
Except under the Montevideo Conventions, Argentina does not provide for the recognition of foreign insolvency proceedings nor for any mechanism or ancillary case to aid foreign creditors or bankruptcy trustees to obtain the turnover of the foreign residents' property within Argentina. It holds to the voidance of effects of foreign insolvency proceedings against creditors holding claims payable in Argentina in connection with the dispute of any rights of such creditors on the foreign residents' assets located in Argentina, or the annulment of any agreements executed by such creditors with the foreign resident. The commencement of an insolvency proceeding in a foreign jurisdiction constitutes grounds for the filing of a petition for the commencement of a full plenary liquidation case in Argentina in respect of debtor's assets within Argentina; provided that the foreign insolvency proceeding commencement resolution must be first recognised by the Argentine courts through the exequatur proceedings.
The Bankruptcy Law includes three additional principles in cross-border insolvencies:
• The principle of preference for creditors participating in the Argentine liquidation process. Creditors participating in a foreign insolvency process will only have the right to get the turnover of the debtor's remaining assets balance after all the claims of the creditors participating in the Argentine liquidation process have been fully satisfied.
• The principle of reciprocity. In which participation in an Argentine liquidation case of creditors holding claims payable outside of Argentina, and not participating in a foreign insolvency process, is conditioned on filing evidence that, reciprocally, creditors holding claims payable in Argentina are permitted to participate in an insolvency process commenced at the jurisdiction where such claims are payable in equal conditions with the domestic creditors of such jurisdiction. An exception is made for creditors holding claims secured by liens on property.
• The principle of dividend parity. In which payments received by unsecured creditors in a foreign liquidation process will be computed on account of the general distribution available to such creditors under the Argentine liquidation process.
Section 3: other material considerations
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
Taxes on property and assets enjoy special preference and the principal amount of other taxes enjoys general preference. Therefore the amount of all such taxes is excluded from the unsecured reorganisation plans or out-of-court restructuring agreements, and cannot be crammed down. In addition, the tax authorities do not consent to any payment proposals. However, federal taxes (and other local taxes) are subject to a special payment plans regime for debtors under reorganisation proceedings.
Labour claims enjoy different treatment and benefits in insolvency proceedings. On commencement of a reorganisation proceeding, the court may authorise the immediate payment of labour claims based on indemnifications, penalties or severance payments, without the need to file proof of claims. The payment will be performed immediately if there are funds available or with an amount equal to up to three percent of the debtor's net monthly income.
In liquidations, labour claims for six-months salary, severance payments and indemnification for health claims enjoy special preference in respect of the proceeds of inventory, row materials and equipment located at the facilities where the employees rendered services, and general preference for all other assets of the estate. The priority extends to the principal and interests accrued during the last two years after the claim became due and payable. The general preference labour claims will enjoy priority on the amount equal to 50% of the proceeds of the estate property after payment of the claims with special preference and the administrative expenses. Distribution among the general preference labour claims will be made pro rata until their payment in full up to the maximum amount described above; and any unpaid remaining balance will be paid pari pasu with the unsecured claims.
Section 4: current trends
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.
In 2001, Argentina suffered the greatest economic crisis in history. As a consequence, the Argentine Congress passed a major change to the Bankruptcy Law, under which it now grants to already existing out-of-court restructuring agreements (approved by the required majorities and endorsed by the court) an effect on non-consenting unsecured creditors. In addition, the courts developed a new calculation for the required majorities to approve a reorganisation plan or an out-of-court restructuring agreement, excluding from the calculation the principal amount of all unsecured debt securities issued in series held by those holders that do not express their rejection of the plan or restructuring agreement.
A more recent amendment increased the rights of employees in insolvency proceedings through their inclusion in creditors' committees, and allows employees' cooperatives to participate in the competitive bidding process, and to set off their member's labour claims against the purchase price for the acquisition of the debtor's shares, business or assets.
First published by our sister publication IFLR magazine. Take your free trial today.
Fernando Hernández
Marval O'Farrell & Mairal
Buenos Aires
About the author
Fernando Hernández has over 14 years' experience specialising in insolvency, restructurings and corporate finance. His practice includes cross-border restructurings and insolvencies involving both private indebtedness and worldwide trading securities. He has been involved in some of the major restructurings in Argentina.
Hernández has spoken at many international conferences and seminars and has written many articles, both in domestic and international publications. He is member of the International Bar Association, Insol International (Latin America Committee Member and World Editorial Board Member) and the International Insolvency Institute – NextGen Leadership Program (Academic Committee Member).